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Multiple Choice Quiz
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1
Present Value of Series of $1 Cash Flows (annuity):
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A project will cost $50,000 and the annual net cash inflows will be $11,871 for the 5-year life of the project. The company has an 8% cost of acquiring investment capital. Use the present value table above and calculate the internal rate of return (IRR).
A)4%.
B)6%.
C)8%.
D)10%.
E)12%.
2
Present Value of Series of $1 Cash Flows (annuity):
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A company's initial cash outflow for an investment project is $68,000 and the investment's annual cash inflow for 5 years is $18,000 per year. Calculate the net present value of the investment project assuming the company has an 8% hurdle rate.
A)–0–
B)$3,874
C)$7,816
D)$22,000
E)None of the above
3
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
E)None of the above
4
Present Value of $1
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Consider the following information for two projects:
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The hurdle rate is 10%. Which of the following is true?
A)The present value of the operating costs 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)The present value of the cash outflow for Year Two, Project B, is $(37,723)
E)Only (A) and (C) are true.
5
Present Value of $1
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A company is considering the purchase of a new refrigerated delivery truck for $175,000. The company has a desired rate of return of 8% and plans to use the truck in operations for 5 years, at which time it will be replaced. Management believes that the truck will generate annual incremental revenue, net of cost of goods sold, of $85,000. Annual cash operating costs are expected to increase by $35,000. Management plans to depreciate the asset as a 5 year asset under MACRS (20% year 1, 32% year 2, 19.2% year 3, 11.52% year 4 & year 5, 5.76% in year 6). Assume a 30% tax rate. The net present value (taking income taxes into consideration) of the delivery truck purchase is closest to:
A)$7,349
B)$(35,245)
C)$49,476
D)$7,652
E)None of the above

6
Present Value of $1
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A company is considering the purchase of a new refrigerated delivery truck for $175,000. The company has a desired rate of return of 8% and plans to use the truck in operations for 5 years, at which time it will be replaced. Management believes that the truck will generate incremental annual net sales revenue of $85,000 (after taking in to account the increase in cost of goods sold). Annual cash expenses are expected to increase by $35,000. Management plans to depreciate the asset as a 5 year asset under MACRS (20% year 1, 32% year 2, 19.2% year 3 and 11.52% year 4 & year 5, 5.76% in year 6) and to sell it for its net book value. Assume a 30% tax rate. Taking income taxes into consideration, the length of the pay-back period for this particular investment option is closest to:
A)1 year
B)2 years
C)3 years
D)4 years
E)5 years or more
7
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
E)$10,750
8
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.
E)Depreciation percentages for each MACRS property class are in published IRS tables.
9
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)$12,800
B)$16,000
C)$14,800
D)$4,000
E)$8,000
10
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)
E)Proceeds from the sale – (Gain/Tax rate)
11
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)
E)Proceeds from the sale – (Loss x (1+Tax rate))
12
Present Value of $1
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Consider the following for each of the 3-year projects, using a 10% discount rate:
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Which of the projects has the lowest net present value?
A)Project A
B)Project B
C)Project C
D)Project D
E)Cannot be determined from the information provided.
13
Consider the following:
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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.
E)Profitability rate cannot be determined from the information provided.
14
Consider the following:
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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%
E)1.00%
15
Which of the following is not one of the difficulties in applying the NPV approach to a CIM investment decision?
A)Hurdle rates that are set too low.
B)Time horizons are too short.
C)Bias toward incremental projects.
D)Greater uncertainties about operating cash flows.
E)Exclusion of benefits which are difficult to quantify.





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