The correct answer for each question is indicated by a .

1

The net present value method takes into account:

A)

the cash flow over the life of the project and the time value of money.

B)

the cash flow over the life of the project but not the time value of money.

C)

the time value of money but not the cash flow over the life of the project.

D)

neither the cash flow over the life of the project nor the time value of money.

2

An increase in the discount rate will:

A)

compensate for reduced risk.

B)

have no effect on net present value.

C)

increase the present value of future cash flows.

D)

reduce the present value of future cash flows.

3

The following data pertain to an investment that is being considered by the management of Hanson Company.

(24.0K) The net present value of the proposed investment is:

A)

($6,860).

B)

$-0-.

C)

$1,242.

D)

$6,710.

4

In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total-cost approach will be:

A)

less than the net present value obtained using the incremental cost approach.

B)

the same as the net present value obtained using the incremental cost approach.

C)

greater than the net present value obtained using the incremental cost approach.

D)

indeterminable.

5

Hartley Company is considering the following investment proposals.

How should management rank the proposals in terms of preference using the profitability index?

A)

D, B, C, A

B)

B, D, C, A

C)

B, D, A, C

D)

A, C, B, D

6

The preference rule for ranking projects by the profitability index is:

A)

the higher the profitability index, the more desirable the project.

B)

the lower the profitability index, the more desirable the project.

C)

the higher the sunk cost, the more desirable the project.

D)

the lower the sunk cost, the more desirable the project.

7

Which of the following statements is correct?

A)

The payback period is the length of time it takes for an investment to recoup its own initial cost out of the cash receipts it generates.

B)

Projects with shorter payback periods are always more profitable than projects with longer payback periods.

C)

The payback method of making capital budgeting decisions gives full consideration to the time value of money.

D)

If new equipment is replacing old equipment, any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment.

8

Hamell Company has gathered the following data on a proposed investment project.

(Note that this is the same data that was provided for the previous question.) Assume that excess of incremental revenues over the incremental expenses (including depreciation) equal the annual cash inflows. The simple rate of return on the proposed investment is closest to:

A)

10%.

B)

20%.

C)

30%.

D)

40%.

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