Question_DOC1_Dec11
1. All of the following are capital investment decisionsexcept:
A. purchasing $40,000 of machinery.
B. buying a $4,000,000 manufacturing plant.
C. acquiring $400,000 of common stock.
D. paying $500,000 to renovate a retail store.
2. Which of the following isnota factor in explaining why the present value of a future dollar is less than one dollar?
A. Inflation
B. Interest
C. Historical cost
D. Risk of failure to receive expected cash inflows
3. Which statement characterizes the time value of money concept?
A. The future value of a present dollar is less than one dollar.
B. The present value of a future dollar is less than one dollar.
C. The timing of cash flows is not relevant to decision making.
D. None of the above answers are correct.
4. Tompkins Company has two investment opportunities. Both investments cost $5,000 and will provide the same total future cash inflows.
The cash receipt schedule for each investment is given below:
Select the correct statement.
A. Tompkins should be indifferent between the two investments because they provide the same total cash inflows.
B. Tompkins should choose Investment I because of the time value of money.
C. Tompkins should choose Investment II because it generates more immediate cash inflows.
D. Time value of money techniques are not useful for comparing these investments.
5. Which of the following statements describes the cost of capital?
A. The return that a company must pay its investors and creditors
B. The maximum acceptable rate of return on investments
C. The internal rate of return on investments
D. The interest rate the bank charges its best customers
6. The cost of capital is called all of the following except:
A. equity rate.
B. discount rate.
C. hurdle rate.
D. cutoff rate.
7. For a capital investment project to be acceptable, it must generate a rate of return:
A. less than the required rate of return.
B. equal to or greater than the cost of capital.
C. equal to the initial investment.
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D. none of the above answers are correct.
8. What amount of cash must be invested today in order to have $30,000 at the end of one year assuming the rate of return is 9%? (Do not
round your PV factors.)
A. $22,727.28
B. $27,000.00
C. $27,522.94
D. $27,300.00
9. What amount of cash would result at the end of one year, if $17,000 is invested today and the rate of return is 10%? (Do not round your
PV factors.)
A. $17,000
B. $18,530
C. $18,700
D. None of these
10. Darlene projects that she can get $100,000 cash per year for 5 years on a real estate investment project. If Darlene wants to earn a rate of
return of 10%, what is the maximum that she should pay for the investment? (rounded to the nearest dollar)
A. $62,092
B. $310,461
C. $379,079
D. $450,000
11. Henry has $500,000 to invest in a 5 year annuity. Assuming the time value of money is 10%, what amount will Henry receive in cash
each year? (Do not round your PV factors. Round your answer to the nearest dollar.)
A. $100,000
B. $110,000
C. $131,899
D. None of the above answers are correct.
12. A cash flow that only occurs once is referred to as:
A. an annuity.
B. a lump sum.
C. a principal sum.
D. None of these.
13. Which of the following cash flow patterns represents of an annuity?
A. A
B. B
C. C
D. Any of the answers can represent an annuity.
14. Which one of the following statements describes an ordinary annuity?
A. Series of cash inflows of varying amounts collected at the beginning of each period
B. Series of cash flows of equal amounts collected at the beginning of each period
C. Series of cash flows of varying amounts collected at the end of each period
D. Series of cash flows of equal amounts collected at the end of each period
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15. Which of the following computer applications would be most useful for capital investment analysis?
A. Word processing
B. Spreadsheet
C. Web browser
D. Database software
16. An even stream of payments over equal time periods where the cash flows are assumed to occur at the end of each period is referred to as
a(n):
A. annuity due.
B. ordinary annuity.
C. postannuity.
D. preannuity.
17. A customary assumption in capital budgeting analysis is that:
A. the desired rate of return includes the effects of compounding.
B. the cash inflows generated by the investment are reinvested at the desired rate of return.
C. annual cash flows occur at the end of each period.
D. all of the above answers are correct.
18. Chartreuse Company has two investment opportunities. Both investments cost $5,000 and will provide the following net cash flows:
The total present value of Investment A's cash inflows assuming a 10% minimum rate of return is (Do not round your PV factors and
intermediate calculations. Round your answer to the nearest whole dollar):
A. $10,628.
B. $9,510.
C. $3,452.
D. $3,000.
19. Harvey wants to determine the net present value for a proposed capital investment. He has determined the desired rate of return, the
expected investment time period, a series of cash inflows of equal amount, the salvage value of the investment, and the required cash
outflows. Which of the following tables would most likely be used to calculate the net present value of the investment?
A. Present value of annuity.
B. Present value of a lump sum.
C. Both present value of annuity and present value of a lump sum.
D. None of the these.
20. Henrico Company has two investment opportunities. Both investments cost $5,000 and will provide the same total future cash inflows.
The cash receipt schedule for each investment is given below:
The net present value of Investment II assuming a 10% minimum rate of return would be which of the following amounts? (Do not round
your PV factors and intermediate calculations. Round your answer to nearest whole dollar.)
A. $6,182
B. $3,415
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C. $1,182
D. ($3,415)
21. An investment that costs $30,000 will produce annual cash flows of $10,000 for a period of 4 years. Given a desired rate of return of 8%,
the investment will generate a (Do not round your PV factors and intermediate calculations. Round your answer to nearest whole dollar):
A. positive net present value of $33,121.
B. positive net present value of $3,121.
C. negative net present value of $33,121.
D. negative net present value of $3,121.
22. An investment that costs $25,000 will produce annual cash flows of $5,000 for a period of 6 years. Further, the investment has an
expected salvage value of $3,000. Given a desired rate of return of 12%, the investment will generate a (Do not round your PV factors and
intermediate calculations. Round your answer to the nearest whole dollar.):
A. negative net present value of $25,000.
B. negative net present value of $2,923.
C. positive net present value of $20,557.
D. negative net present value of $1,520.
23. The rate of return that equates the present value of cash inflows and outflows is the:
A. minimum rate of return.
B. internal rate of return.
C. desired rate of return.
D. none of the above answers are correct.
24. An investment that cost $48,000 provided annual cash inflows of $9,000 per year for six years. The desired rate of return is 10%. The
actual return from the investment was (Do not round your PV factors and intermediate calculations):
A. less than the desired rate of return.
B. equal to the desired rate of return.
C. greater than the desired rate of return.
D. the answer cannot be determined from the information provided.
25. Select theincorrectstatement concerning the internal rate of return (IRR) method of evaluating capital projects.
A. The higher the IRR the better.
B. A project whose IRR is less than the cost of capital should be rejected.
C. If a project has a positive net present value then its IRR will exceed the hurdle rate.
D. The internal rate of return is that rate that makes the present value of the initial outlay equal to zero.
26. Which of the following is the approximate internal rate of return for an investment that costs $45,880 and provides a $4,000 annuity for
20 years?
A. 5%
B. 6%
C. 8%
D. 10%
27. Tawanna is considering starting a small business. She plans to purchase equipment costing $145,000. Rent on the building used by the
business will be $24,000 per year while other operating costs will total $30,000 per year. A market research specialist estimates that
Tawanna's annual sales from the business will amount to $90,000. Tawanna plans to operate the business for 6 years. Disregarding the
effects of taxes, what will be the amount of annual net cash flow generated by the business?
A. $36,000
B. $54,000
C. $90,000
D. None of the above answers are correct.
28. Cash outflows can be categorized into all of the following groups except:
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A. opportunity costs associated with selecting a specific capital project.
B. outflows associated with the initial investment.
C. working capital commitments.
D. increases in operating expenses.
29. Which of the following would be considered a cash inflow in determining the value of a capital investment?
A. Incremental revenues from increased productivity
B. Cost savings from a reduction in labor hours
C. A reduction in working capital commitments
D. All of the above answers are correct.
30. A capital investment project may provide cash inflows from:
A. incremental revenues.
B. cost savings.
C. the salvage value of the investment.
D. all of the above answers are correct.
31. Cash outflows from a capital investment project include:
A. incremental revenues.
B. the reduction in the amount of working capital.
C. increases in operating expenses.
D. all of the above answers are correct.
32. Select theincorrectstatement concerning the present value index (PVI).
A. The PVI is computed by dividing the total present value of the cash inflows by the present value of the cash outflows.
B. The PVI should be used to evaluate two or more projects whose initial investments differ.
C. The lower the PVI, the better.
D. A project whose PVI is positive will also have a positive net present value.
33. Britannia Company has two investment opportunities. A cash flow schedule for the investments is provided below:
Considering the unequal investments, which of the following techniques would be most appropriate for choosing between Investment A
and Investment B?
A. Payback technique
B. Present value index
C. Net present value technique
D. None of the above answers are correct.
34. Mountain Brook Company is considering two investment opportunities whose cash flows are provided below:
The company's hurdle rate is 12%. What is the present value index of Investment A? (Do not round your PV factors and intermediate
calculations.)
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A. 1.01
B. 1.00
C. 0.97
D. None of the above answers are correct.
35. An investment that costs $5,000 will produce annual cash flows of $2,000 for a period of 4 years. Given a desired rate of return of 10%,
the investment will generate a present value index of (Do not round your PV factors and intermediate calculations):
A. 0.789.
B. 1.268.
C. 2.500.
D. 7.745.
36. East Ridge Company is considering a capital project that delivers a $50,000 annual net cash flow before tax. The investment will result in
annual depreciation expense of $10,000 over the project's fouryear useful life. Assuming a tax rate of 40%, what amount of annual aftertax
net cash flow will be provided by this project?
A. $40,000
B. $16,000
C. $24,000
D. $34,000
37. Synthesis Company is considering the purchase of a piece of equipment that costs $105,000. The equipment would be depreciated on a
straightline basis to its expected salvage value of $5,000 over its 10year useful life. Assuming a tax rate of 40%, what is the annual
amount of the depreciation tax shield provided by this investment?
A. $10,000
B. $6,000
C. $4,000
D. None of the above answers are correct.
38. Nielsen Company is considering the purchase of an asset that will provide a depreciation tax shield of $20,000 per year for 10 years.
Assuming the company is subject to a 40% tax rate during the period, what is the depreciable cost of the new asset?
A. $200,000
B. $333,333
C. $500,000
D. Can't be determined from the information provided
39. Mackinac Company is considering a capital project that costs $16,000. The project will deliver the following cash flows:
Using the incremental approach, the payback period for the investment is:
A. 5 years.
B. 2.4 years.
C. 2 years.
D. 1.66 years.
40. Grange Company has the opportunity to purchase an asset that costs $45,000. The asset is expected to increase net income by $15,000 per
year. Depreciation expense will be $5,000 per year. Based on this information the payback period is:
A. 3 years.
B. 2.25 years.
C. 2.5 years.
D. 9 years.

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Solution: Question_DOC1_Dec11  Answer