braun3 12 tif

Managerial Accounting, 3e (Braun/Tietz)

Chapter 12 Capital Investment Decisions and the Time Value of Money

1) Capital investments do not typically require large sums of money.

Answer: FALSE

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective Thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

2) The process of making capital investment decisions is referred to as capital budgeting.

Answer: TRUE

Diff: 1

LO: 12-1

EOC: S12-1



3) Self-check-in machines at airports are an example of capital assets.

Answer: TRUE

Diff: 1

LO: 12-1

EOC: E12-16



4) Capital budgeting is done when common stock is issued.

Answer: FALSE

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Analytical Thinking


5) Choosing among alternative capital investments is called a post-audit.

Answer: FALSE

Diff: 1

LO: 12-1

EOC: S12-1



6) Post-audits of capital investments compare actual net cash inflows to projected net cash inflows.

Answer: TRUE

Diff: 1

LO: 12-1

EOC: S12-1



7) The costs to develop a major website for a company would be considered to be a capital asset if those costs are significant and material (for example, the costs to develop the website exceed $100,000).

Answer: TRUE

Diff: 1

LO: 12-1

EOC: E12-16



8) The cost associated with renovating a warehouse to be used as a restaurant would be considered to be a capital asset.

Answer: TRUE

Diff: 1

LO: 12-1

EOC: E12-16



9) The health care insurance cost of a company for its assembly-line workers would not be considered to be a capital asset.

Answer: TRUE

Diff: 1

LO: 12-1

EOC: E12-16



10) The following are all methods of analyzing capital investments except

A) Payback Period.

B) Regression Analysis.

C) Net Present Value (NPV).

D) Accounting Rate of Return (ARR).

Answer: B

Diff: 1

LO: 12-1

EOC: E12-16



11) Which of the following items would be considered a capital asset?

A) Purchase of office supplies to be used internally over the next year

B) Payment for this year's advertising campaign

C) Construction of a new store building

D) Donation of money to United Way

Answer: C

Diff: 1

LO: 12-1

EOC: E12-16



12) Which of the following is a characteristic of a capital asset?

A) The item will be used for a long period of time.

B) The item involves a significant sum of money.

C) None of these characteristics are correct.

D) Both A and B are correct.

Answer: D

Diff: 1

LO: 12-1

EOC: E12-16



13) The process of choosing among different alternative investments due to limited resources is referred to as

A) capital investing.

B) capital rationing.

C) resource rationing.

D) resource allocation.

Answer: B

Diff: 1

LO: 12-1

EOC: S12-1



14) The ________ capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations.

A) ARR

B) Payback

C) NPV

D) IRR

Answer: A

Diff: 1

LO: 12-1

EOC: S12-15



15) Regarding capital rationing decisions for capital assets, which of the following is true?

A) Companies should always choose the investment with the shortest payback period.

B) Companies should always choose the investment with the highest NPV.

C) Companies should always choose the investment with the highest ARR.

D) None of the above are true.

Answer: D

Diff: 1

LO: 12-1

EOC: S12-15



16) After a company invests in capital assets, it will perform a ________ in order to compare the actual to the projected net cash inflows.

A) cash flow analysis

B) pre and post analysis

C) post-audit

D) post-cash flow

Answer: C

Diff: 1

LO: 12-1

EOC: S12-1



17) The term ________ is described as a "formal means of analyzing long-range investment alternatives."

A) annuity

B) time value of money

C) payback period

D) capital budgeting

Answer: D

Diff: 1

LO: 12-1

EOC: S12-1



18) The term ________ is best described as a "relationship among principal, interest rate, and time."

A) capital budgeting

B) time value of money

C) payback period

D) annuity

Answer: B

Diff: 1

LO: 12-1

EOC: S12-7



19) The term ________ is best described as "a stream of equal periodic payments."

A) time value of money

B) capital budgeting

C) annuity

D) payback period

Answer: C

Diff: 1

LO: 12-1

EOC: S12-7



20) The term ________ is best described as "the length of time required to recover the cost of an investment."

A) time value of money

B) payback period

C) capital budgeting

D) annuity

Answer: B

Diff: 1

LO: 12-1

EOC: E12-17



21) The accounting rate of return uses non-cash flow factors including depreciation in calculating the operating income of the asset.

Answer: TRUE

Diff: 1

LO: 12-2

EOC: S12-15



22) Investments with longer payback periods are more desirable, all else being equal.

Answer: FALSE

Diff: 1

LO: 12-2

EOC: E12-17



23) The payback method can be used when the net cash inflows from a capital investment are unequal.

Answer: TRUE

Diff: 1

LO: 12-2

EOC: E12-18



24) Capital budgeting predictions must consider factors such as changing consumer preferences, competition, and government regulations.

Answer: TRUE

Diff: 1

LO: 12-2

EOC: S12-1



25) The accounting rate of return method of analyzing capital budgeting decisions measures the average annual rate of return from using the asset over its entire life.

Answer: TRUE

Diff: 2

LO: 12-2

EOC: E12-20



26) The accounting rate of return is a measure of profitability computed by dividing the average annual operating income from an asset by the initial amount invested in the asset.

Answer: TRUE

Diff: 2

LO: 12-2

EOC: E12-20


Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

27) Accrual-based accounting is not used in determining the accounting rate of return.

Answer: FALSE

Diff: 1

LO: 12-2

EOC: S12-15



28) The payback method primarily focuses on profitability and not time.

Answer: FALSE

Diff: 1

LO: 12-2

EOC: S12-15



29) One advantage of the internal rate of return is that it considers the time value of money.

Answer: TRUE

Diff: 1

LO: 12-2

EOC: S12-15



30) One disadvantage of the payback method is that it does not consider the time value of money.

Answer: TRUE

Diff: 1

LO: 12-2

EOC: S12-15



31) If the accounting rate of return exceeds the required accounting rate of return,

A) invest in the capital asset.

B) do not invest in the capital asset.

C) only invest if the payback period is also greater than the required rate of return.

D) only invest if the payback period is also less than the required rate of return.

Answer: A

Diff: 1

LO: 12-2

EOC: E12-20



32) How does depreciation affect the calculation of a project's payback period?

A) Depreciation is deducted from the annual cash inflows.

B) Depreciation is added to the annual cash inflows.

C) Depreciation is only deducted if the payback period exceeds five years.

D) Depreciation does not affect the payback calculation.

Answer: D

Diff: 1

LO: 12-2

EOC: E12-17



33) How does depreciation affect the calculation of a project's accounting rate of return (ARR)?

A) Depreciation is added to the annual cash inflows.

B) Depreciation is deducted from the annual cash inflows.

C) Depreciation does not affect ARR.

D) Depreciation is only deducted if the ARR is less than the minimum required rate of return.

Answer: B

Diff: 1

LO: 12-2

EOC: E12-20



34) Which of the following is used as the equation's numerator when computing the payback period for a capital asset with equal annual net cash inflows?

A) Expected annual cash inflow

B) Total cash inflows

C) Amount invested

D) Net cash outflow

Answer: C

Diff: 1

LO: 12-2

EOC: E12-17



35) Which of the following is used as the equation's numerator when computing the accounting rate of return for a capital asset?

A) Average amount invested in the asset

B) Average annual operating income from the asset

C) Total amount invested in the asset

D) Average net cash flows from the asset

Answer: B

Diff: 1

LO: 12-2

EOC: E12-19



36) All else being equal, a company would choose to invest in a capital asset if which of the following is true?

A) If the payback period equals the amount invested

B) If the expected accounting rate of return is less than the required rate of return

C) If the expected accounting rate of return is greater than the required rate of return

D) If the average amount invested is equal to the net cash inflows

Answer: C

Diff: 2

LO: 12-2

EOC: E12-20



37) The formula for calculating the accounting rate of return for a capital asset is

A) average annual operating income from asset/amount invested in asset.

B) average annual net cash inflow from asset/amount invested in asset.

C) (average annual operating income + depreciation expense)/amount invested in asset.

D) (average annual cash inflows - depreciation expense)/(amount invested in asset + residual value of asset).

Answer: A

Diff: 1

LO: 12-2

EOC: E12-19



38) Gomez Corporation is considering two alternative investment proposals with the following data:

Proposal XProposal Y

Investment$ 850,000$ 468,000

Useful life8 years8 years

Estimated annual net

cash inflows for 8 years$ 125,000$ 78,000

Residual value$ 40,000$ -

Depreciation methodStraight-lineStraight-line

Required rate of return14%10%

How long is the payback period for Proposal X?

A) 10.90 years

B) 6.00 years

C) 6.80 years

D) 21.25 years

Answer: C

Explanation: C) Payback = Investment/annual cash flow

$850,000.00/$125,000.00 = 6.8 years

Diff: 1

LO: 12-2

EOC: E12-17





Investment$ 850,000$ 468,000







How long is the payback period for Proposal Y?

A) 21.25 years

B) 6.00 years

C) 6.80 years

D) 11.70 years

Answer: B

Explanation: B) Payback = Investment/annual cash flow

$468,000/$78,000.00 = 6.0 years

Diff: 2

LO: 12-2

EOC: E12-17





Investment$ 850,000$ 468,000







What is the accounting rate of return for Proposal X?

A) 2.88 %

B) 14.71 %

C) 26.62 %

D) 2.79%

Answer: D

Explanation: D) (Annual net cash flow - depreciation)/Investment = Accounting rate of return

($125,000 - (850,000 - 40000/8))/850,000

($125,000 - 101,250)/850,000 = 2.79%

Diff: 2

LO: 12-2

EOC: E12-19





Investment$ 850,000$ 468,000







What is the accounting rate of return for Proposal Y?

A) 5.24%

B) 4.17%

C) 29.17%

D) 16.67%

Answer: B

Explanation: B) (Annual net cash flow - depreciation)/Investment = Accounting rate of return

($78,000 - (468,000/8))/468,000=

($78,000 - 58,500)/468,000 =4.17%

Diff: 2

LO: 12-2

EOC: E12-19



42) The Warren Company is considering investing in two alternative projects:

Project 1Project 2

Investment$400,000$250,000

Useful life (years)56

Estimated annual net cash inflows for useful life$100,000$45,000

Residual value$25,000$15,000



What is the payback period for Project 1?

A) 4.00 years

B) 5.56 years

C) 16.00 years

D) 8.89 years

Answer: A

Explanation: A) Payback = Investment/annual cash flow

$400,000/$100,000 = 4 years

Diff: 1

LO: 12-2

EOC: E12-17




Project 1Project 2

Investment$400,000$250,000






What is the payback period for Project 2?

A) 4.00 years

B) 5.56 years

C) 10.00 years

D) 16.00 years

Answer: B


$250,000/$45,000.00 = 5.56 years

Diff: 2

LO: 12-2

EOC: E12-17




Project 1Project 2

Investment$400,000$250,000






What is the accounting rate of return for Project 1?

A) 43.75%

B) 6.25%

C) 1.88%

D) 25.00%

Answer: B


($100,000 - (400,000 - 25,000/5))/400,000

($100,000 - 75,000)/400,000 = 6.25%

Diff: 2

LO: 12-2

EOC: E12-19




Project 1Project 2

Investment$400,000$250,000






What is the accounting rate of return for Project 2?

A) 33.67%

B) 3.00%

C) 18.00%

D) 2.33%

Answer: D

Explanation: D)

(Annual net cash flow - depreciation)/Investment = Accounting rate of return

($45,000 - (250,000 - 15,000/6))/250,000=

($45,000 - 39,167)250,000 =2.33 %

Diff: 2

LO: 12-2

EOC: E12-19



46) Ribelin Corporation is adding a new product line that will require an investment of $138,000. The product line is estimated to generate cash inflows of $25,000 the first year, $23,000 the second year, and $18,000 each year thereafter for ten more years. What is the payback period?

A) 7.26 years

B) 5.52 years

C) 7.00 years

D) 7.67 years

Answer: C

Diff: 2

LO: 12-2

EOC: E12-17



47) Pitt Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:

Investment AInvestment B

Initial capital investment$112,500$160,000

Estimated useful life5 years5 years

Estimated residual value$10,000$15,000

Estimated annual net cash inflow

For 3 years$25,000$40,000


How long is the payback period for Investment A?

A) 4.50 years

B) 4.10 years

C) 11.25 years

D) 2.49 years

Answer: A

Explanation: A) Payback = Investment/annual cash flow

$112,500/25,000 = 4.50 years

Diff: 2

LO: 12-2

EOC: E12-18



48) Pitt Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:

Investment AInvestment B

Initial capital investment$112,500$160,000

Estimated useful life5 years5 years


Estimated annual net cash inflow

For 3 years$25,000$40,000


How long is the payback period for Investment B?

A) 3.63 years

B) 4.00 years

C) 2.40 years

D) 10.67 years

Answer: B


$160,000/40,000 = 4.00 years

Diff: 2

LO: 12-2

EOC: E12-18



49) Landrum Corporation is considering investing in specialized equipment costing $250,000. The equipment has a useful life of 5 years and a residual value of $20,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:

Year 1$ 60,000

Year 2$ 90,000

Year 3$110,000

Year 4$ 40,000

Year 5$ 25,000

Total cash inflows$325,000

Landrum Corporation's required rate of return on investments is 14%.

What is the accounting rate of return on the investment?

A) 7.60%

B) 5.60%

C) 18.40%

D) 44.40%

Answer: A

Explanation: A) (Annual net cash flow - depreciation)/Investment = Accounting rate of return

($325,000/5 - (250,000 - 20,000)/5)/$250,000

($65,000 - $46,000)$/250,000 = 7.60 %

Diff: 2

LO: 12-2

EOC: E12-19



50) Cowell Corporation is considering an investment in new equipment costing $155,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $45,000 the first year, $65,000 the second year, and $90,000 every year thereafter until the fifth year. What is the payback period for this investment? The equipment has no residual value.

A) 2.04 years

B) 3.44 years

C) 1.72 years

D) 2.50 years

Answer: D

Diff: 2

LO: 12-2

EOC: E12-18



51) Suppose Whole Foods is considering investing in warehouse-management software that costs $600,000, has $60,000 residual value and should lead to cash cost savings of $130,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation's denominator?

A) $60,000

B) $600,000

C) $130,000

D) $275,000

Answer: B

Explanation: B) Investment = $600,000

Diff: 1

LO: 12-2

EOC: E12-18



52) The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated:

Estimated useful life: 3 years

Initial investment:$500,000

Savings year 1:$210,000



Residual value after 3 yrs$ 50,000

Total net inflows during the useful life of the asset are

A) $635,000.

B) $535,000.

C) $585,000.

D) $85,000.

Answer: C

Explanation: C)



Savings year 3:

Total$225,000

$585,000

Diff: 2

LO: 12-2

EOC: E12-17


Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts. Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.








Total operating income from the asset over the 3-year period is

A) $85,000.

B) $150,000.

C) $435,000.

D) $135,000.

Answer: D

Diff: 2

LO: 12-2

EOC: E12-19










The total depreciation expense over the life of the asset is

A) $150,000.

B) $550,000.

C) $450,000.

D) $585,000.

Answer: C

Explanation: C) Investment - residual value

$500,000 - 50,000 = 450,000

Diff: 2

LO: 12-2

EOC: E12-18










The accounting rate of return is closest to

A) 39.00%.

B) 9.00%.

C) 30.00%.

D) 7.69%.

Answer: B

Explanation: B)

(Annual net cash flow - depreciation)/Investment = Accounting rate of return

(210,000 + 150,000 + 225,000) - (500,000 - 50,000)/500,000

(585,000 - 450,000)/500,000 = 27.00

Divide by 3 years = 9.00 %

Diff: 2

LO: 12-2

EOC: E12-20



56) O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available:

Indiana proposalKentucky proposal

Required investment$1,920,000$2,500,000

Estimated life10 years10 years


Estimated annual cash inflows over the next 10 years$400,000$500,000


The payback period for the Kentucky proposal is closest to

A) 4.5 years.

B) 6.25 years.

C) 5.00 years.

D) 31.25 years.

Answer: C

Explanation: C) Investment/Annual cash flows

$2,500,000/500,000 = 5.0 yrs

Diff: 2

LO: 12-2

EOC: E12-18










The payback period for the Indiana proposal is closest to

A) 3.8 years.

B) 5.0 years.

C) 4.8 years.

D) 38.4 years.

Answer: C


$1,920,000/400,000 = 4.8 yrs

Diff: 2

LO: 12-2

EOC: E12-18










The accounting rate of return for the Kentucky proposal is closest to

A) 10.32%.

B) 11.09%.

C) 10.00%.

D) 20.00%.

Answer: A

Explanation: A) (Annual net cash flow - depreciation)/Investment = Accounting rate of return

($500,000 - (2,500,000 - 80,000)/10)/2,500,000

($500,000 - 242,000)/2,500,000 = 10.32%

Diff: 2

LO: 12-2

EOC: E12-18










The accounting rate of return for the Indiana proposal is closest to

A) 10.32%.

B) 11.09%.

C) 20.83%.

D) 10.83%.

Answer: B


($400,000 - (1,920,000 - 50,000)/10)/1,920,000

($400,000 - 187,000)/1,920,000 = 11.09375%

Diff: 2

LO: 12-2

EOC: E12-18



60) Runnin' Wild Family Fun Center bought new go-karts for its recreation facility. The useful life is 6 years. The go-karts had a total cost of $5,100 and will generate $1,700 total cash inflows each year for the life of the go-karts. The residual value of the go-karts is $650. The payback period in years is closest to

A) 3.38.

B) 3.00.

C) 2.62.

D) 2.17.

Answer: B

Explanation: B) Investment/Annual cash flows

5,100/1,700 = 3.00 yrs

Diff: 2

LO: 12-2

EOC: E12-17



61) Speedy Print Shop bought a new high-speed photo copier for customers to be able to bring in their digital pictures to make high-quality copies. Its useful life is 6 years. The copier cost $7,740 and will generate annual cash inflows of $2,150. The residual value of the copier is $1,320. The payback period in years is closest to

A) 4.21.

B) 3.60.

C) 2.99.

D) 2.23.

Answer: B


$7,740/2,150 = 3.6 yrs

Diff: 2

LO: 12-2

EOC: E12-17



62) Buxton Corporation is evaluating a capital investment project which would require an initial investment of $240,000 to purchase new machinery. The annual revenues and expenses generated specifically by this project each year during the project's nine year life would be:

Sales$185,000

Variable expenses$ 38,000

Contribution margin$147,000

Fixed expenses:

Salaries expense$ 31,000

Rent expense$ 24,000

Depreciation expense$ 25,000

Total fixed expenses$ 80,000

Operating income$ 67,000

The residual value of the machinery at the end of the nine years would be $15,000. The payback period of this potential project in years would be closest to

A) 2.6.

B) 3.6.

C) 3.1.

D) 1.4.

Answer: A

Explanation: A) Investment/Annual cash flows

$240,000 / (67,000 + 25,000) = 2.6 yrs

Diff: 3

LO: 12-2

EOC: E12-17



63) Smith & Cramer, Computer Repair, is considering an investment in computer and network equipment costing $254,000. This equipment would allow them to offer new programming services to clients. The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $60,000. Using the accounting rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve an 11% accounting rate of return?

A) $6,600

B) $21,340

C) $31,750

D) $27,940

Answer: D

Explanation: D) (Annual net cash flow - depreciation)/Investment = Accounting rate of return

Annual net cash flow/254,000 = 11%

Annual net cash flow = 11% 254,000 = 27,940.

Diff: 3

LO: 12-2

EOC: E12-20



64) Pro-Am Audio is a company that is contracted to DJ private events. Due to a recent increase in bookings, Pro-Am is considering the purchase of another mobile DJ unit. Pro-Am uses the payback method to evaluate its investments. The mobile DJ unit will cost $12,000, has a useful life of 10 years, and will generate $2,000 in net cash inflows per year. The residual value of the unit is $1,000. What is the payback period for the mobile DJ unit?

A) 6.50 years

B) 5.50 years

C) 6.00 years

D) 4.00 years

Answer: C


12,000 / 2,000 = 6 years

Diff: 2

LO: 12-2

EOC: E12-17



65) Sparky the Electrician specializes in rewiring historic houses. Sparky recently purchased a new wire-pulling device that will decrease the time to complete each job and increase total revenues. The device will cost $4,375 and will increase net cash flows by $1,750 per year. The new device has a useful life of 7 years and a residual value of $250. What is the payback period for the new wire-pulling device?

A) 2.64 years

B) 2.50 years

C) 2.36 years

D) 2.19 years

Answer: B


4,375 / 1,750 = 2.5 years

Diff: 2

LO: 12-2

EOC: E12-17



66) Bonneville Manufacturing is considering an investment that would require an initial net investment of $650,000. The following revenues/expenses relate exclusively to the investment:

Sales$350,000

Variable expenses$40,000

Contribution margin$310,000

Fixed expenses

Salaries expense$28,000

Rent expense$20,000

Depreciation expense$40,000

Total fixed expenses$88,000

Operating income$222,000

The investment will have a residual value of $50,000 at the end of its 15 year useful life. What is the payback period for this investment?

A) 1.86 years

B) 3.07 years

C) 2.93 years

D) 2.48 years

Answer: D

Explanation: D) Investment/Annual cash flows

$650,000 / (222,000 + 40,000) = 2.48 yrs

Diff: 3

LO: 12-2

EOC: E12-17



67) GlenGary Investment Corporation is analyzing a proposal to build condo units in southern Florida. The project will require an initial invest of $500,000. The building has a useful life of 20 years, a residual value of $200,000, and is depreciated on a straight-line basis. GlenGary uses the accounting rate of return model to evaluate investment projects. What is the minimum annual operating income that must be generated by this project to achieve the 9% accounting return required by GlenGary?

A) $18,000

B) $45,000

C) $25,000

D) $27,000

Answer: B


Annual net cash flow/500,000 = 9%

Annual net cash flow = 9% 500,000 = 45,000.

Diff: 3

LO: 12-2

EOC: E12-20



68) Globe Enterprises purchased a new machine with a total cost of $30,450 and a useful life of 6 years. The machine will produce net cash inflows of $7,250 over its useful life and has a residual value of $2,125. What is the payback period for the new machine?

A) 4.49 years

B) 3.91 years

C) 4.20 years

D) 3.25 years

Answer: C

Explanation: C) $30,450 / $7,250 = 4.20 years

Diff: 2

LO: 12-2

EOC: E12-17



69) Siesta Manufacturing has asked you to evaluate a capital investment project. The project will require an initial investment of $88,000. The life of the investment is 7 years with a residual value of $4,000. If the project produces net annual cash inflows of $16,000, what is the accounting rate of return?

A) 3.90%

B) 4.55%

C) 550.00%

D) 18.18%

Answer: B

Explanation: B) ($88,000 - 4,000)/7 years = $12,000 annual depreciation expense

$16,000 - $12,000/$88,000 = 4.55%

Diff: 2

LO: 12-2

EOC: E12-17



70) Abdul Corporation bought a new machine, which cost $90,000, has a useful life of 10 years, and will generate annual cash inflows of $25,000. The residual value of the machine is $5,500. What is the payback period?

Answer: $90,000/$25,000 = 3.60 years

Diff: 2

LO: 12-2

EOC: E12-17



71) The Toth Company bought a new specialty machine that cost $100,000 with a 4-year life with no residual value. The company plans to generate annual cash inflows of $30,000 each year for 4 years. Calculate the accounting rate of return.

Answer: 5.00%

Calculations:

($100,000 - 0)/4 years = $25,000 annual depreciation expense

$30,000 - $25,000/$100,000 = $5,000/$100,000 = 5.00%

Diff: 2

LO: 12-2

EOC: E12-17



72) The Hawn Corporation bought a new machine that cost $150,000 with a 10-year life and a residual value of $20,000. The company plans to generate annual cash inflows of $40,000 over 10 years. Calculate the accounting rate of return.

Answer: 18.00%

Calculations:

($150,000 - $20,000)/10 years = $13,000 annual depreciation expense

$40,000 - $13,000/$150,000 = $27,000/$150,000 = 18.00%

Diff: 2

LO: 12-2

EOC: E12-17



73) Sicily, Inc.., is considering investing $250,000 in a machine that will last 4 years with no residual value. The new machine will generate annual operating income of $55,000 per year for 4 years. What is the accounting rate of return?

Answer: 22%

Calculations:

$55,000/$250,000 = 22%

Diff: 2

LO: 12-2

EOC: E12-20



74) Buller Manufacturing is considering acquiring another facility for a cost of $610,000. The required payback period is 4.5 years. Assume annual net cash inflows are $150,000 for the first two years and $125,000 for years 3 and 4. What must the inflow be in the fifth year to meet the 4.5 year payback period?

Answer: $120,000

Calculations:

$300,000 + $250,000 + .5X = $610,000; X = $120,000

Diff: 3

LO: 12-2

EOC: E12-20



75) One dollar to be received in the future is worth more than one dollar today.

Answer: FALSE

Diff: 1

LO: 12-3

EOC: S12-10



76) The net present value method does not incorporate the time value of money.

Answer: FALSE

Diff: 1

LO: 12-3

EOC: S12-10



77) The principal amount, the interest rate, and the number of periods are all factors needed to calculate the time value of money.

Answer: TRUE

Diff: 1

LO: 12-3

EOC: S12-10



78) Calculating interest on the principal and on all the interest earned to date is called compound interest.

Answer: TRUE

Diff: 1

LO: 12-3

EOC: S12-10



79) When computing the present value of a future sum, the interest rate must always be expressed as an annual rate.

Answer: FALSE

Diff: 2

LO: 12-3

EOC: S12-10



80) The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.

Answer: TRUE

Diff: 1

LO: 12-3

EOC: S12-7



81) The three factors that affect the time value of money are principal, number of periods, and the interest rate.

Answer: TRUE

Diff: 1

LO: 12-3

EOC: S12-10



82) Which of the following areas does not make significant use of time value of money concepts?

A) Capital investment analysis

B) Lending and borrowing

C) Personal finance planning

D) Marketing research

Answer: D

Diff: 2

LO: 12-3

EOC: S12-10



83) The time value of money is explained by which of the following?

A) Invested money earns income over time.

B) Money is more valuable over time.

C) A stream of payments is received over time.

D) Interest is always compounded over time.

Answer: A

Diff: 2

LO: 12-3

EOC: S12-10



84) Your grandfather has promised to give you $1,000 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year. Using a discount rate of 6%, which of the following is correct for determining the present value of the gift?

A) PV = $1,000 6% 4

B) PV = $1,000 (PV factor, i = 4%, n = 6)

C) PV = $1,000 (Annuity PV factor, i = 6%, n = 4)

D) PV = $1,000 (Annuity FV factor, i = 6%, n = 4)

Answer: C

Diff: 2

LO: 12-3

EOC: S12-10



85) You have been awarded a scholarship that will pay you $500 per semester at the end of each of the next 8 semesters that you earn a GPA of 3.5 or better. You are a very serious student and you anticipate receiving the scholarship every semester. Using a discount rate of 3% per semester, which of the following is the correct calculation for determining the present value of the scholarship?

A) PV = $500 3% 8

B) PV = $500 (Annuity PV factor, i = 3%, n = 8)

C) PV = $500 (Annuity FV factor, i = 6%, n = 4)

D) PV = $1,000 (PV factor, i = 3%, n = 4)

Answer: B

Diff: 2

LO: 12-3

EOC: S12-10



86) You won the lottery and have a number of choices as to how to take the money. Which choice yields a greater present value?

A) $12,000 a year at the end of each of the next 6 years using a 6% discount rate

B) $53,500 (lump sum) now using a 6% discount rate

C) $90,000 (lump sum) 7 years from now using a 6% discount rate

D) $92,000 (lump sum) 7 years from now using an 8% discount rate

Answer: C

Diff: 2

LO: 12-3

EOC: S12-7



87) When you graduate from college, your mother plans to give you a gift of $50,000 to start you on your way. However, to determine what you learned in business school, your mother presents you with four options on how to receive the gift. Which of the four options presented by your mother will yield the greatest present value to you?

A) A lump sum of $50,000 today

B) $25,000 per year for the next 2 years using a 3% discount rate

C) A lump sum of $50,000 after grad school (2 years) assuming a 5% discount rate

D) A lump sum of $50,000 after grad school (2 years) assuming a 3% discount rate

Answer: A

Diff: 2

LO: 12-3

EOC: S12-7



88) Your wealthy neighbor has promised to give you $2,000 a year at the end of each of the next four years to help with college. Using a discount rate of 8%, the present value of the gift can be stated as

A) PV = $2,000 (PV factor, i = 4%, n = 4).

B) PV = $2,000 8% 5.

C) PV = $2,000 (Annuity FV factor, i = 8%, n = 4).

D) PV = $2,000 (Annuity PV factor, i = 8%, n = 4).

Answer: D

Diff: 2

LO: 12-3

EOC: S12-10



89) Your hard work in college paid off, quite literally, and you received a graduate assistantship for your MBA program. The assistantship pays a stipend of $10,000 at the end of each of the next 2 years. Using an average discount rate of 3%, the future value of your assistantship can be calculated by

A) PV = $10,000 3% 2.

B) PV = $10,000 (PV factor, i = 3%, n = 2).

C) PV = $10,000 (Annuity PV factor, i = 3%, n = 2).

D) PV = $10,000 (Annuity FV factor, i = 3%, n = 2).

Answer: D

Diff: 2

LO: 12-3

EOC: S12-10



90) The present value of an investment is affected by which of the following?

A) The interest rate

B) The number of time periods (length of the investment)

C) The type of investment (annuity versus lump sum)

D) All of the above

Answer: D

Diff: 2

LO: 12-3

EOC: S12-10



91) You win the lottery and must decide how to take the payout. Use an 8% discount rate. What is the present value of $15,000 a year received at the end of each of the next six years?

A) $9,450

B) $90,000

C) $74,893

D) $69,345

Answer: D

Explanation: D) Present value annuity @ 8% for 6 yrs = 4.623 15,000 = $69,345

Diff: 1

LO: 12-3

EOC: S12-7



92) Assuming an interest rate of 10%, the present value of $50,000 to be received 8 years from now would be closest to

A) $23,350.

B) $21,200.

C) $19,300.

D) $107,200.

Answer: A

Explanation: A) Present value @ 10% for 8 yrs = .467 50,000 = $23,350

Diff: 1

LO: 12-3

EOC: S12-7



93) Assuming an interest rate of 10%, the present value of $11,000 received at the end of each year for 6 years would be closest to

A) $6,204.

B) $66,000.

C) $47,905.

D) $84,876.

Answer: C

Explanation: C) Present value annuity @ 10% for 6 yrs = 4.355 11,000 = $47,905

Diff: 1

LO: 12-3

EOC: S12-7



94) Assuming an interest rate of 10%, if you invest a lump sum of $5,000 now, the balance of your investment in 7 years will be closest to

A) $12,970.

B) $9,745.

C) $23,340.

D) $35,000.

Answer: B

Explanation: B) Future value @ 10% for 7 yrs = 1.949 5000 = 9,745

Diff: 1

LO: 12-3

EOC: S12-7



95) If you invest $1,200 at the end of every year for five years at an interest rate of 10%, the balance of your investment in 5 years will be closest to

A) $1,933.

B) $6,000.

C) $7,326.

D) $4,549.

Answer: C

Explanation: C) Future value annuity @ 10 % for 5 yrs = 6.1051 1200 = 7,326

Diff: 1

LO: 12-3

EOC: S12-7



96) Income from an apartment building you own totals $260,000 per year. You plan on selling the building and retiring to France in 12 years. Assuming you can invest the income from the building each year at 3%, how much money will you have on which to retire?

A) $3,330,080

B) $4,060,680

C) $3,689,920

D) $2,558,040

Answer: C

Explanation: C) Future value @ 3% for 12 yrs = 14.192 260,000 = $3,689,920

Diff: 1

LO: 12-3

EOC: S12-7



97) You recently won a contest sponsored by a local radio station. The radio station will pay you $2,500 at the end of each of the next 15 years. Assuming an interest rate of 3%, what is the present value of this prize?

A) $46,498

B) $29,845

C) $28,240

D) $42,715

Answer: B

Explanation: B) Present value annuity @ 3% for 15 yrs = 11.938 2,500 = $29,845

Diff: 1

LO: 12-3

EOC: S12-7



98) The present value of $1,000,000 received in 13 years, given an interest rate of 3%, is

A) $681,000.

B) $661,000.

C) $1,469,000.

D) $10,635,000.

Answer: A

Explanation: A) Present value @ 3% for 13 yrs = 0.681 1,000,000 = $681,000

Diff: 1

LO: 12-3

EOC: S12-7



99) On a whim you purchased a scratch-off lottery ticket at the gas station. It must have been your lucky day because you won $1,000,000. Being logical and rational you decide to invest the money at 3% for 10 years until you are ready to start a family. At the end of 10 years, how much will your investment be worth?

A) $11,464,000

B) $1,344,000

C) $744,000

D) $1,384,000

Answer: B

Explanation: B) Future value @ 3% for 10 yrs = 1,000,000 1.344 = $1,344,000

Diff: 1

LO: 12-3

EOC: S12-7



100) Assuming an interest rate of 6%, the present value of $22,000 to be received 9 years from now would be closest to

A) $16,434.

B) $13,024.

C) $37,162.

D) $35,068.

Answer: B

Explanation: B) Present value @ 6% for 9 yrs = .592 22,000 = $13,024

Diff: 1

LO: 12-3

EOC: S12-7



101) Assuming an interest rate of 6%, the present value of $18,000 received at the end of each year for 6 years would be closest to

A) $88,506.

B) $11,970.

C) $108,000.

D) $125,550.

Answer: A

Explanation: A) Present value annuity @ 6% for 6 yrs = 4.917 18,000 = $88,506

Diff: 1

LO: 12-3

EOC: S12-7



102) Assuming an interest rate of 6%, if you invest a lump sum of $6,500 now, the balance of your investment in 7 years will be closest to

A) $45,500.

B) $11,642.

C) $36,283.

D) $9,776.

Answer: D

Explanation: D) Future value @ 6% for 7 yrs = 1.504 6,500 = $9,776

Diff: 1

LO: 12-3

EOC: S12-7



103) If you invest $5,000 at the end of every year for nine years at an interest rate of 6%, the balance of your investment in 5 years will be closest to

A) $6,690.

B) $28,185.

C) $21,060.

D) $25,000.

Answer: B

Explanation: B) Future value annuity @ 6% for 5 yrs = 5.637 5,000 = $28,185

Diff: 1

LO: 12-3

EOC: S12-7



104) You win the lottery and must decide how to take the payout. Use an 8% discount rate for all parts of this question.

Required:

a.What is the present value of $12,000 a year received at the end of each of the next six years?

b.What is the present value of taking a $60,000 lump sum now?

c.What is the present value of a $90,000 lump sum taken in 7 years?

Answer: a.($12,000 4.623) = $55,476

b.$60,000

c.($90,000 0.583) = $52,470

Diff: 2

LO: 9-3

EOC: S12-7



105) Solve the following two cases (the cases are independent).

a.If you invest $5,000 today at 10% interest, what is the value of the investment at the end of 5 years?

b.If you invest $1,200 at the end of each of the next 5 years and the investment earns 10% interest, what is the value of the investment at the end of 5 years?

Answer: a.FV = $5,000 1.611 = $8,055

b.FVA = $1,200 6.105 = $7,326

Diff: 2

LO: 12-3

EOC: S12-7



106) The ARR allows managers to compare the present value of future cash generated by a project against the cost of investing in that project.

Answer: FALSE

Diff: 2

LO: 12-4

EOC: S12-11



107) Net present value and the internal rate of return are examples of discounted cash flow models used in capital budgeting decisions.

Answer: TRUE

Diff: 2

LO: 12-4

EOC: S12-11



108) In calculating the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.

Answer: FALSE

Diff: 2

LO: 12-4

EOC: S12-11



109) The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.

Answer: TRUE

Diff: 1

LO: 12-4

EOC: E12-26



110) The residual value is considered in a net present value computation.

Answer: TRUE

Diff: 1

LO: 12-4

EOC: E12-26



111) A series of equal payments or deposits made at equal time intervals are called compound interest.

Answer: FALSE

Diff: 1

LO: 12-4

EOC: E12-26



112) The interest rate that makes the net present value of the investment equal to zero is the internal rate of return.

Answer: TRUE

Diff: 2

LO: 12-4

EOC: E12-26



113) The internal rate of return is used as the discount rate when calculating the net present value of a project.

Answer: FALSE

Diff: 2

LO: 12-4

EOC: E12-26



114) The net present value method assumes that all cash inflows are immediately reinvested at a rate of return equal to the internal rate of return.

Answer: FALSE

Diff: 2

LO: 12-4

EOC: E12-26



115) When evaluating capital investment projects, if the internal rate of return is less than the required rate of return, the project will be accepted.

Answer: FALSE

Diff: 2

LO: 12-4

EOC: E12-26



116) When selecting a capital investment project from three alternatives, the project with the highest net present value will always be preferable.

Answer: FALSE

Diff: 2

LO: 12-4

EOC: E12-26



117) The hurdle rate is the length of time it takes to recoup an investment's initial cost from the cash inflows that investment generates.

Answer: FALSE

Diff: 2

LO: 12-4

EOC: E12-26



118) When evaluating the cash flows from an investment, a reduction in cash outflows is treated as the same as an increase in cash inflows.

Answer: TRUE

Diff: 2

LO: 12-4

EOC: E12-26



119) When the profitability index is less than 1.00 for a project, that project has a positive net present value.

Answer: FALSE

Diff: 2

LO: 12-4

EOC: E12-26



120) What is an attribute of the internal rate of return?

A) It is the interest rate that makes the NPV of the investment equal to zero.

B) It is the interest rate that makes the cost of the investment equal to the present value of the investment's net cash inflows.

C) It is used in the capital rationing process.

D) All of the above are attributes of the internal rate of return.

Answer: D

Diff: 2

LO: 12-4

EOC: E12-26



121) What would a project's profitability index be if the project has an internal rate of return which is equal to the company's discount rate?

A) It would be 0.5.

B) It would be 0.0.

C) It would be 1.0.

D) It cannot be determined from information provided

Answer: B

Diff: 2

LO: 12-4

EOC: E12-26



122) What will happen to the net present value (NPV) of a project if the discount rate is increased from 8% to 10%?

A) NPV will always decrease.

B) NPV will always increase.

C) The discount rate change will not affect NPV.

D) We cannot determine the direction of the effect on NPV from the information provided.

Answer: A

Diff: 1

LO: 12-4

EOC: E12-26



123) What will happen to the internal rate of return (IRR) of a project if the discount rate is decreased from 9% to 7%?

A) IRR will always increase.

B) The discount rate change will not affect IRR.

C) IRR will always decrease.

D) We cannot determine the direction of the effect on IRR from the information provided.

Answer: B

Diff: 1

LO: 12-4

EOC: E12-26



124) The net present value method assumes that the cash inflows from a project are immediately reinvested at the

A) internal rate of return.

B) accounting rate of return.

C) market rate of return.

D) required rate of return.

Answer: D

Diff: 1

LO: 12-4

EOC: E12-26



125) A company finds that the residual value of $8,000 for the equipment in a capital budgeting project has been inadvertently omitted from the calculation of the net present value (NPV) for that project. How does this omission affect the NPV of that project?

A) The project's NPV should be higher, but be less than $8,000 higher, with the residual value included.

B) The project's NPV should be $8,000 higher with the residual value included.

C) The project's NPV should be $8,000 lower with the residual value included.

D) The project's NPV should be lower, but be less than $8,000 lower, with the residual value included.

Answer: A

Diff: 1

LO: 12-4

EOC: E12-26



126) Which of the following is a weakness of the internal rate of return (IRR)?

A) IRR assumes that the cash inflows from the project are immediately reinvested at the minimum required rate of return.

B) IRR ignores the time value of money.

C) IRR assumes that the cash inflows from the project are immediately reinvested at the internal rate of return.

D) IRR is not a percentage rate, but is expressed in dollars.

Answer: C

Diff: 1

LO: 12-4

EOC: E12-29



127) Another name for the minimum desired rate of return is

A) discount rate.

B) required rate of return.

C) hurdle rate.

D) All of the above

Answer: D

Diff: 2

LO: 12-4

EOC: E12-29



128) A company would consider all of the following in computing the IRR of an investment, except

A) predicted cash inflows over the life of the project.

B) the cost of the project.

C) depreciation expense on the assets of the project.

D) present value factors.

Answer: C

Diff: 2

LO: 12-4

EOC: E12-29



129) (Present value tables are required.) Mantua Motors is evaluating a capital investment opportunity. This project would require an initial investment of $38,000 to purchase equipment. The equipment will have a residual value at the end of its life of $3,000. The useful life of the equipment is 5 years. The new project is expected to generate additional net cash inflows of $12,000 per year for each of the five years. Mantua Motors' required rate of return is 14%. The net present value of this project is closest to

A) ($1,994).

B) $4,753.

C) $3,196.

D) $28,386.

Answer: B

Explanation: B) Annual cash flow ($12,000 3.433) = $41,213

Residual value ($3,000 0.519)= 1,557

Less investment cost= (38,000)

Net present value$ 4,753

Diff: 3

LO: 12-4

EOC: P12-59



130) (Present value tables are required.) Maersk Metal Stamping is analyzing a special investment project. The project will require the purchase of two machines for $30,000 and $8,000 (both machines are required). The total residual value at the end of the project is $1,500. The project will generate cash inflows of $11,000 per year over its 8-year life. If Maersk requires a 6% return, what is the net present value (NPV) of this project?

A) $30,308

B) $8,332

C) $2,456

D) $9,453

Answer: D

Explanation: D)

Year(s)AmountFacctorPresent valueInitial investment

in equipmentNow$(30,000)1.000$(30,000)

Additional equipment

neededNow$(8,000)1.000$(8,000)

Annual net cash inflow1 to 8$11,0004.212$46,332

Residual value 8$1.5000.747 $1,121Net present value

$9,453Diff: 3

LO: 12-4

EOC: P12-59



131) (Present value tables are required.) Figgey, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $52,000 and would have a residual value of $5,000 at the end of its 8 year life. The annual operating expenses of the new extruder would be $8,000. The other option that Figgey has is to rebuild its existing extruder. The rebuilding would require an investment of $30,000 and would extend the life of the existing extruder by 8 years. The existing extruder has annual operating costs of $11,000 per year and does not have a residual value. Figgey discount rate is 14%. Using net present value analysis, which option is the better option and by how much?

A) Better by $8,083 to rebuild existing extruder

B) Better by $8,083 to purchase new extruder

C) Better by $6,328 to rebuild existing extruder

D) Better by $6,328 to purchase new extruder

Answer: C

Diff: 3

LO: 12-4

EOC: P12-59



132) (Present value tables are required.) The Speedy-Delivery Company has two options for its delivery truck. The first option is to purchase a new truck for $15,000. The new truck will have a useful life of 5 years and a residual value of $2,000. Operating costs for the new truck will be $200. The second option is to overhaul its existing truck. The cost of the overhaul will be $8,000. The overhauled truck will have a useful life of 5 years and a residual value of $0. Operating costs for the overhauled truck will be $600. Using Speedy's discount rate of 5%, which option is better and by what amount?

A) Better to overhaul by $3,700

B) Better to purchase new by $3,700

C) Better to overhaul by $5,144

D) Better to purchase new by $5,144

Answer: A

Explanation: A)

Diff: 3

LO: 12-4

EOC: P12-59



133) (Present value tables are required.) Interior Products, Inc. is evaluating the purchase of a new machine to use in its manufacturing process. The new machine would cost $41,000 and have a useful life of 6 years. At the end of the machine's life, it would have a residual value of $2,500. Annual cost savings from the new machine would be $12,400 per year for each of the six years of its life. Interior Products, Inc. has a minimum required rate of return of 16% on all new projects. The net present value of the new machine would be closest to

A) $3,669.

B) $5,719.

C) $4,694.

D) $46,719.

Answer: B

Explanation: B) Cost of Equipment

$-41,000

Residual value2,500

PV 16% 6 yrs0.4101,025

Annual Expense12,400

PFA 16% 6 yrs3.68545,694

Total

5,719

Diff: 3

LO: 12-4

EOC: P12-59



134) (Present value tables are required.) Westin Manufacturing is considering the purchase of a new machine to use in its packing department. The new machine will have an initial cost of $170,000, a useful life of 12 years and a $10,000 residual value. Westin will realize $15,750 in annual savings for each of the machine's 12-year useful life. Given Westin's 4% required rate of return, the new machine will have a net present value (NPV) of

A) ($28,436).

B) ($15,936).

C) ($154,064).

D) ($22,186).

Answer: B

Explanation: B) Diff: 3

LO: 12-4

EOC: P12-59



135) (Present value tables are required.) Calby Enterprises is evaluating the purchase of a new computer network system. The new system would cost $25,000 and have a useful life of 6 years. At the end of the system's life, it would have a residual value of $3,000. Annual operating cost savings from the new system would be $8,800 per year for each of the six years of its life. Calby Enterprises has a minimum required rate of return of 12% on all new projects. The net present value of the new network system would be closest to

A) $9,656.

B) $12,698.

C) $11,177.

D) $37,698.

Answer: B

Diff: 3

LO: 12-4

EOC: P12-59



136) (Present value tables are required.) Karpets Industries is investing in a new high-speed loom for weaving its rugs and carpets. The new loom will have a useful life of 7 years and cost $80,000. The loom's residual value is $5,000. Assume that Karpets requires a return of 10% and that the loom will create annual cost savings of $16,250. What is the net present value (NPV) of the new loom?

A) $1,670

B) ($3,460)

C) $81,670

D) ($895)

Answer: A

Explanation: A)

Diff: 3

LO: 12-4

EOC: P12-59



137) (Present value tables are required.) Renfroe Corporation is considering the purchase of a machine that would cost $22,712 and would have a useful life of 5 years. The machine would generate $6,300 of net annual cash inflows per year for each of the 5 years of its life. The internal rate of return on the machine would be closest to

A) 8%.

B) 10%.

C) 12%.

D) 14%.

Answer: C

Explanation: C) Costs$22,712/6,300 net cash flow = 3.605

Closest FVA

= >12.00%

Diff: 3

LO: 12-4

EOC: P12-59



138) (Present value tables are required.) Hincapie Manufacturing evaluating investing in a new metal stamping machine costing $30,924. Hincapie estimates that it will realize $12,000 in annual cash inflows for each year of the machine's 3-year useful life. The internal rate of return (IRR) for the machine is approximately

A) 8%.

B) 10%.

C) 5%.

D) 6%.

Answer: A

Explanation: A) Costs$30,924/12,000 net cash flow = 2.577

Closest FVA for 3 years

= 8%

Diff: 3

LO: 12-4

EOC: P12-59



139) (Present value tables are required.) Currence Corporation is considering the purchase of a special blow-molding machine that would cost $59,752 and would have a useful life of 8 years. The machine would generate $11,200 of net annual cash inflows per year for each of the 8 years of its life. The internal rate of return on the machine would be closest to

A) 8%.

B) 10%.

C) 12%.

D) 14%.

Answer: B

Explanation: B)

Costs$59,752/11,200 net cash flow = 5.335

Closest FVA

= >10.00 %

Diff: 3

LO: 12-4

EOC: P12-58



140) (Present value tables are required.) Vino Winery is considering the purchase of a state-of-the-art bottling machine. The new machine will cost $28,250 and will have a useful life of 10 years. The new machine will provide net cash savings of $5,000 per year. What is the internal rate of return (IRR) for the new bottling machine?

A) 8%

B) 10%

C) 12%

D) 14%

Answer: C

Explanation: C)

Costs$28,250/5,000 net cash flow = 5.65

Closest FVA

= >12.00 %

Diff: 3

LO: 12-4

EOC: P12-58



141) (Present value tables are required.) Lenardi Corporation is evaluating the purchase of a new machine that would have an initial cost of $125,000. This new machine would have a profitability index of 1.25. The company's discount rate is 12%. What is the present value of the net cash inflows of the new machine project?

A) $15,000

B) $156,250

C) $100,000

D) $1,041,667

Answer: B

Explanation: B) Costs 125,000 1.25 Profitability index = 156,250

Diff: 3

LO: 12-4

EOC: P12-58



142) Senseman Company has three potential projects from which to choose. Selected information on each of the three projects follows:

Project AProject BProject C

Investment required$ 42,500$ 56,000$ 53,700

Net present value of project$ 45,700$ 75,400$ 70,200

Using the profitability index, rank the projects from most profitable to least profitable.

A) A, B, C

B) C, B, A

C) B, A, C

D) B, C, A

Answer: D

Diff: 3

LO: 12-4

EOC: P12-59



143) Silver Creations is evaluating a project that would require an initial investment of $36,000. The present value of the net cash inflows associated with this project would be $43,200. The profitability index for this project would be closest to

A) 0.83.

B) 1.20.

C) 0.20.

D) 5.00.

Answer: B

Explanation: B) Net cash inflows $43,200/36,000 Invest. = 1.20

Diff: 3

LO: 12-4

EOC: P12-59



144) (Present value tables are needed.) Cleveland Cove Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to twothe B14 Model and the F54 Model. Financial data about the two choices follows.

B14 ModelF54 Model

Investment$ 320,000$ 240,000


Estimated annual net cash inflows for useful life$ 70,000$ 35,000

Residual value$ 30,000$ 10,000



What is the total present value of future cash inflows from the F54 Model?

A) $(48,605)

B) $186,725

C) $191,395

D) $167,035

Answer: C

Diff: 3

LO: 12-4

EOC: E12-21



145) (Present value tables are needed.) Cleveland Cove Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two: the B14 Model and the F54 Model. Financial data about the two choices follows.

B14 ModelF54 Model

Investment$ 320,000$ 240,000


Estimated annual net cash inflows for useful life$ 70,000$ 35,000

Residua

braun3 12 tif

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