A company is considering an iron ore extraction project that requires an initial investment of $512,000 and will yield annual cash inflows of $156,000 for four years.The company's discount rate is 9%.What is the NPV of the project? Present value of an ordinary annuity of $1: \[\begin{array} { | c | r | r | r | } \hline & { 8 \% } & { 9 \% } & { 10 \% } \\ \hline 1 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 1.783 & 1.759 & 1.736 \\ \hline 3 & 2.577 & 2.531 & 2.487 \\ \hline 4 & 3.312 & 3.24 & 3.17 \\ \hline 5 & 3.993 & 3.89 & 3.791 \\ \hline 6 & 4.623 & 4.486 & 4.355 \\ \hline 7 & 5.206 & 5.033 & 4.868 \\ \hline 8 & 5.747 & 5.535 & 5.335 \\ \hline 9 & 6.247 & 5.995 & 5.759 \\ \hline 10 & 6.71 & 6.418 & 6.145 \\ \hline \end{array}\]

A) $6,560 B) $(102,400) C) $102,400 D) $(6,560) A) $6,560 B) $(102,400) C) $102,400 D) $(6,560)

Carolina Logistics,Inc.is considering three investment opportunities with the following payback periods: \[\begin{array} { | l | c | c | c | } \hline & \text { Project } X & \text { Project } Y & \text { Project } Z \\ \hline \text { Payback period } & 3 \text { years } & 2.5 \text { years } & 2.8 \text { years } \\ \hline \end{array}\] Use the decision rule for payback to rank the projects from most desirable to least desirable,all else being equal.

A) Y, Z, X B) X, Y, Z C) Z, Y, X D) Y, X, Z A) Y, Z, X B) X, Y, Z C) Z, Y, X D) Y, X, Z

The following information is provided by Graham Company: \[\begin{array} { | l | r | r | r | r | } \hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \\ \hline \text { Initial investment } & \$ 434,000 & \$ 200,000 & \$ 568,000 & \$ 510,000 \\ \hline \text { PV of cash inflows } & \$ 572,000 & \$ 396,000 & \$ 808,000 & \$ 402,000 \\ \hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \\ \hline \text { NPV of project } & \$ 138,000 & \$ 196,000 & \$ 240,000 & ( \$ 108,000 ) \\ \hline \end{array}\] Which project has the highest profitability index?

A) Project A B) Project B C) Project C D) Project D A) Project A B) Project B C) Project C D) Project D

Jenna would like to purchase a new car in three years.If she saves $1,000 per year in an account that pays 8% annual interest for the next 3 years,how much will she have saved for a down payment? (Round the final answer to the nearest dollar.) Values for i=8%,n=3 \[\begin{array} { | l | r | } \hline \text { Present value of an ordinary annuity of } \$ 1 & 2.577 \\ \hline \text { Present value of } \$ 1 \text { : } & .772 \\ \hline \text { Future value of an ordinary annuity of } \$ 1 & 3.246 \\ \hline \text { Future value of } \$ 1 : & 1.260 \\ \hline \end{array}\]

A) $3,246 B) $3,772 C) $3,577 D) $2,577 A) $3,246 B) $3,772 C) $3,577 D) $2,577

A company is evaluating three possible investments.Each uses the straight-line method of depreciation.Following information is provided by the company: \[\begin{array} { | l | r | r | r | } \hline & \text { Project A } & \text { Project B } & \text { Project C } \\ \hline \text { Investment } & \$ 230,000 & \$ 54,000 & \$ 230,000 \\ \hline \text { Residual value } & 0 & 12,000 & 36,000 \\ \hline \text { Net cash inflows: } & & & \\ \hline \text { Year 1 } & 56,000 & 38,000 & 94,000 \\ \hline \text { Year 2 } & 56,000 & 29,000 & 64,000 \\ \hline \text { Year 3 } & 56,000 & 25,000 & 74,000 \\ \hline \text { Year 4 } & 56,000 & 22,000 & 34,000 \\ \hline \text { Year 5 } & 56,000 & 0 & 0 \\ \hline \end{array}\] What is the accounting rate of return for Project B? (Round your answer to two decimal places.)

A) 38.14% B) 26.19% C) 54.55% D) 51.83% A) 38.14% B) 26.19% C) 54.55% D) 51.83%

Provide responses to the following questions regarding the discount rate. \[\begin{array} { | l | l | } \hline \text { Question? } & \text { Your response } \\ \hline \text { What does the discount rate represent? } & \\ \hline \text { What are other names for the discount rate? } & \\ \hline \text { Is the following statement TRUE? Discuss } & \\ \text { the reason for your response. } \\ \text { The higher the risk, the lower the discount } \\ \text { rate." }\\ \hline \end{array}\]

\[\begin{array} { | l | l | } \hline \t

Thom Corporation is considering an investment opportunity with the following expected net cash inflows: Year 1,$230,000; Year 2,$370,000; Year 3,$360,000.The company uses a discount rate of 13%,and the initial cost of the investment is $720,000. Present Value of $1: \[\begin{array} { | c | c | c | c | c | c | c | } \hline & 10 \% & 11 \% & 12 \% & 13 \% & 14 \% & 15 \% \\ \hline 1 & 0.909 & 0.901 & 0.893 & 0.885 & 0.877 & 0.870 \\ \hline 2 & 0.826 & 0.812 & 0.797 & 0.783 & 0.769 & 0.756 \\ \hline 3 & 0.751 & 0.731 & 0.712 & 0.693 & 0.675 & 0.658 \\ \hline 4 & 0.683 & 0.659 & 0.636 & 0.613 & 0.592 & 0.572 \\ \hline 5 & 0.621 & 0.593 & 0.567 & 0.543 & 0.519 & 0.497 \\ \hline \end{array}\] The IRR of the project will be ________.

A) less than 13% B) between 13% and 14% C) between 14% and 15% D) more than 13% A) less than 13% B) between 13% and 14% C) between 14% and 15% D) more than 13%

Exam 26: Capital Investment Decisions

A company is considering an iron ore extraction project that requires an initial investment of $512,000 and will yield annual cash inflows of $156,000 for four years.The company's discount rate is 9%.What is the NPV of the project? Present value of an ordinary annuity of $1: 8\% 9\% 10\% 1 0.926 0.917 0.909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 4 3.312 3.24 3.17 5 3.993 3.89 3.791 6 4.623 4.486 4.355 7 5.206 5.033 4.868 8 5.747 5.535 5.335 9 6.247 5.995 5.759 10 6.71 6.418 6.145

(Multiple Choice)

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Question 41

If an investment's internal rate of return is higher than the required rate of return,the company should reject the investment.

(True/False)

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Question 42

The payback method is a screening device and is rarely used as the sole method for deciding whether to invest in an asset.

(True/False)

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Question 43

Carolina Logistics,Inc.is considering three investment opportunities with the following payback periods: Project X Project Y Project Z Payback period 3 years 2.5 years 2.8 years Use the decision rule for payback to rank the projects from most desirable to least desirable,all else being equal.

(Multiple Choice)

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Question 44

Odeletta Corporation is considering an investment of $518,000 in a land development project.The investment will yield cash inflows of $220,000 per year for five years.The company uses a discount rate of 9%.What is the net present value of the investment? Present value of an ordinary annuity of $1: 8\% 9\% 10\% 1 0.926 0.917 0.909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 4 3.312 3.24 3.17 5 3.993 3.89 3.791

(Multiple Choice)

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Question 45

The following information is provided by Graham Company: Project A Project B Project C Project D Initial investment \ 434,000 \ 200,000 \ 568,000 \ 510,000 PV of cash inflows \ 572,000 \ 396,000 \ 808,000 \ 402,000 Payback period (years) 3.6 3.2 4.0 2.0 NPV of project \ 138,000 \ 196,000 \ 240,000 (\ 108,000) Which project has the highest profitability index?

(Multiple Choice)

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Question 46

Jenna would like to purchase a new car in three years.If she saves $1,000 per year in an account that pays 8% annual interest for the next 3 years,how much will she have saved for a down payment? (Round the final answer to the nearest dollar.) Values for i=8%,n=3 Present value of an ordinary annuity of \ 1 2.577 Present value of \ 1 : .772 Future value of an ordinary annuity of \ 1 3.246 Future value of \ 1: 1.260

(Multiple Choice)

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Question 47

The residual value is discounted as a single lump sum because it will be received only once,when the asset is sold.

(True/False)

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Question 48

Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.

(True/False)

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Question 49

A company is evaluating three possible investments.Each uses the straight-line method of depreciation.Following information is provided by the company: Project A Project B Project C Investment \ 230,000 \ 54,000 \ 230,000 Residual value 0 12,000 36,000 Net cash inflows: Year 1 56,000 38,000 94,000 Year 2 56,000 29,000 64,000 Year 3 56,000 25,000 74,000 Year 4 56,000 22,000 34,000 Year 5 56,000 0 0 What is the accounting rate of return for Project B? (Round your answer to two decimal places.)

(Multiple Choice)

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Question 50

Provide responses to the following questions regarding the discount rate. Question? Your response What does the discount rate represent? What are other names for the discount rate? Is the following statement TRUE? Discuss the reason for your response. The higher the risk, the lower the discount rate."

(Essay)

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Question 51

When using the accounting rate of return,what is the rule for making the decision to make the investment?

(Essay)

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Question 52

When projecting future cash flows of an investment ________.

(Multiple Choice)

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Question 53

Which of the following is NOT part of the capital budgeting process?

(Multiple Choice)

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Question 54

If the expected accounting rate of return meets or exceeds the required rate of return,the decision rule is to not make the investment.

(True/False)

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Question 55

Which of the following best describes a capital budgeting post-audit?

(Multiple Choice)

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Question 56

Thom Corporation is considering an investment opportunity with the following expected net cash inflows: Year 1,$230,000; Year 2,$370,000; Year 3,$360,000.The company uses a discount rate of 13%,and the initial cost of the investment is $720,000. Present Value of $1: 10\% 11\% 12\% 13\% 14\% 15\% 1 0.909 0.901 0.893 0.885 0.877 0.870 2 0.826 0.812 0.797 0.783 0.769 0.756 3 0.751 0.731 0.712 0.693 0.675 0.658 4 0.683 0.659 0.636 0.613 0.592 0.572 5 0.621 0.593 0.567 0.543 0.519 0.497 The IRR of the project will be ________.

(Multiple Choice)

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Question 57

When computing the present value,the interest rate will vary depending on the amount of risk.Riskier investments,such as FDIC-insured bank deposits,command higher interest rates.

(True/False)

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Question 58

Brooks Company will receive $10,000 a year at the end of each of the next five years.Using a discount rate of 14%,the present value of the receipts can be stated as ________.

(Multiple Choice)

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Question 59

If the net cash inflows are unequal,how is the payback period (in years)of an investment calculated?

(Essay)

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Question 60

If an investment's internal rate of return is higher than the required rate of return,the company should reject the investment.

The payback method is a screening device and is rarely used as the sole method for deciding whether to invest in an asset.

Carolina Logistics,Inc.is considering three investment opportunities with the following payback periods: Project X Project Y Project Z Payback period 3 years 2.5 years 2.8 years Use the decision rule for payback to rank the projects from most desirable to least desirable,all else being equal.

The residual value is discounted as a single lump sum because it will be received only once,when the asset is sold.

Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.

When using the accounting rate of return,what is the rule for making the decision to make the investment?

When projecting future cash flows of an investment ________.

Which of the following is NOT part of the capital budgeting process?

If the expected accounting rate of return meets or exceeds the required rate of return,the decision rule is to not make the investment.

Which of the following best describes a capital budgeting post-audit?

When computing the present value,the interest rate will vary depending on the amount of risk.Riskier investments,such as FDIC-insured bank deposits,command higher interest rates.

Brooks Company will receive $10,000 a year at the end of each of the next five years.Using a discount rate of 14%,the present value of the receipts can be stated as ________.

If the net cash inflows are unequal,how is the payback period (in years)of an investment calculated?

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