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A project will cost $50,000 and the annual net cash inflows will be $12,000 for the 5-year life of the project. The company has a 12% cost of capital. Use the present value table above and determine which of the following statements is (are) true. |
| | A) | The project should be accepted. |
| | B) | The present value of the net cash inflows is $43,260. |
| | C) | The net present value is ($6,740). |
| | D) | Statements B and C are true. |
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A company's initial cash outflow for an investment project is $75,820 and the investment's annual cash inflow for 5 years is $20,000 per year. Calculate the internal rate of return (or time-adjusted rate of return) on the investment project. |
| | A) | 6% |
| | B) | 8% |
| | C) | 10% |
| | D) | 12% |
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A company's initial cash outflow for an investment project is $62,400, and the investment's annual cash inflow for 4 years is $18,000 per year. Calculate the internal rate of return on the investment project, within .5%. |
| | A) | 6% |
| | B) | 8% |
| | C) | 4% |
| | D) | 5% |
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| 4 | |
A company's initial cash outflow for an investment project is $68,660, and the investment's annual cash cost savings for 5 years is $20,000 per year. The internal rate of return for the project is 14%. To the nearest dollar, what is the amount of the unrecovered investment at the end of the second year? |
| | A) | $28,660 |
| | B) | $58,272 |
| | C) | $32,930 |
| | D) | $46,430 |
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| 5 | |
The acquisition cost of machinery is $60,000. The projected annual cost savings over the next five years is $13,000 per year. Using a discount factor of 3.791 (10%, 5 periods), the net present value of the cash inflows is $49,283, and the project is unacceptable. What is the least amount of annual cost savings per year that would result in a decision to acquire the machinery? |
| | A) | $60,000/5 = $12,000.00 |
| | B) | $49,283/5 = $9,856.60 |
| | C) | $49,283/3.791 = $13,000 |
| | D) | $60,000/3.791 = $15,827 |
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| 6 | |
When the cash flows from a project are uneven, varying from year to year, which is true about determining the internal rate of return for an investment project? |
| | A) | It is easy and simple to calculate. |
| | B) | It requires iteration. |
| | C) | It cannot be determined. |
| | D) | It can be determined by using an average cash flow. |
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| 7 | |
Which of the following is one of the potential advantages of the net-present value (NPV) method over the internal-rate-of-return (IRR) method? |
| | A) | It is easier to compute a project's NPV than its IRR |
| | B) | A project's NPV does not have to be adjusted for risk considerations |
| | C) | A hurdle rate is not used in the NPV method |
| | D) | NPV method relies on a single discount rate |
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| 8 | |
Which of the following is an assumption underlying discounted-cash-flow analysis? |
| | A) | All cash inflows are treated as though they occur at year-end. |
| | B) | All cash inflows are immediately reinvested at the IRR rate. |
| | C) | It assumes a perfect capital market. |
| | D) | All of the above |
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| 9 | |
Which of the following statements is false? |
| | A) | The hurdle rate is based on the investment opportunity rate. |
| | B) | In capital-expenditure decisions, the investment decision should be separated from the finance decision. |
| | C) | For profit-oriented enterprises, the only cost of capital is the cost of borrowing. |
| | D) | The cost of capital may be the interest rate foregone on an original investment. |
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| 10 | |
Which of the following about cash flows is false? |
| | A) | Cash flows can be to external parties. |
| | B) | Cash flows can flow inward to the organization. |
| | C) | Cash flows include depreciation. |
| | D) | Cash flows are worth more today than the same cash flows three years from now. |
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| 11 | |
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The hurdle rate is 10%. Which of the following is true? |
| | A) | The present value of the cash outflow for Year One, Project A, is $(16,817). |
| | B) | The present value of the acquisition cost of Project A is $(54,540). |
| | C) | The present value of the cash outflow for Year Two, Project B, is $(12,390). |
| | D) | Only (A) and (C) are true. |
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The hurdle rate is 8%. Which of the following is true? |
| | A) | The present value of the cash outflow for Year One, Project B, is $(21,425). |
| | B) | The present value of the acquisition cost of Project B is $(54,897). |
| | C) | The present value of the cash outflow for Year Two, Project A, is $(11,910). |
| | D) | The present value of the acquisition cost for Project B is $(90,000). |
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| 13 | |
Which of the following is the formula for determining the after-tax cash inflow for cash revenues? |
| | A) | Incremental sales revenue, net of cost of goods sold x Tax rate |
| | B) | Incremental sales revenue, net of cost of goods sold x (1 - Tax rate) |
| | C) | Incremental sales revenue, net of cost of goods sold /Tax rate |
| | D) | Incremental sales revenue, net of cost of goods sold /(1 - Tax rate) |
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| 14 | |
Which of the following is the formula for determining the after-tax cash outflow for cash expenses? |
| | A) | Incremental cash expense x Tax rate |
| | B) | Incremental cash expense x (1 - Tax rate) |
| | C) | Incremental cash expense/Tax rate |
| | D) | Incremental cash expense/(1 - Tax rate) |
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| 15 | |
Which of the following is the formula for determining the depreciation tax shield? |
| | A) | Depreciation expense x Tax rate |
| | B) | Depreciation expense x (1 - Tax rate) |
| | C) | Depreciation expense/Tax rate |
| | D) | Depreciation expense/(1 - Tax rate) |
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| 16 | |
A company purchased an asset for $120,000. The second year depreciation expense is $30,000. The company's tax rate is 35%. What is the depreciation tax shield for the second year? |
| | A) | $10,500 |
| | B) | $30,000 |
| | C) | $19,500 |
| | D) | $8,750 |
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What is the present value of the total cash flow for Year 2? |
| | A) | $00 |
| | B) | $9,912 |
| | C) | $23,128 |
| | D) | $56,168 |
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| 18 | |
Which of the following is false about the use of MACRS for tax purposes? |
| | A) | A half-year convention is used. |
| | B) | Salvage value is not considered. |
| | C) | Straight-line depreciation is optional to MACRS. |
| | D) | Every asset is placed in one of six classes. |
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A depreciable asset cost $40,000, has a $3,000 salvage value, and is in the 5-year MACRS property class life, which is depreciated under the double-declining balance (DDB) method. What is the amount of the first year depreciation expense under MACRS? |
| | A) | $8,000 |
| | B) | $16,000 |
| | C) | $14,800 |
| | D) | $4,000 |
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| 20 | |
Which of the following formulas will yield the total cash flow from the sale of a depreciable asset at a gain? |
| | A) | Proceeds from the sale - (Gain x Tax rate) |
| | B) | Proceeds from the sale x (1 - Tax rate) |
| | C) | Proceeds from the sale + (Gain x (1 - Tax rate)) |
| | D) | Proceeds from the sale + (Gain x Tax rate) |
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| 21 | |
Which of the following formulas will yield the total cash flow from the sale of a depreciable asset at a loss? |
| | A) | Proceeds from the sale + (Loss x (1 +Tax rate)) |
| | B) | Proceeds from the sale x (1 - Tax rate) |
| | C) | Proceeds from the sale + (Loss x (1 - Tax rate)) |
| | D) | Proceeds from the sale + (Loss x Tax rate) |
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| 22 | |
In order to support a project, a firm must increase its merchandise inventory by $20,000 throughout the five-year period of the project. In a discounted-cash-flow analysis of the project, the increase in merchandise is treated as which of the following? |
| | A) | An operating expense (cost of goods sold) |
| | B) | A tax shield |
| | C) | An investment in working capital |
| | D) | An after-tax cash outflow |
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Which of the projects has the lowest net present value? |
| | A) | Project A |
| | B) | Project B |
| | C) | Project C |
| | D) | Cannot be determined from information provided. |
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| 24 | |
The profitability index is computed by dividing the cost of the initial investment into which of the following? |
| | A) | Cash flows plus the initial investment. |
| | B) | Present value of cash flows exclusive of initial investment. |
| | C) | Present value of cash flows exclusive of after-tax cash outflows. |
| | D) | Present value of cash flows including the after-tax cash outflows. |
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Which of the following statements is TRUE? |
| | A) | Project A has the lowest profitability index. |
| | B) | Project B has the lowest profitability index. |
| | C) | Project C has the lowest profitability index. |
| | D) | Project B would be ranked number 1, using the profitability index for ranking projects. |
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| 26 | |
The present value of cash flows, exclusive of the initial investment is $450,000. The profitability index is 3.0. What was the initial investment? |
| | A) | $1,575,000 |
| | B) | $150,000 |
| | C) | $300,000 |
| | D) | $100,000 |
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| 27 | |
A firm will spend $120,000 to purchase production equipment, which has an estimated service life of 8 years. The cash inflows resulting from the purchase of the equipment will be $30,000 annually, for six years, at which time the equipment will be replaced. The annual cash inflows will be subject to a tax rate of 30%. What will be the length of the payback period? |
| | A) | 4.00 years |
| | B) | 13.00 years |
| | C) | 5.71 years |
| | D) | It will occur after the useful life of the equipment expires. |
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The annual cash inflows will be subject to a tax rate of 30%. What will be the length of the payback period? |
| | A) | 2.5 years |
| | B) | 3.18 years |
| | C) | 3.257 years |
| | D) | 3.10 years |
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At a 10% discount rate for determining the present value of cash flows, the discount factors for Years 1 to 3 are 0.909, 0.826, and 0.751, respectively. Ignoring income taxes, which of the following is TRUE? |
| | A) | The total of the discounted cash flows will be less than the original investment. |
| | B) | The total of the discounted cash flows will exceed the original investment in lessthan three years. |
| | C) | The total of the discounted cash flows will equal the original investment in two years. |
| | D) | None of the above is true. |
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The initial investment was $240,000, and the period of investment is 4 years. What is the accounting rate of return for the 4-year period? |
| | A) | 43.64% |
| | B) | 10.00% |
| | C) | 6.00% |
| | D) | 60.00% |
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The initial investment was $240,000, and the period of investment is 4 years. What is the average annual investment for the 4-year period? |
| | A) | $60,000 |
| | B) | $120,000 |
| | C) | $24,000 |
| | D) | $150,000 |
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| 32 | |
The average incremental revenue is $40,000. The average incremental expense including depreciation and income taxes is $32,000. The accounting rate of return using average investment is 12.5%. What is the average investment? |
| | A) | $8,000 |
| | B) | $100,000 |
| | C) | $80,000 |
| | D) | $64,000 |
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| 33 | |
What is the general rule of thumb that describes the relationships between the internal rate of return, the accounting rate of return using initial investment, and the accounting rate of return using average investment? |
| | A) | Accounting rate of return (using average investment) < Internal rate of return < Accounting rate of return (using initial investment). |
| | B) | Internal rate of return < Accounting rate of return (using average investment) < Accounting rate of return (using initial investment). |
| | C) | Accounting rate of return (using initial investment) < Internal rate of return < Accounting rate of return (using average investment). |
| | D) | Accounting rate of return (using initial investment) < Accounting rate of return (using average investment) < Internal rate of return. |
| | E) | Accounting rate of return (using average investment) < Accounting rate of return (using initial investment) < Internal rate of return. |
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| 34 | |
Which of the following is a difficulty in applying the NPV approach to a CIM investment decision? |
| | A) | Hurdle rates are too high |
| | B) | Time horizons which are too short |
| | C) | Bias toward incremental projects |
| | D) | All of the above |
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