chapter 12 quiz informations

Managerial Accounting, 3e (Braun/Tietz)Chapter 12 Capital Investment Decisions and the Time Value of Money 2014

1) Capital investments do not typically require large sums of money. Answer: FALSEDiff: 1LO: 12-1EOC: S12-1AACSB: Reflective ThinkingLearning 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: TRUEDiff: 1LO: 12-1EOC: S12-1AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

3) Self-check-in machines at airports are an example of capital assets.Answer: TRUEDiff: 1LO: 12-1EOC: E12-16AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

4) Capital budgeting is done when common stock is issued.Answer: FALSEDiff: 1LO: 12-1EOC: S12-1AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

5) Choosing among alternative capital investments is called a post-audit.Answer: FALSEDiff: 1LO: 12-1EOC: S12-1AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

6) Post-audits of capital investments compare actual net cash inflows to projected net cash inflows.Answer: TRUEDiff: 1LO: 12-1

1Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

EOC: S12-1AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: TRUEDiff: 1LO: 12-1EOC: E12-16AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

8) The cost associated with renovating a warehouse to be used as a restaurant would be considered to be a capital asset.Answer: TRUEDiff: 1LO: 12-1EOC: E12-16AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

9) The health care insurance cost of a company for its assembly-line workers would not be considered to be a capital asset.Answer: TRUEDiff: 1LO: 12-1EOC: E12-16AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


10) The following are all methods of analyzing capital investments exceptA) Payback Period.B) Regression Analysis.C) Net Present Value (NPV).D) Accounting Rate of Return (ARR).Answer: BDiff: 1LO: 12-1EOC: E12-16AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

11) Which of the following items would be considered a capital asset?A) Purchase of office supplies to be used internally over the next yearB) Payment for this year's advertising campaignC) Construction of a new store buildingD) Donation of money to United Way Answer: CDiff: 1LO: 12-1EOC: E12-16AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: DDiff: 1LO: 12-1EOC: E12-16AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


13) The process of choosing among different alternative investments due to limited resources is referred to asA) capital investing.B) capital rationing.C) resource rationing.D) resource allocation.Answer: BDiff: 1LO: 12-1EOC: S12-1AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

14) The ________ capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations.A) ARRB) Payback C) NPVD) IRRAnswer: ADiff: 1LO: 12-1EOC: S12-15AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: DDiff: 1LO: 12-1EOC: S12-15AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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 analysisB) pre and post analysis C) post-auditD) post-cash flowAnswer: CDiff: 1LO: 12-1EOC: S12-1AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

17) The term ________ is described as a "formal means of analyzing long-range investment alternatives."A) annuityB) time value of money C) payback periodD) capital budgetingAnswer: DDiff: 1LO: 12-1EOC: S12-1AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

18) The term ________ is best described as a "relationship among principal, interest rate, and time."A) capital budgeting B) time value of moneyC) payback periodD) annuityAnswer: BDiff: 1LO: 12-1EOC: S12-7AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


19) The term ________ is best described as "a stream of equal periodic payments."A) time value of moneyB) capital budgetingC) annuityD) payback period Answer: CDiff: 1LO: 12-1EOC: S12-7AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

20) The term ________ is best described as "the length of time required to recover the cost of an investment."A) time value of moneyB) payback periodC) capital budgeting D) annuityAnswer: BDiff: 1LO: 12-1EOC: E12-17AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

21) The accounting rate of return uses non-cash flow factors including depreciation in calculating the operating income of the asset. Answer: TRUEDiff: 1LO: 12-2EOC: S12-15AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

22) Investments with longer payback periods are more desirable, all else being equal.Answer: FALSEDiff: 1LO: 12-2EOC: E12-17AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


23) The payback method can be used when the net cash inflows from a capital investment are unequal.Answer: TRUEDiff: 1LO: 12-2EOC: E12-18AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

24) Capital budgeting predictions must consider factors such as changing consumer preferences, competition, and government regulations.Answer: TRUEDiff: 1LO: 12-2EOC: S12-1AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: TRUEDiff: 2LO: 12-2EOC: E12-20AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: TRUEDiff: 2LO: 12-2EOC: E12-20AACSB: Reflective ThinkingLearning 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: FALSEDiff: 1LO: 12-2EOC: S12-15AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

28) The payback method primarily focuses on profitability and not time.Answer: FALSEDiff: 1LO: 12-2EOC: S12-15AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

29) One advantage of the internal rate of return is that it considers the time value of money.Answer: TRUEDiff: 1LO: 12-2EOC: S12-15AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

30) One disadvantage of the payback method is that it does not consider the time value of money.Answer: TRUEDiff: 1LO: 12-2EOC: S12-15AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: ADiff: 1LO: 12-2EOC: E12-20AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: DDiff: 1LO: 12-2EOC: E12-17AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: BDiff: 1LO: 12-2EOC: E12-20AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 inflowB) Total cash inflows C) Amount investedD) Net cash outflowAnswer: CDiff: 1LO: 12-2EOC: E12-17AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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 assetC) Total amount invested in the assetD) Average net cash flows from the assetAnswer: BDiff: 1LO: 12-2EOC: E12-19AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 investedB) If the expected accounting rate of return is less than the required rate of returnC) If the expected accounting rate of return is greater than the required rate of returnD) If the average amount invested is equal to the net cash inflows Answer: CDiff: 2LO: 12-2EOC: E12-20AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

37) The formula for calculating the accounting rate of return for a capital asset isA) 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: ADiff: 1LO: 12-2EOC: E12-19AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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

Proposal X Proposal YInvestment $ 850,000 $ 468,000Useful life 8 years 8 yearsEstimated annual netcash inflows for 8 years $ 125,000 $ 78,000Residual value $ 40,000 $ -Depreciation method Straight-line Straight-lineRequired rate of return 14% 10%

How long is the payback period for Proposal X?A) 10.90 yearsB) 6.00 yearsC) 6.80 yearsD) 21.25 yearsAnswer: CExplanation: C) Payback = Investment/annual cash flow$850,000.00/$125,000.00 = 6.8 yearsDiff: 1LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment




How long is the payback period for Proposal Y?A) 21.25 yearsB) 6.00 yearsC) 6.80 yearsD) 11.70 yearsAnswer: BExplanation: B) Payback = Investment/annual cash flow$468,000/$78,000.00 = 6.0 yearsDiff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment




What is the accounting rate of return for Proposal X?A) 2.88 %B) 14.71 %C) 26.62 %D) 2.79%Answer: DExplanation: 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: 2LO: 12-2EOC: E12-19AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment




What is the accounting rate of return for Proposal Y?A) 5.24%B) 4.17%C) 29.17%D) 16.67%Answer: BExplanation: 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: 2LO: 12-2EOC: E12-19AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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

Project 1 Project 2Investment $400,000 $250,000Useful life (years) 5 6Estimated annual net cash inflows for useful life $100,000 $45,000Residual value $25,000 $15,000Depreciation method Straight-line Straight-lineRequired rate of return 12% 8%

What is the payback period for Project 1?A) 4.00 yearsB) 5.56 yearsC) 16.00 yearsD) 8.89 yearsAnswer: AExplanation: A) Payback = Investment/annual cash flow$400,000/$100,000 = 4 yearsDiff: 1LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment




What is the payback period for Project 2?A) 4.00 yearsB) 5.56 yearsC) 10.00 yearsD) 16.00 yearsAnswer: BExplanation: B) Payback = Investment/annual cash flow$250,000/$45,000.00 = 5.56 yearsDiff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment




What is the accounting rate of return for Project 1?A) 43.75%B) 6.25%C) 1.88%D) 25.00%Answer: BExplanation: B) (Annual net cash flow - depreciation)/Investment = Accounting rate of return($100,000 - (400,000 - 25,000/5))/400,000($100,000 - 75,000)/400,000 = 6.25%Diff: 2LO: 12-2EOC: E12-19AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment




What is the accounting rate of return for Project 2?A) 33.67%B) 3.00%C) 18.00%D) 2.33%Answer: DExplanation: 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: 2LO: 12-2EOC: E12-19AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 yearsB) 5.52 yearsC) 7.00 yearsD) 7.67 yearsAnswer: CDiff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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 A

Investment B

Initial capital investment $112,500 $160,000Estimated useful life 5 years 5 yearsEstimated residual value $10,000 $15,000Estimated annual net cash inflowFor 3 years $25,000 $40,000Required rate of return 10% 12%

How long is the payback period for Investment A?A) 4.50 yearsB) 4.10 yearsC) 11.25 yearsD) 2.49 yearsAnswer: AExplanation: A) Payback = Investment/annual cash flow$112,500/25,000 = 4.50 yearsDiff: 2LO: 12-2EOC: E12-18AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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 A

Investment B

Initial capital investment $112,500 $160,000Estimated useful life 5 years 5 yearsEstimated residual value $10,000 $15,000Estimated annual net cash inflowFor 3 years $25,000 $40,000Required rate of return 10% 12%

How long is the payback period for Investment B?A) 3.63 yearsB) 4.00 yearsC) 2.40 yearsD) 10.67 yearsAnswer: BExplanation: B) Payback = Investment/annual cash flow$160,000/40,000 = 4.00 yearsDiff: 2LO: 12-2EOC: E12-18AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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 $ 60,000Year 2 $ 90,000Year 3 $110,000Year 4 $ 40,000Year 5 $ 25,000Total 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: AExplanation: 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: 2LO: 12-2EOC: E12-19AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 yearsB) 3.44 yearsC) 1.72 yearsD) 2.50 yearsAnswer: DDiff: 2LO: 12-2EOC: E12-18AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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) $60,000B) $600,000C) $130,000D) $275,000Answer: BExplanation: B) Investment = $600,000Diff: 1LO: 12-2EOC: E12-18AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 yearsInitial investment: $500,000Savings year 1: $210,000Savings year 2: $150,000Savings year 3: $225,000Residual value after 3 yrs $ 50,000

Total net inflows during the useful life of the asset areA) $635,000.B) $535,000.C) $585,000.D) $85,000.Answer: CExplanation: C) Savings year 1: $210,000Savings year 2: $150,000Savings year 3:Total

$225,000$585,000

Diff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning 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 isA) $85,000.B) $150,000.C) $435,000.D) $135,000.Answer: DDiff: 2LO: 12-2EOC: E12-19AACSB: Analytical ThinkingLearning 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.


The total depreciation expense over the life of the asset isA) $150,000.B) $550,000.C) $450,000.D) $585,000.Answer: CExplanation: C) Investment - residual value$500,000 - 50,000 = 450,000Diff: 2LO: 12-2EOC: E12-18AACSB: Analytical ThinkingLearning 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.

55) 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 yearsInitial investment: $500,000


Savings year 1: $210,000Savings year 2: $150,000Savings year 3: $225,000Residual value after 3 yrs $ 50,000

The accounting rate of return is closest toA) 39.00%.B) 9.00%.C) 30.00%.D) 7.69%.Answer: BExplanation: 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 = 27.00Divide by 3 years = 9.00 % Diff: 2LO: 12-2EOC: E12-20AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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 $2,500,000Estimated life 10 years 10 yearsEstimated residual value $50,000 $80,000Estimated annual cash inflows over the next 10 years $400,000 $500,000Required rate of return 10% 10%

The payback period for the Kentucky proposal is closest toA) 4.5 years.B) 6.25 years.C) 5.00 years.D) 31.25 years.Answer: CExplanation: C) Investment/Annual cash flows$2,500,000/500,000 = 5.0 yrsDiff: 2LO: 12-2EOC: E12-18AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment





The payback period for the Indiana proposal is closest toA) 3.8 years.B) 5.0 years.C) 4.8 years.D) 38.4 years.Answer: CExplanation: C) Investment/Annual cash flows$1,920,000/400,000 = 4.8 yrsDiff: 2LO: 12-2EOC: E12-18AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment





The accounting rate of return for the Kentucky proposal is closest toA) 10.32%.B) 11.09%.C) 10.00%.D) 20.00%.Answer: AExplanation: 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: 2LO: 12-2EOC: E12-18AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment





The accounting rate of return for the Indiana proposal is closest toA) 10.32%.B) 11.09%.C) 20.83%.D) 10.83%.Answer: BExplanation: B) (Annual net cash flow - depreciation)/Investment = Accounting rate of return($400,000 - (1,920,000 - 50,000)/10)/1,920,000($400,000 - 187,000)/1,920,000 = 11.09375%Diff: 2LO: 12-2EOC: E12-18AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 toA) 3.38. B) 3.00. C) 2.62. D) 2.17. Answer: BExplanation: B) Investment/Annual cash flows5,100/1,700 = 3.00 yrsDiff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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 toA) 4.21. B) 3.60. C) 2.99. D) 2.23. Answer: BExplanation: B) Investment/Annual cash flows$7,740/2,150 = 3.6 yrsDiff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 $185,000Variable expenses $ 38,000Contribution margin $147,000Fixed expenses:Salaries expense $ 31,000Rent expense $ 24,000Depreciation expense $ 25,000Total fixed expenses $ 80,000Operating 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 toA) 2.6.B) 3.6.C) 3.1.D) 1.4.Answer: AExplanation: A) Investment/Annual cash flows$240,000 / (67,000 + 25,000) = 2.6 yrsDiff: 3LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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) $6,600B) $21,340C) $31,750D) $27,940Answer: DExplanation: D) (Annual net cash flow - depreciation)/Investment = Accounting rate of returnAnnual net cash flow/254,000 = 11%Annual net cash flow = 11% × 254,000 = 27,940.Diff: 3LO: 12-2EOC: E12-20AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 yearsB) 5.50 yearsC) 6.00 yearsD) 4.00 yearsAnswer: CExplanation: C) Investment/Annual cash flows12,000 / 2,000 = 6 yearsDiff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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 yearsB) 2.50 yearsC) 2.36 yearsD) 2.19 yearsAnswer: BExplanation: B) Investment/Annual cash flows4,375 / 1,750 = 2.5 yearsDiff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 $350,000Variable expenses $40,000Contribution margin $310,000Fixed expensesSalaries expense $28,000Rent expense $20,000Depreciation expense $40,000Total fixed expenses $88,000Operating 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 yearsB) 3.07 yearsC) 2.93 yearsD) 2.48 yearsAnswer: DExplanation: D) Investment/Annual cash flows$650,000 / (222,000 + 40,000) = 2.48 yrsDiff: 3LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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) $18,000B) $45,000C) $25,000D) $27,000Answer: BExplanation: B) (Annual net cash flow - depreciation)/Investment = Accounting rate of returnAnnual net cash flow/500,000 = 9%Annual net cash flow = 9% × 500,000 = 45,000.Diff: 3LO: 12-2EOC: E12-20AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 yearsB) 3.91 yearsC) 4.20 yearsD) 3.25 yearsAnswer: CExplanation: C) $30,450 / $7,250 = 4.20 yearsDiff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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: BExplanation: B) ($88,000 - 4,000)/7 years = $12,000 annual depreciation expense$16,000 - $12,000/$88,000 = 4.55%Diff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 yearsDiff: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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: 2LO: 12-2EOC: E12-17AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: 2LO: 12-2EOC: E12-20AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 = $120,000Diff: 3LO: 12-2EOC: E12-20AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


75) One dollar to be received in the future is worth more than one dollar today.Answer: FALSEDiff: 1LO: 12-3EOC: S12-10AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

76) The net present value method does not incorporate the time value of money.Answer: FALSEDiff: 1LO: 12-3EOC: S12-10AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

77) The principal amount, the interest rate, and the number of periods are all factors needed to calculate the time value of money.Answer: TRUEDiff: 1LO: 12-3EOC: S12-10AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

78) Calculating interest on the principal and on all the interest earned to date is called compound interest.Answer: TRUEDiff: 1LO: 12-3EOC: S12-10AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

79) When computing the present value of a future sum, the interest rate must always be expressed as an annual rate.Answer: FALSEDiff: 2LO: 12-3EOC: S12-10AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


80) The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.Answer: TRUEDiff: 1LO: 12-3EOC: S12-7AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

81) The three factors that affect the time value of money are principal, number of periods, and the interest rate.Answer: TRUEDiff: 1LO: 12-3EOC: S12-10AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

82) Which of the following areas does not make significant use of time value of money concepts?A) Capital investment analysisB) Lending and borrowingC) Personal finance planningD) Marketing researchAnswer: DDiff: 2LO: 12-3EOC: S12-10AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: ADiff: 2LO: 12-3EOC: S12-10AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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% × 4B) 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: CDiff: 2LO: 12-3EOC: S12-10AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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% × 8B) 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: BDiff: 2LO: 12-3EOC: S12-10AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 rateB) $53,500 (lump sum) now using a 6% discount rateC) $90,000 (lump sum) 7 years from now using a 6% discount rateD) $92,000 (lump sum) 7 years from now using an 8% discount rateAnswer: CDiff: 2LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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 todayB) $25,000 per year for the next 2 years using a 3% discount rateC) A lump sum of $50,000 after grad school (2 years) assuming a 5% discount rateD) A lump sum of $50,000 after grad school (2 years) assuming a 3% discount rateAnswer: ADiff: 2LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 asA) 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: DDiff: 2LO: 12-3EOC: S12-10AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 byA) 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: DDiff: 2LO: 12-3EOC: S12-10AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


90) The present value of an investment is affected by which of the following?A) The interest rateB) The number of time periods (length of the investment)C) The type of investment (annuity versus lump sum)D) All of the aboveAnswer: DDiff: 2LO: 12-3EOC: S12-10AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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) $9,450B) $90,000C) $74,893D) $69,345Answer: DExplanation: D) Present value annuity @ 8% for 6 yrs = 4.623 × 15,000 = $69,345Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

92) Assuming an interest rate of 10%, the present value of $50,000 to be received 8 years from now would be closest toA) $23,350.B) $21,200.C) $19,300.D) $107,200.Answer: AExplanation: A) Present value @ 10% for 8 yrs = .467 × 50,000 = $23,350Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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 toA) $6,204.B) $66,000.C) $47,905.D) $84,876.Answer: CExplanation: C) Present value annuity @ 10% for 6 yrs = 4.355 × 11,000 = $47,905Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 toA) $12,970.B) $9,745.C) $23,340.D) $35,000.Answer: BExplanation: B) Future value @ 10% for 7 yrs = 1.949 × 5000 = 9,745Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 toA) $1,933.B) $6,000.C) $7,326.D) $4,549.Answer: CExplanation: C) Future value annuity @ 10 % for 5 yrs = 6.1051 × 1200 = 7,326Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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) $3,330,080B) $4,060,680C) $3,689,920D) $2,558,040Answer: CExplanation: C) Future value @ 3% for 12 yrs = 14.192 × 260,000 = $3,689,920Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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) $46,498B) $29,845C) $28,240D) $42,715 Answer: BExplanation: B) Present value annuity @ 3% for 15 yrs = 11.938 × 2,500 = $29,845Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

98) The present value of $1,000,000 received in 13 years, given an interest rate of 3%, isA) $681,000.B) $661,000.C) $1,469,000.D) $10,635,000.Answer: AExplanation: A) Present value @ 3% for 13 yrs = 0.681 × 1,000,000 = $681,000Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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) $11,464,000B) $1,344,000C) $744,000D) $1,384,000Answer: BExplanation: B) Future value @ 3% for 10 yrs = 1,000,000 × 1.344 = $1,344,000Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

100) Assuming an interest rate of 6%, the present value of $22,000 to be received 9 years from now would be closest toA) $16,434.B) $13,024.C) $37,162.D) $35,068.Answer: BExplanation: B) Present value @ 6% for 9 yrs = .592 × 22,000 = $13,024Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 toA) $88,506.B) $11,970.C) $108,000.D) $125,550.Answer: AExplanation: A) Present value annuity @ 6% for 6 yrs = 4.917 × 18,000 = $88,506Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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 toA) $45,500.B) $11,642.C) $36,283.D) $9,776.Answer: DExplanation: D) Future value @ 6% for 7 yrs = 1.504 × 6,500 = $9,776Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 toA) $6,690.B) $28,185.C) $21,060.D) $25,000.Answer: BExplanation: B) Future value annuity @ 6% for 5 yrs = 5.637 × 5,000 = $28,185Diff: 1LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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) = $55,476b. $60,000c. ($90,000 × 0.583) = $52,470Diff: 2LO: 9-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 = $8,055b. FVA = $1,200 × 6.105 = $7,326Diff: 2LO: 12-3EOC: S12-7AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: FALSEDiff: 2LO: 12-4EOC: S12-11AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

107) Net present value and the internal rate of return are examples of discounted cash flow models used in capital budgeting decisions.Answer: TRUEDiff: 2LO: 12-4EOC: S12-11AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: FALSEDiff: 2LO: 12-4EOC: S12-11AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


109) The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.Answer: TRUEDiff: 1LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

110) The residual value is considered in a net present value computation.Answer: TRUEDiff: 1LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

111) A series of equal payments or deposits made at equal time intervals are called compound interest.Answer: FALSEDiff: 1LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

112) The interest rate that makes the net present value of the investment equal to zero is the internal rate of return.Answer: TRUEDiff: 2LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

113) The internal rate of return is used as the discount rate when calculating the net present value of a project.Answer: FALSEDiff: 2LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: FALSEDiff: 2LO: 12-4EOC: E12-26


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

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: FALSEDiff: 2LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

116) When selecting a capital investment project from three alternatives, the project with the highest net present value will always be preferable.Answer: FALSEDiff: 2LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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: FALSEDiff: 2LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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: TRUEDiff: 2LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

119) When the profitability index is less than 1.00 for a project, that project has a positive net present value.Answer: FALSEDiff: 2LO: 12-4EOC: E12-26AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: DDiff: 2LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 providedAnswer: BDiff: 2LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: ADiff: 1LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: BDiff: 1LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

124) The net present value method assumes that the cash inflows from a project are immediately reinvested at theA) internal rate of return.B) accounting rate of return. C) market rate of return.D) required rate of return.Answer: DDiff: 1LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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: ADiff: 1LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: CDiff: 1LO: 12-4EOC: E12-29AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

127) Another name for the minimum desired rate of return isA) discount rate.B) required rate of return.C) hurdle rate.D) All of the aboveAnswer: DDiff: 2LO: 12-4EOC: E12-29AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


128) A company would consider all of the following in computing the IRR of an investment, exceptA) 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: CDiff: 2LO: 12-4EOC: E12-29AACSB: Reflective ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 toA) ($1,994).B) $4,753.C) $3,196.D) $28,386.Answer: BExplanation: B) Annual cash flow ($12,000 × 3.433) = $41,213Residual value ($3,000 × 0.519) = 1,557Less investment cost = (38,000)Net present value $ 4,753Diff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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) $30,308B) $8,332C) $2,456D) $9,453Answer: DExplanation: D)

Year(s) Amount Facctor Present value

Initial investmentin equipment Now $(30,000) 1.000 $(30,000)Additional equipmentneeded Now $(8,000) 1.000 $(8,000)Annual net cash inflow 1 to 8 $11,000 4.212 $46,332Residual value 8 $1.500 0.747 $1,121Net present value $9,453

Diff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 extruderC) Better by $6,328 to rebuild existing extruderD) Better by $6,328 to purchase new extruderAnswer: CDiff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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 $3,700B) Better to purchase new by $3,700C) Better to overhaul by $5,144D) Better to purchase new by $5,144Answer: AExplanation: A)



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 toA) $3,669.B) $5,719.C) $4,694.D) $46,719.Answer: BExplanation: B) Cost of Equipment $-41,000Residual value 2,500PV 16% 6 yrs 0.410 1,025

Annual Expense 12,400PFA 16% 6 yrs 3.685 45,694Total 5,719Diff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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) ofA) ($28,436).B) ($15,936).C) ($154,064).D) ($22,186).Answer: B

Explanation: B) Diff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


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 toA) $9,656.B) $12,698.C) $11,177.D) $37,698.Answer: BDiff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

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) $1,670B) ($3,460)C) $81,670D) ($895)Answer: AExplanation: A)



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 toA) 8%.B) 10%.C) 12%.D) 14%.Answer: CExplanation: C) Costs $22,712/6,300 net cash flow = 3.605Closest FVA = >12.00%Diff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 approximatelyA) 8%.B) 10%.C) 5%.D) 6%.Answer: AExplanation: A) Costs $30,924/12,000 net cash flow = 2.577Closest FVA for 3 years = 8%Diff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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 toA) 8%.B) 10%.C) 12%.D) 14%.Answer: BExplanation: B) Costs $59,752/11,200 net cash flow = 5.335Closest FVA = >10.00 %Diff: 3LO: 12-4EOC: P12-58AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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: CExplanation: C) Costs $28,250/5,000 net cash flow = 5.65Closest FVA = >12.00 %Diff: 3LO: 12-4EOC: P12-58AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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) $15,000B) $156,250C) $100,000D) $1,041,667Answer: BExplanation: B) Costs 125,000 × 1.25 Profitability index = 156,250Diff: 3LO: 12-4EOC: P12-58AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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

Project A Project B Project CInvestment required $ 42,500 $ 56,000 $ 53,700Net 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, CB) C, B, AC) B, A, CD) B, C, AAnswer: DDiff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


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 toA) 0.83.B) 1.20.C) 0.20.D) 5.00.Answer: BExplanation: B) Net cash inflows $43,200/36,000 Invest. = 1.20Diff: 3LO: 12-4EOC: P12-59AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment

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 two–the B14 Model and the F54 Model. Financial data about the two choices follows.

B14 Model F54 ModelInvestment $ 320,000 $ 240,000Useful life (years) 8 8Estimated annual net cash inflows for useful life $ 70,000 $ 35,000Residual value $ 30,000 $ 10,000Depreciation method Straight-line Straight-lineRequired rate of return 14% 10%

What is the total present value of future cash inflows from the F54 Model? A) $(48,605)B) $186,725C) $191,395D) $167,035Answer: CDiff: 3LO: 12-4EOC: E12-21AACSB: Analytical ThinkingLearning 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.


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.


What is the total present value of future cash inflows from the B14 Model? A) $15,260B) $335,260C) $383,980D) $191,395Answer: BDiff: 2LO: 12-4EOC: E12-21AACSB: Analytical ThinkingLearning 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.




What is the net present value of the F54 Model? A) $15,260 positive B) $48,605 negativeC) $191,395 positiveD) $156,395 positiveAnswer: BDiff: 2LO: 12-4EOC: E12-21AACSB: Analytical ThinkingLearning 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.




What is the net present value of the B14 Model? A) $15,260 positiveB) $48,605 negative C) $5,800 negativeD) $335,260 positiveAnswer: ADiff: 2LO: 12-4EOC: E12-21AACSB: Analytical ThinkingLearning 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.




Using the net present value model, which alternative should the company select?A) Neither investment should be selected.B) The F54 Model should be selected.C) Both investments should be selected.D) The B14 Model should be selected.Answer: DDiff: 2LO: 12-4EOC: E12-21AACSB: Analytical ThinkingLearning 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.


149) (Present value tables are needed.) The Janus Vending Machine Company is looking to expand its business by adding a new line of vending machines. The management team is considering expanding into either soda machines or snack machines. Following is the relevant financial data relating to the decision:

Soda Machines

Snack Machines

Investment $75,000 $50,000Useful life (years) 5 10Estimated annual net cash inflows for useful life $30,000 $18,000Residual value $30,000 $10,000Depreciation method straight-line straight-lineRequired rate of return 8% 12%

What is the present value of all future cash inflows from the snack machines? A) $101,700B) $104,920C) $75,094D) $54,920Answer: B

Explanation: B) Estimated annual net cash inflows for useful life $18,000

Present value of an annuity factorCash flow present value $101,700

Residual value $10,000

Present value of $1 factorResidual value present value $3,220

Cash flow present value $10,000

Residual value present value

Present value of future cash inflows from Snack Machine




Soda Machines

Snack Machines


What is the total present value of future cash inflows from the soda machines? A) $189,930B) $104,920C) $62,220D) $140,220Answer: DExplanation: D) Estimated annual net cash inflows for useful life $30,000Present value of an annuity factor 3.993Cash flow present value $119,790

Residual value $30,000Present value of $1 factor 0.681Residual value present value $20,430

Cash flow present value $119,790Residual value present value $20,430Present value of future cash inflows from Soda machine $140,220




Soda Machines

Snack Machines


What is the net present value for the snack machines? A) $(65,220)B) $104,920C) $54,920D) $86,920Answer: C

Explanation: C)

Estimated annual net cash inflows for useful life $18,000




Cash flow present value $101,700Residual value present value $3,220

Investment

Net present value for Snack Machine




Soda Machines

Snack Machines


What is the net present value for the soda machines? A) $(140,220)B) $24,360 C) $65,220D) $54,920Answer: CExplanation: C) Estimated annual net cash inflows for useful life $30,000




Cash flow present value $119,790Residual value present value $20,430

Investment

Net present value for Soda Machine




Soda Machines

Snack Machines


Using the net present value model, which alternative should Janus Vending Machine Company select?A) The snack machines should be selected.B) The soda machines should be selected.C) Both investments should be selected.D) Neither investment should be selected.Answer: BExplanation: B) Decision Rule:NPV Soda (65,220) > NPV snack (54,920)Diff: 2LO: 12-4EOC: E12-21AACSB: Analytical ThinkingLearning 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.


154) (Present value tables are needed.) Somerville Corporation is considering investing in specialized equipment costing $618,000. The equipment has a useful life of 5 years and a residual value of $55,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:

Year 1 $ 250,000Year 2 $ 190,000Year 3 $ 152,000Year 4 $ 112,000Year 5 $ 95,000

$ 799,000

Somerville Corporation's required rate of return is 14%.

The net present value of the investment is closest toA) $62,976 negative.B) $5,886 negative.C) $34,431 negative.D) $181,000 positive.Answer: BDiff: 2LO: 12-4EOC: E12-28AACSB: Analytical ThinkingLearning 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.


155) (Present value tables are needed.) Somerville Corporation is considering investing in specialized equipment costing $618,000. The equipment has a useful life of 5 years and a residual value of $55,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:

Year 1 $ 250,000Year 2 $ 190,000Year 3 $ 152,000Year 4 $ 112,000Year 5 $ 95,000

$ 799,000

Somerville Corporation's required rate of return is 14%.

Is the internal rate of return of the investment equal to, higher than, or lower than 14%?A) Equal to 14%B) Higher than 14%C) Lower than 14%D) Cannot be determined from the given dataAnswer: CDiff: 2LO: 12-4EOC: E12-28AACSB: Analytical ThinkingLearning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment


156) (Present value tables are needed.) Mulheim Corporation is deciding whether to automate one phase of its production process. The equipment has a six-year life and will cost $410,000. Projected net cash inflows from the equipment are as follows:

Year 1 $ 120,000Year 2 $ 100,000Year 3 $ 110,000Year 4 $ 100,000Year 5 $ 95,000Year 6 $ 90,000

Mulheim Corporation's hurdle rate is 12%. Assume the residual value is zero.

What is the net present value of the equipment?A) $(18,275)B) $3,046C) $20,000D) $18,275Answer: DDiff: 3LO: 12-4EOC: E12-28AACSB: Analytical ThinkingLearning 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.


157) (Present value tables are needed.) Mulheim Corporation is deciding whether to automate one phase of its production process. The equipment has a six-year life and will cost $410,000. Projected net cash inflows from the equipment are as follows:

Year 1 $ 120,000Year 2 $ 100,000Year 3 $ 110,000Year 4 $ 100,000Year 5 $ 95,000Year 6 $ 90,000

Mulheim Corporation's hurdle rate is 12%.

If Mulheim Corporation decides to refurbish the equipment at a cost of $60,000 at the end of year 6, it could be used for one more year and would have a $30,000 residual value at the end of year 7. Assume the cash inflow in year 7 is $65,000. What is the NPV of just the refurbishment?A) ($1,040)B) $12,520C) $15,820D) $46,240Answer: BExplanation: B) Investment (end year 6) $ 60,000Present value of $1, n=6 r=12% 0.507Present value of investment - Year 6 $ 30,420

Cash inflow - Year 7 $ 65,000Present value of $1, n=7 r=12% 0.452Present value cash flows - Year 7 $ 29,380

Residual value - Year 7 $ 30,000Present value of $1, n=7 r=12% 0.452Present value of residual value - Year 7 $ 13,560

Present value of investment - Year 6 $ (30,420)Present value cash flows - Year 7 $ 29,380Present value of residual value - Year 7 $ 13,560Net present value of refurbishment $ 12,520


158) (Present value tables are needed.) 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:



The net present value of the Indiana proposal is closest toA) $538,000. B) $557,300.C) $461,650.D) $1,171,800.Answer: BExplanation: B) Cash flow $400,000 × (PVA 10yr @ 10%) 6.145 = 2,458,000Residual 50,000 × (PV 10 yr @ 10%) .386 = 19,300Less Cost -1,920,000NPV 557,300Diff: 2LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning 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.


159) (Present value tables are needed.) 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:



The net present value of the Kentucky proposal is closest toA) $557,300.B) $572,500.C) $603,380.D) $684,600.Answer: CExplanation: C) Cash flow $500,000 × (PVA 10yr @ 10%) 6.145 = 3,072,500Residual 80,000 × (PV 10 yr @ 10%) .386 = 30,880Less Cost -2,500,000NPV 603,380Diff: 2LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning 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.


160) (Present value tables are needed.) Family Fun Park is evaluating the purchase of a new game to be located on its Midway. Family Fun has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows.

Wacky Water Race

Whack-A-Mole

Investment $ 32,000 $ 22,000Useful life 5 5Estimated annual net cash inflows for 5 years $ 8,000 $ 6,000Residual value $ 2,000 $ 1,000Depreciation method straight-line straight-lineRequired rate of return 8% 10%

What is the total present value of future cash inflows from the Whack-A-Mole game? A) $22,746B) $24,579C) $23,367D) $45,367Answer: CExplanation: C) Cash flow $ 6,000 × (PVA 5yr @ 10%) 3.791 = 22,746Residual 1,000 × (PV 5 yr @ 10%) .621 = 621Total 23,367Diff: 3LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning Outcome: Discuss standard costing and variance analysis. Discuss and calculate direct material, direct labor and overhead variances.



Wacky Water Race

Whack-A-Mole


What is the total present value of future cash inflows from the Wacky Water Race game? A) $1,306B) $23,367C) $33,306D) $31,690Answer: CExplanation: C) Cash flow $ 8,000 x (PVA 5yr @ 8%) 3.993 = 31,944Residual 2,000 x (PV 5 yr @ 8%) .681 = 1,362Total 33,306Diff: 2LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts



Wacky Water Race

Whack-A-Mole


What is the net present value of the Whack-A-Mole game? A) $1,367 B) ($56)C) $56D) ($1,367)Answer: AExplanation: A) Cash flow $ 6,000 × (PVA 5yr @ 10%) 3.791 = 22,746Residual 1,000 × (PV 5 yr @ 10%) 621 = 621Total 23,367Cost -22,000NPV 1,367Diff: 2LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning 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.



Wacky Water Race

Whack-A-Mole


What is the net present value of the Wacky Water Race game? A) $(746)B) $(1,306)C) $1,306D) $746Answer: CExplanation: C) Cash flow $ 8,000 × (PVA 5yr @ 8% ) 3.993 = 31,944Residual 2,000 × (PV 5 yr @ 8% ) .681 = 1,362Total 33,306Cost -32,000NPV 1,306Diff: 2LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning 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.



Wacky Water Race

Whack-A-Mole


Using the net present value model, which alternative(s) should Family Fun Park select?A) The Wacky Water Race game should be selected.B) Neither investment should be selected.C) Both investments should be selected.D) The Whack-A-Mole game should be selected.Answer: DDiff: 2LO: 12-4EOC: E12-26AACSB: Analytical ThinkingLearning 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.

165) Icy Peaks Sports makes snowboards. The company wants to add a new machine that would cost $80,000 and have a useful life of 5 years and no residual value. The company expects the machine will generate $24,000 annual cash inflows for 5 years. The discount rate is 10%. What is the net present value of the investment?Answer: ($24,000 × 3.791) - $80,000 = $10,984Diff: 2LO: 12-4EOC: E12-27AACSB: Analytical ThinkingLearning 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.


166) Louise owns a golf course and wants to add some computers to the lounge. The computers would cost $14,000 and would have a 3 year life and no residual value. Louise expects the computers to generate $4,000 annual cash inflows for 3 years. The discount rate is 8%. What is the net present value of the investment?Answer: ($4,000 × 2.577) - 14,000 = ($3,692) Diff: 2LO: 12-4EOC: E12-27AACSB: Analytical ThinkingLearning 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.

167) Spinelli Company is deciding whether to automate one phase of its production process. The equipment has a six year life and will cost $450,000. The interest rate is 12%. Net cash inflows per year:

Year 1 $ 85,000 Year 2 $ 70,000 Year 3 $ 95,000 Year 4 $ 75,000 Year 5 $ 85,000 Year 6 $ 96,000

a. What is the present value of the net inflow for year 1?b. What is the present value of the net inflow for year 5?Answer: a. $85,000 × .893 = $75,905b. $85,000 × .567 = $48,195Diff: 3LO: 12-4EOC: E12-28AACSB: Analytical ThinkingLearning 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.


168) (Present value tables are needed.) Georgia Peach Farms is upgrading its fruit washing/separating machine. Georgia has narrowed the decision down to two machines: Machine A and Machine B.Pertinent information for each machine follows:

Machine A Machine BInvestment $450,000 $650,000Useful life (years) 10 10Estimated annual net cash inflows for useful life $75,000 $120,000Residual value $25,000 $35,000Depreciation method straight-line straight-lineRequired rate of return 10% 12%

Required:a. Calculate the net present value of Machine A.b. Calculate the net present value of Machine B.c. Using the net present value method, which machine should Georgia select if it can select only one investment?

Answer: SOLUTION part a.Estimated annual net cash inflows for useful life $75,000Present value of an annuity factor 6.145 Cash flow present value $460,875

Residual value $25,000Present value of $1 factor 0.386 Residual value present value $9,650

Cash flow present value $460,875Residual value present value $9,650Investment $(450,000) Net present value for Machine A $20,525

SOLUTION part b.Estimated annual net cash inflows for useful life $120,000Present value of an annuity factor 5.650 Cash flow present value $678,000

Residual value $35,000Present value of $1 factor 0.322 Residual value present value $11,270

Cash flow present value $678,000Residual value present value $11,270Investment $(650,000) Net present value for Machine B $39,270


SOLUTION part c. NPV Machine B (39,270) > NPV Machine A (20,525); therefore select Machine B.Diff: 3LO: 12-4EOC: E12-28AACSB: Analytical ThinkingLearning 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.

169) (Present value tables are needed.) Shaker Investments, a private investment holding company, is searching for a new investment opportunity. Shaker Investments has identified two potential investment opportunities: an upstart fast food chain and a growing organic grocery chain. Information for each investment follows:

Fast Food Organic GroceryChain Chain

Investment $975,000 $1,500,000Useful life (years) 15 15Estimated annual net cash inflows for useful life $120,000 $210,000Residual value $50,000 $100,000Depreciation method straight-line straight-lineRequired rate of return 8% 10%

Required:a. Calculate the net present value of the Fast Food Chain. b. Calculate the net present value of the Organic Grocery Chain.c. Using the net present value method, which investment should Shaker select if it can select only one investment?


Answer: SOLUTION part a.Estimated annual net cash inflows for useful life $120,000Present value of an annuity factor 8.559Cash flow present value $1,027,080


Cash flow present value $1,027,080Residual value present value $15,750Investment $(975,000)Net present value for Fast Food Chain $67,830

SOLUTION part b.Estimated annual net cash inflows for useful life $210,000Present value of an annuity factor 7.606Cash flow present value $1,597,260


Cash flow present value $1,597,260Residual value present value $23,900Investment $(1,500,000)Net present value for Organic Grocery Chain $121,160

SOLUTION part c.

NPV Organic Grocery (121,160) > NPV Fast Food (67,830); therefore choose Organic GroceryDiff: 2LO: 12-4EOC: E12-21AACSB: Analytical ThinkingLearning 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.


170) The ARR is the only method that uses accrual accounting figures and thus making it important to financial statement users.Answer: TRUEDiff: 1LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.

171) Neither the payback period nor the IRR capital budgeting method recognizes the time value of money.Answer: FALSEDiff: 1LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.

172) The payback and accounting rate of return models are conceptually better than the discounted cash flow models because they are based on cash flows, and they consider both profitability and the time value of money.Answer: FALSEDiff: 2LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.

173) The net present value model differs from the IRR model in that it does NOT show the project's unique rate of return.Answer: TRUEDiff: 2LO: 12-5EOC: E12-35AACSB: Analytical ThinkingLearning 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.


174) The discounted cash flow methods for capital budgeting are generally considered inferior to the payback period and the ARR because they consider the time value of money.Answer: FALSEDiff: 2LO: 12-5EOC: E12-35AACSB: Analytical ThinkingLearning 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.

175) The Internal Rate of Return, the Accounting Rate of Return, Net Present Value and Payback Period are four recognized capital budgeting methods.Answer: TRUEDiff: 1LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.

176) Capital budgeting methods will not work with unequal cash flows during the capital asset's life. Other methods must be utilized in those cases.Answer: FALSEDiff: 2LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning Outcome: Discuss standard costing and variance analysis. Discuss and calculate direct material, direct labor and overhead variances.

177) Capital budgeting techniques such as payback method and net present value are based upon Generally Accepted Accounting Principles (GAAP) and accrual accounting.Answer: FALSEDiff: 1LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning Outcome: Discuss standard costing and variance analysis. Discuss and calculate direct material, direct labor and overhead variances.


178) A manager wants to know which investment decision will affect the bottom line of the financial statements according to Generally Accepted Accounting Principles. Which capital budgeting method would he choose?A) Payback methodB) Accounting rate of return methodC) Net present value methodD) Profitability indexAnswer: BDiff: 1LO: 12-5EOC: E12-35AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

179) A company is evaluating a variety of different capital investment opportunities. Due to limited funds, the company can only choose one project. What would be the best capital budgeting method for this company to use to select a project?A) Payback methodB) Accounting rate of return methodC) Profitability indexD) Net present value method Answer: CDiff: 1LO: 12-5EOC: E12-35AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

180) The ________ capital budgeting method uses accrual accounting income.A) accounting rate of returnB) payback C) net present value D) internal rate of return Answer: ADiff: 1LO: 12-5EOC: E12-35AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts


181) Which of the following is not an advantage of post-audits of capital investments?A) They indicate whether project should continue or should be abandoned.B) They help managers make better estimates for future projects.C) They encourage managers to submit realistic net cash inflows with their project proposals. D) They help managers to decide which project should be selected.Answer: DDiff: 1LO: 12-5EOC: E12-35AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

182) The ________ capital budgeting model considers both profitability and the time value of money.A) paybackB) net present valueC) accounting rate of returnD) Both a and c are correctAnswer: BDiff: 1LO: 12-5EOC: E12-35AACSB: Analytical ThinkingLearning 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.

183) The ________ capital budgeting model is generally the simplest to compute.A) accounting rate of returnB) net present valueC) internal rate of returnD) paybackAnswer: DDiff: 1LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.


184) Which of the capital budgeting methods is the best?A) Payback periodB) Net present valueC) Internal rate of returnD) No single method is best. Answer: DDiff: 2LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.

185) The ________ capital budgeting methods are based on cash flows, profitability, and the time value of money.A) payback and accounting rate of returnB) payback and net present valueC) net present value and internal rate of returnD) accounting rate of return and internal rate of returnAnswer: CDiff: 2LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.

186) The ________ is generally considered to be the most superior method for making capital budgeting decisions.A) accounting rate of return methodB) net present value methodC) payback methodD) incremental methodAnswer: BDiff: 2LO: 12-5EOC: E12-35AACSB: Analytical ThinkingLearning 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.


187) "Management's minimum desired rate of return on an investment" is best described by which of the following terms?A) Payback returnB) Internal rate of return C) Discount rateD) Net present valueAnswer: CDiff: 1LO: 12-5EOC: E12-35AACSB: Analytical ThinkingLearning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts

188) "A measure of profitability computed by dividing the average annual operating income by the amount of the investment" is best described by which of the following terms?A) Net present value B) Discount rateC) Internal rate of returnD) Accounting rate of returnAnswer: DDiff: 1LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.

189) The "rate of return that makes the NPV of a capital project equal to zero" is best described by which of the following terms?A) Accounting rate of returnB) Internal rate of returnC) Discount rate D) Net present valueAnswer: BDiff: 1LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.


190) The "decision model that computes the difference between the present value of the investment's net cash inflows, using a desired rate of return, and the cost of the initial investment" is best described by which of the following terms?A) Accounting rate of returnB) Discount rateC) Net present valueD) Internal rate of return Answer: CDiff: 1LO: 12-5EOC: E12-35AACSB: Reflective ThinkingLearning 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.


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time value of money

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