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1 | |
The net present value method takes into account:| | Cash Flow Over | Time Value | | | Life of Project | of Money | | A) | Yes | Yes | | B) | Yes | No | | C) | No | Yes | | D) | No | No |
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| | A) | Answer A |
| | B) | Answer B |
| | C) | Answer C |
| | D) | Answer D |
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2 | |
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. |
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3 | |
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. |
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4 | |
Which of the following statements are true? |
| | 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. |
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5 | |
An increase in the discount rate: |
| | A) | is one method of compensating for reduced risk. |
| | B) | will have no effect on net present value. |
| | C) | will increase the present value of future cash flows. |
| | D) | will reduce the present value of future cash flows. |
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6 | |
Parker Company is considering the following investment proposals:| | Investment Proposal | | | A | B | C | D | | Investment required | $80,000 | $100,000 | $60,000 | $75,000 | | Present value of future net cash flows | 96,000 | 150,000 | 84,000 | 120,000 |
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. |
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7 | |
The following data pertain to an investment that is being considered by the management of Caillabotte Company:| Cost of the investment | $37,910 | | Life of the project | 5 years | | Annual cost savings | $ 10,000 | | Estimated salvage value | $ 2,000 | | Discount rate | 10% |
The net present value of the proposed investment is: |
| | A) | ($6,860). |
| | B) | $-0-. |
| | C) | $1,242. |
| | D) | $6,710. |
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8 | |
Simmons Company has gathered the following data on a proposed investment project:| Investment required in equipment | $400,000 | | Annual cash inflows | $80,000 | | Salvage value | $-0- | | Life of the investment | 10 years | | Discount rate | 10% |
The net present value on this investment is closest to: |
| | A) | $(96,720). |
| | B) | $80,000. |
| | C) | $91,600. |
| | D) | $491,600. |
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9 | |
Simmons Company has gathered the following data on a proposed investment project. | Investment required in equipment | $400,000 | | Annual cash inflows | $80,000 | | Salvage value | $-0- | | Life of the investment | 10 years | | Discount rate | 10% |
(Note that this is the same data as that provided for the question above.) The payback period for the investment is closest to: |
| | A) | 0.2 years. |
| | B) | 1.0 years. |
| | C) | 3.0 years. |
| | D) | 5.0 years. |
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10 | |
Simmons Company has gathered the following data on a proposed investment project. | Investment required in equipment | $400,000 | | Annual cash inflows | $80,000 | | Salvage value | $-0- | | Life of the investment | 10 years | | Discount rate | 10% |
(Note that this is the same data as that provided for the question above.) Assume that excess of incremental revenues over the incremental expenses (including depreciation) equal the annual cash inflows. The simple rate of return on the investment is closest to: |
| | A) | 10%. |
| | B) | 20%. |
| | C) | 30%. |
| | D) | 40%. |
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2002 McGraw-Hill Higher Education