Question 1

How is net present value (NPV) computed and interpreted?

Accepted Answer

NPV is computed by taking the difference

Question 2

If the net present value of an investment is negative, then:

Accepted Answer

A)  the actual rate of return is less than the discount rate. 
B)  the actual rate of return is more than the discount rate. 
C)  the actual rate of return is negative. 
D)  the discount rate is negative. 
A)  the actual rate of return is less than the discount rate. 
B)  the actual rate of return is more than the discount rate. 
C)  the actual rate of return is negative. 
D)  the discount rate is negative.

Question 3

Answer the following questions with respect to a "depreciation tax shield".

Accepted Answer

The answer of Answer the following questions with respect to...

Question 4

Which of the following statements regarding the profitability index is true?

Accepted Answer

A)  A profitability index greater than 1.0 means that the investment will take longer than one year to pay for itself. 
B)  A profitability index greater than 1.0 means that the investment should not be made. 
C)  When comparing projects, the one with the highest profitability index will have a longer payback period. 
D)  When comparing projects, the one with the highest profitability index is preferred. 
A)  A profitability index greater than 1.0 means that the investment will take longer than one year to pay for itself. 
B)  A profitability index greater than 1.0 means that the investment should not be made. 
C)  When comparing projects, the one with the highest profitability index will have a longer payback period. 
D)  When comparing projects, the one with the highest profitability index is preferred.

Question 5

The internal rate of return (IRR) of a project can be calculated using all of the following except:

Accepted Answer

A)  a financial calculator. 
B)  present value tables. 
C)  a spreadsheet application, such as Excel. 
D)  the payback method. 
A)  a financial calculator. 
B)  present value tables. 
C)  a spreadsheet application, such as Excel. 
D)  the payback method.

Question 6

NPV calculations generally require which of the following simplifying assumptions?

Accepted Answer

A)  All cash flows occur in the middle of the period. 
B)  All cash flows occur evenly during the period. 
C)  Cash flows occur equally at the beginning and end of the period. 
D)  All cash flows occur at the end of the period. 
A)  All cash flows occur in the middle of the period. 
B)  All cash flows occur evenly during the period. 
C)  Cash flows occur equally at the beginning and end of the period. 
D)  All cash flows occur at the end of the period.

Question 7

Hi-Town Nursery is considering the purchase of a new greenhouse. The greenhouse will have an initial cost of $20,000 and an estimated salvage value of $3,000 at the end of its useful life. The nursery expects annual net operating cash inflows to increase $5,000 each year for ten years. The cost of capital is 12 percent.
Required: Compute the net present value of the new greenhouse. (Ignore income taxes)

Accepted Answer

The answer of Hi-Town Nursery is considering the purchase of...

Question 8

Which of the following expenses for accounting purposes generates an indirect after-tax cash inflow for purposes of net present value computations?

Accepted Answer

A)  Repairs expense 
B)  Salaries expense 
C)  Depreciation expense 
D)  Tax expense 
A)  Repairs expense 
B)  Salaries expense 
C)  Depreciation expense 
D)  Tax expense

Question 9

Pristine Products is considering the purchase of a new machine. The estimated cost of the machine is $45,000. The machine is expected to generate annual cash inflows for the next four years as follows:   The machine is not expected to have a residual value at the end of its useful life. If the company uses a discount rate of 15%, what is the expected net present value of the machine? (ignore taxes)

Accepted Answer

A)  $6,914 
B)  $6,253 
C)  $(2,757) 
D)  $4,200 
A)  $6,914 
B)  $6,253 
C)  $(2,757) 
D)  $4,200

Question 10

Pauline's Products Inc. is considering investing in a new piece of equipment that costs $75,000. The equipment is expected to generate revenues of $25,000 per year for five years. The equipment would be depreciated using the straight-line method over its five year life and have a salvage value of $8,000. The company considers the impact of income taxes in all of its capital investment decisions. The company has a 35 percent income tax rate and desires an after-tax rate of return of 12 percent on its investment. The net present value of the equipment is:

Accepted Answer

A)  $7,042. 
B)  $(13,472). 
C)  $21,248. 
D)  $5,453. 
A)  $7,042. 
B)  $(13,472). 
C)  $21,248. 
D)  $5,453.

Question 11

Palmetto Products is considering the purchase of a new industrial machine. The estimated cost of the machine is $50,000. The machine is expected to generate annual cash inflows for the next four years as follows:   The machine is not expected to have a residual value at the end of its useful life. If Palmetto uses a discount rate of 16%, what is the expected net present value of the machine? (ignore taxes)

Accepted Answer

A)  $12,800 
B)  $18,969 
C)  $(5,816) 
D)  $7,515 
A)  $12,800 
B)  $18,969 
C)  $(5,816) 
D)  $7,515

Question 12

Bluefield Inc. is considering a project that will require an initial investment of $75,000 and is expected to generate future cash flows of $15,000 for years 1 through 3 and $10,000 for years 4 through 8. The project's payback period is:

Accepted Answer

A)  6 years. 
B)  5 years. 
C)  4 years. 
D)  2.67 years. 
A)  6 years. 
B)  5 years. 
C)  4 years. 
D)  2.67 years.

Question 13

Triangle Catering is considering investing in new equipment that costs $100,000. The equipment would be depreciated using the straight-line method with no half-year convention over five years and have no salvage value. If the company has a 35 percent income tax rate and desires an after-tax rate of return of 15 percent on investments, the total present value of the depreciation tax shield is:

Accepted Answer

A)  $67,044. 
B)  $43,579. 
C)  $23,465. 
D)  $49,720. 
A)  $67,044. 
B)  $43,579. 
C)  $23,465. 
D)  $49,720.

Question 14

Newman Auto Repair is considering the purchase of a hydraulic machine costing approximately $35,000. Using a discount rate of 18%, the present value of future cash inflows are calculated to be $42,000. To yield at least an 18% return, the actual cost of the machine should not exceed the $35,000 estimate by more than:

Accepted Answer

A)  $28,000. 
B)  $49,000. 
C)  $7,000. 
D)  $6,300. 
A)  $28,000. 
B)  $49,000. 
C)  $7,000. 
D)  $6,300.

Question 15

The IRR method assumes that cash inflows associated with a particular investment occur:

Accepted Answer

A)  uniformly throughout the year. 
B)  only at the end of the year. 
C)  only at the beginning of the year. 
D)  only at the time of the initial investment. 
A)  uniformly throughout the year. 
B)  only at the end of the year. 
C)  only at the beginning of the year. 
D)  only at the time of the initial investment.

Question 16

The IRR method assumes that cash flows are reinvested at:

Accepted Answer

A)  the internal rate of return of the original investment. 
B)  the company's discount rate. 
C)  the lower of the company's discount rate or internal rate of return. 
D)  an average of the internal rate of return and the discount rate. 
A)  the internal rate of return of the original investment. 
B)  the company's discount rate. 
C)  the lower of the company's discount rate or internal rate of return. 
D)  an average of the internal rate of return and the discount rate.

Question 17

Vinson Manufacturing requires all capital investment projects to have a payback period of 5 years or less. Vinson is currently considering an equipment purchase that has an initial cost of $90,000. The equipment is expected to have a ten year life and a salvage value of $5,000. Assuming cash flows are equal, what does the annual cash flow generated by the equipment need to be in order to meet the payback period requirements?

Accepted Answer

A)  $18,000 
B)  $19,000 
C)  $17,000 
D)  $9,000 
A)  $18,000 
B)  $19,000 
C)  $17,000 
D)  $9,000

Question 18

Mayberry Textiles Inc. is considering the purchase of a new machine which has an initial cost of $400,000. Annual operating cash inflows are expected to be $100,000 each year for eight years. No salvage value is expected at the end of the asset's life. Mayberry's cost of capital is 14 percent.
Required: Compute the net present value of the machine. (Ignore income taxes)

Accepted Answer

The answer of Mayberry Textiles Inc. is considering the purchase...

Question 19

Which of the following is classified as a capital investment decision?

Accepted Answer

A)  Purchase of a building 
B)  Purchase of inventory 
C)  Paying interest on bonds issued 
D)  Purchase of a 6-month treasury bill 
A)  Purchase of a building 
B)  Purchase of inventory 
C)  Paying interest on bonds issued 
D)  Purchase of a 6-month treasury bill

Question 20

Which of the following statements is false regarding the interest rate used in NPV calculations?

Accepted Answer

A)  Some companies use their cost of capital as the discount rate. 
B)  The interest rate used may be adjusted for uncertainty. 
C)  It should be equal to the maximum required rate of return needed to make the investment profitable. 
D)  The interest rate used may be higher or lower than the investment's actual internal rate of return. 
A)  Some companies use their cost of capital as the discount rate. 
B)  The interest rate used may be adjusted for uncertainty. 
C)  It should be equal to the maximum required rate of return needed to make the investment profitable. 
D)  The interest rate used may be higher or lower than the investment's actual internal rate of return.

How is net present value (NPV) computed and interpreted?

If the net present value of an investment is negative, then:

Answer the following questions with respect to a "depreciation tax shield".

Which of the following statements regarding the profitability index is true?

The internal rate of return (IRR) of a project can be calculated using all of the following except:

NPV calculations generally require which of the following simplifying assumptions?

Which of the following expenses for accounting purposes generates an indirect after-tax cash inflow for purposes of net present value computations?

Bluefield Inc. is considering a project that will require an initial investment of $75,000 and is expected to generate future cash flows of $15,000 for years 1 through 3 and $10,000 for years 4 through 8. The project's payback period is:

The IRR method assumes that cash inflows associated with a particular investment occur:

The IRR method assumes that cash flows are reinvested at:

Which of the following is classified as a capital investment decision?

Which of the following statements is false regarding the interest rate used in NPV calculations?

Introduction to Managerial Accounting

Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows

Job Costing, Process Costing, and Operations Costing

Activity-Based Costing

Cost Behavior

Cost-Volume-Profit Analysis

Relevant Costs and Product Planning Decisions

The Use of Budgets in Planning and Decision Making

Variance Analysis A Tool for Cost Control and Performance Evaluation

Decentralization, Performance Evaluation, and the Balanced Scorecard

Financial Statement Analysis

The Statement of Cash Flows

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Exam 8: Long-Term Capital Investment Decisions

How is net present value (NPV) computed and interpreted?

If the net present value of an investment is negative, then:

Answer the following questions with respect to a "depreciation tax shield".

Which of the following statements regarding the profitability index is true?

The internal rate of return (IRR) of a project can be calculated using all of the following except:

NPV calculations generally require which of the following simplifying assumptions?

Which of the following expenses for accounting purposes generates an indirect after-tax cash inflow for purposes of net present value computations?

Bluefield Inc. is considering a project that will require an initial investment of $75,000 and is expected to generate future cash flows of $15,000 for years 1 through 3 and $10,000 for years 4 through 8. The project's payback period is:

The IRR method assumes that cash inflows associated with a particular investment occur:

The IRR method assumes that cash flows are reinvested at:

Which of the following is classified as a capital investment decision?

Which of the following statements is false regarding the interest rate used in NPV calculations?

Introduction to Managerial Accounting

Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows

Job Costing, Process Costing, and Operations Costing

Activity-Based Costing

Cost Behavior

Cost-Volume-Profit Analysis

Relevant Costs and Product Planning Decisions

The Use of Budgets in Planning and Decision Making

Variance Analysis A Tool for Cost Control and Performance Evaluation

Decentralization, Performance Evaluation, and the Balanced Scorecard

Financial Statement Analysis

The Statement of Cash Flows

Filters