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| 1 | |
A capital investment decision is essentially a decision to: |
| | A) | exchange current assets for current liabilities. |
| | B) | exchange current cash outflows for the expectation of receiving future cash inflows. |
| | C) | exchange current cash flow from operations for future decrease in equity |
| | D) | exchange current cash inflows for future cash outflows. |
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| 2 | |
In addition to incremental revenues, cash inflows from capital investments can be generated from all of the following sources except: |
| | A) | debt financing |
| | B) | cost savings |
| | C) | salvage value |
| | D) | reduction in the amount of working capital |
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| 3 | |
Ajax invested $120,000 in a machine with a 4-year useful life. The machine will generate a net cash flow of $40,000 per year.
What is the unadjusted rate of return? |
| | A) | 16.67% |
| | B) | 300% |
| | C) | 33.3% |
| | D) | 66.67% |
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| 4 | |
A $300,000 investment can save $60,000 a year for 6 years. Should this investment be accepted if alternative investments achieve a 10% return? |
| | A) | No, the project should be accepted only if it saved $65,000 or more a year. |
| | B) | No, the net present value is a negative value. |
| | C) | Yes, the project has a payback of five years. |
| | D) | Yes the project pays back more than the $300,000 invested. |
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| 5 | |
Ajax Rentals has an opportunity to purchase a truck for $130,000 with a useful life of 5 years and a $20,000 salvage value. Spare parts totaling $4,000 must be purchased when the truck is acquired and this cost will be recovered at the end of the truck's useful life. After two years a $25,000 major overhaul is needed. Ajax can generate $75,000 a year in delivery revenues, and operating expenses will be $35,000 a year, without depreciation. Cost of capital is 8%.
What is the present value of cash outflows? |
| | A) | $176,683 |
| | B) | $290,178 |
| | C) | $293,735 |
| | D) | $509,992 |
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| 6 | |
Ajax Rentals has an opportunity to purchase a truck for $130,000 with a useful life of 5 years and a $20,000 salvage value. Spare parts totaling $4,000 must be purchased when the truck is acquired and this cost will be recovered at the end of the truck's useful life. After two years a $25,000 major overhaul is needed. Ajax can generate $75,000 a year in delivery revenues, and operating expenses will be $35,000 a year, without depreciation. Cost of capital is 8%.
Assuming Ajax has a 40% tax rate, would it accept the project? |
| | A) | Yes, taxes paid will cost $36,000 over 5 years. |
| | B) | No, but the net present value of the project will be lower. |
| | C) | Yes, depreciation expense is $110,000 over 5 years. |
| | D) | No, depreciation does not have a cash flow impact. |
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| 7 | |
Which project shown below would be selected based upon the net present value?
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| | A) | Digital camera |
| | B) | Scanner |
| | C) | Neither project as they produce a negative net present value. |
| | D) | Both projects have the same net present value. |
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| 8 | |
A company earns an income of $200 from a project that requires a $1,500 investment. The $200 represents: |
| | A) | Recovery of Investment |
| | B) | Return of Investment |
| | C) | Recovery on Investment |
| | D) | Return on Investment. |
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| 9 | |
The unadjusted rate of return: |
| | A) | is the most accurate investment evaluation technique. |
| | B) | is somewhat misleading because it does not recognize recovery of the cost of the asset. |
| | C) | is not useful because it does not include cash remitted for taxes. |
| | D) | calculates the amount of time to recover the cost of the asset purchase. |
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| 10 | |
Candy Cups is considering whether to purchase either a machine that manufactures cups with names printed on them or a bow tying machine. The cup machine will cost $5,000 and, over its 5 year life, will provide net cash inflows of $1,800 per year. The bow tier costs $3,000 and will save $1,200 net cash outflow per year for 5 years.
What is the IRR, internal rate of return for the cup machine? |
| | A) | 2.3% |
| | B) | 23% |
| | C) | 2.9% |
| | D) | 29% |
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| 11 | |
Candy Cups is considering whether to purchase either a machine that manufactures cups with names printed on them or a bow tying machine. The cup machine will cost $5,000 and, over its 5 year life, will provide net cash inflows of $1,800 per year. The bow tier costs $3,000 and will save $1,200 net cash outflow per year for 5 years.
What is the IRR, internal rate of return for the bow tying machine? |
| | A) | 2.3% |
| | B) | 23% |
| | C) | 2.9% |
| | D) | 29% |
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| 12 | |
Candy Cups is considering whether to purchase either a machine that manufactures cups with names printed on them or a bow tying machine. The cup machine will cost $5,000 and, over its 5 year life, will provide net cash inflows of $1,800 per year. The bow tier costs $3,000 and will save $1,200 net cash outflow per year for 5 years.
What is the payback period for the cup machine? |
| | A) | sometime in September in the third year. |
| | B) | 3 years. |
| | C) | sometime in October in the fourth year. |
| | D) | 4 years. |
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| 13 | |
Candy Cups thinks that offering delivery will increase their sales. Candy is considering whether to purchase a used delivery truck or hire a delivery service. The truck will cost $12,000 and last roughly 5 years. The delivery service will charge $3,600 per year for the next five years. Candy can borrow from the bank at 8%.
What is the net present value of the truck purchase? |
| | A) | $1,200/month |
| | B) | $2,400/year |
| | C) | $12,000 |
| | D) | $18,000 |
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| 14 | |
Candy Cups thinks that offering delivery will increase their sales. Candy is considering whether to purchase a used delivery truck or hire a delivery service. The truck will cost $12,000 and last roughly 5 years. The delivery service will charge $3,600 per year for the next five years. Candy can borrow from the bank at 8%.
Should Candy invest in the truck or use the delivery service? |
| | A) | buy the truck for a savings of $2,373. |
| | B) | hire the delivery service for $200 a month. |
| | C) | buy the truck, although it costs more than the delivery as the eventual savings will increase the IRR. |
| | D) | none of the above. |
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| 15 | |
Candy Cups thinks that offering delivery will increase their sales. Candy is considering whether to purchase a used delivery truck costing $12,000. Net cash inflow from the delivery service will be $3,400. The truck will last roughly 5 years.
What is the unadjusted rate of return? |
| | A) | about 7.2% |
| | B) | about 8.3% |
| | C) | about 18.3% |
| | D) | about 72% |
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