Question 1

Competing investment projects where accepting one project eliminates the possibility of taking the remaining projects is referred to as

Accepted Answer

A) common projects. 
B) mutually exclusive projects. 
C) joint projects. 
D) opportunity costs.

Question 2

The XYZ Company is evaluating a capital budgeting proposal for the current year.The initial investment would be $50,000.It would be depreciated on a straight-line basis over five years with no salvage value.The before-tax annual cash inflow due to this investment is $5,000,and the income tax rate is 40 percent paid in the same year as incurred.The desired after-tax rate of return is 15 percent.All cash flows occur at year-end.
What is the net present value of XYZ's capital-budgeting proposal? Should the proposal be accepted?

Accepted Answer

The answer of The XYZ Company is evaluating a capital...

Question 3

Yipann Corporation is reviewing an investment proposal.The initial costs as well as other related data for each year are presented in the schedule below.The cash flows are all assumed to take place at the end of the year.All salvage value of the investment at the end of each year is equal to its net book value,and there will be no salvage value at the end of the investment's life.
Investment Proposal
  
Yipann uses a 24 percent after-tax target rate of return for new investment proposals.The discount figures for a 24 percent rate of return are given below:
  
What is the net present value of the investment proposal?

Accepted Answer

The answer of Yipann Corporation is reviewing an investment proposal.The...

Question 4

Explain how you might analyze a capital budgeting decision where the cash flow data
are nominal (including expected inflation of,say,4 percent per year)but the quoted
cost of capital of 12 percent per year is real (excluding anticipated inflation).

Accepted Answer

The answer of Explain how you might analyze a capital...

Question 5

Describe the steps of the net present value method for making long-term decisions using discounted cash flows.Analyze the effect of income taxes on cash flows.

Accepted Answer

The answer of Describe the steps of the net present...

Question 6

In which area will analysts will likely err when making capital investment decisions?

Accepted Answer

A) the amount of future cash flows 
B) the timing of cash flows 
C) the discount rate. 
D) all of the above.

Question 7

Jackson Company is considering the investment in a computer system.The company estimates that it will require an initial outlay of $1,200,000.Other cash flows will be as follows:
  
Required:
Assuming the company limits its analysis to five years,should the company consider this investment if the required rate of return is 12 percent?

Accepted Answer

The answer of Jackson Company is considering the investment in...

Question 8

An investment that costs $50,000 will return $22,000 per year for five years.
Required:
Determine the net present value of the investment if the required rate of return is 14 percent (ignoring taxes).Should the investment be undertaken?

Accepted Answer

The answer of An investment that costs $50,000 will return...

Question 9

The appropriate discount rate that analysts use in computing the present value of future cash flows is comprised of which of the following?

Accepted Answer

A) an increase reflecting the inflation expected to occur over the life of the project. 
B) a risk factor reflecting the riskiness of the project 
C) a pure rate of interest reflecting the productive capability of capital assets 
D) all of the above.

Question 10

Use this information to answer the following questions:
An investment of $20,000 today will yield $8,000 a year at the end of the next three years.
Refer to the above information.Will the project be accepted at a cost of capital of 6 percent?

Accepted Answer

The answer of Use this information to answer the following...

Question 11

A planned factory expansion project has an estimated initial cost of $500,000.Using a discount rate of 20 percent,the present value of the future cost savings from the expansion is $520,000.To yield exactly the 20 percent time-adjusted rate of return,the actual investment expenditure should not exceed the $500,000 estimate by more than

Accepted Answer

A) $160,000. 
B) $20,000. 
C) $1,075. 
D) $43,000.

Question 12

Eastchester Products
Eastchester Products is considering a project that requires an initial investment of $400,000 and will generate the following cash inflows for the next 4 years:
  
Refer to Eastchester Products.Ignoring tax effects,calculate the net present value of this project if Eastchester's cost of capital is 12 percent?

Accepted Answer

The answer of Eastchester Products
Eastchester Products is considering a project...

Question 13

Project A has an expected cash flow of $500,000 at the end of year 5.Project B has an expected cash flow of $100,000 to be received at the end of each year for the next five years.What can be said of the net present value of project A compared to project B?

Accepted Answer

A) They are the same because both cash flows total $500,000 over the lives of the projects. 
B) Project A is preferred because of the largest lump-sum payment in year 5. 
C) Project B is preferred because of the periodic payments made consistently throughout the years and are made earlier. 
D) The both have the same internal rate of return and either should be accepted.

Question 14

If the net present value of a proposed project is positive,then the actual rate of return

Accepted Answer

A) is higher than the cost of capital. 
B) is lower than the cost of capital. 
C) is equal to the cost of capital. 
D) is negative.

Question 15

Which of the following is a likely errors in the calculation of net present value?

Accepted Answer

A) the amount of cash flows 
B) the timing of cash flows 
C) the discount rate. 
D) all of the above

Question 16

The steps of the net present value method for making long-term decisions include

Accepted Answer

A) estimate the amounts of future cash inflows and future cash outflows in each period for each alternative under consideration. 
B) requiring the use of the applicable treasury rate as the discount rate in computing the present value of future cash flows. 
C) if the present value of the future cash inflows exceeds the present value of the future cash outflows for a proposal,reject the alternative. 
D) ignore depreciation because it is not a cash flow and does not affects the after-tax cash flow.

Question 17

The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a pure interest rate,a premium for the risk of the investment,an increase to reflect expected inflation.What is this rate is called?

Accepted Answer

A) risk-free rate. 
B) real interest rate. 
C) nominal interest rate. 
D) none of the above.

Question 18

Which of the following is a behavioral issue that influences capital investment project planners objectivity when making estimates?

Accepted Answer

A) desire to implement a project. 
B) performance evaluation measures. 
C) organizational policies and procedures. 
D) all of the above.

Question 19

Which statement is true concerning depreciation?

Accepted Answer

A) Depreciation affects the tax cash flow because it is a deductible expense that affects taxable income. 
B) Depreciation should be considered in the cash flow analysis. 
C) Depreciation is affected by income tax laws which specify the allowable methods. 
D) all of the above.

Question 20

Systematic feedback to planners based on audits creates an environment in which planners will find less temptation to

Accepted Answer

A) deflate their estimates of the benefits associated with their pet projects. 
B) inflate their estimates of the benefits associated with their pet projects. 
C) inflate their estimates of the costs associated with their pet projects. 
D) inflate their estimates of the prestige associated with their pet projects.

Exam 8: Capital Expenditure Decisions