# Quiz 15: Capital Budgeting

Business

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Q 6Q 6

The decision concerning which assets to acquire to achieve an organization's objectives is an investing decision.

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True False

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Q 9Q 9

An organization's discount rate should be equal to or exceed the organization's cost of capital.

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True False

Q 10Q 10

If the net present value is positive,the actual return on a project exceeds the required rate of return.

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True False

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Q 13Q 13

If a project's internal rate of return is greater than or equal to an organization's hurdle rate,the project is considered to be an acceptable investment.

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Q 14Q 14

If a project's internal rate of return is greater than or equal to an organization's hurdle rate,the project is considered to be an unacceptable investment.

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True False

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Q 16Q 16

An organization's hurdle rate should be at least equal to the organization's cost of capital.

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True False

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Q 18Q 18

The tax benefit from depreciation expense is the depreciation amount multiplied by the tax rate.

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Q 19Q 19

The tax benefit from depreciation expense is the depreciation amount divided by the tax rate.

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True False

Q 20Q 20

Using MACRS depreciation for tax purposes and straight-line depreciation for book purposes will affect after-tax cash flows during the life of a project.

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True False

Q 21Q 21

A decision in which projects are ranked according to their impact on achieving company objectives is a screening decision.

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Q 22Q 22

A decision in which projects are ranked according to their impact on achieving company objectives is a preference decision.

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Q 23Q 23

In a mutually inclusive project situation,if one project is chosen,all related projects are also chosen.

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True False

Q 24Q 24

In a mutually inclusive project situation,if one project is chosen,all related projects are eliminated from further consideration.

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True False

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Q 28Q 28

When using the risk-adjusted discount rate method,a manager increases the rate used for discounting future cash inflows.

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Q 29Q 29

When using the risk-adjusted discount rate method,a manager increases the rate used for discounting future cash outflows.

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Q 37Q 37

The evaluation of future long-range projects to allocate resources effectively and efficiently is referred to as ______________________________________.

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Q 38Q 38

A judgment regarding an entity's method of funding an investment is considered to be a(n)_______________________ decision.

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Q 39Q 39

A judgment regarding which assets an entity should acquire to achieve its stated objectives is considered to be a(n)_______________________ decision.

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Q 40Q 40

A capital budgeting method that measures the time required for a project's cash inflows to equal the original investment is referred to as the _________________________.

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Q 41Q 41

The rate of return required by a company that is used to determine the imputed interest portion of future cash receipts and disbursements is referred to as the _______________________.

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Q 42Q 42

The weighted average cost of an organization's various sources of funds is referred to as ______________________________.

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Q 43Q 43

Discounting net cash inflows by using an organization's desired rate of return and comparing the result with the net cash outflows for a project yields __________________________.

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Q 44Q 44

A ratio comparing the present value of a project's net cash inflows to the project's net investment is referred to as the ____________________________________.

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Q 45Q 45

The discount rate that causes the present value of a project's net cash inflows to equal the present value of the cash outflows is referred to as the ________________________________________.

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Q 46Q 46

The rate of return specified as the lowest acceptable return on an investment is referred to as the ________________________________.

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Q 47Q 47

A decision regarding whether a capital project is desirable based upon some previously established minimum criteria is referred to as a(n)___________________________________.

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Q 48Q 48

A decision in which projects are ranked according to their impact on the achievement of company objectives is referred to as a(n)___________________________________.

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Q 49Q 49

When a project is chosen from a group and all other projects are excluded from further consideration,the project is referred to as _________________________________.

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Q 50Q 50

In a _________________________________ project situation,if one project is chosen,all related projects are also chosen.

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Q 51Q 51

The process of determining the amount of change that must occur in a variable before a different decision would be made is referred to as _________________________________.

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Q 52Q 52

When information on actual project results is gathered and compared to actual results,the process is referred to as a(n)______________________________________.

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Q 53Q 53

The capital budgeting technique that divides average annual profits from an investment by the average investment in a project is referred to as the _____________________________________.

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Q 54Q 54

With regard to a capital investment,net cash inflow is equal to the
A)cost savings resulting from the investment.
B)sum of all future revenues from the investment.
C)net increase in cash receipts over cash payments.
D)net increase in cash payments over cash receipts.

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Multiple Choice

Q 55Q 55

Which of the following capital budgeting techniques typically ignores the time value of money?
A)payback period
B)net present value
C)internal rate of return
D)profitability index

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Q 56Q 56

The weighted average cost of capital represents the
A)cost of bonds,preferred stock,and common stock divided by the three sources.
B)equivalent units of capital used by the organization.
C)overall cost of capital from all organization financing sources.
D)overall cost of dividends plus interest paid by the organization.

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Q 58Q 58

The interest rate used to find the present value of a future cash flow is the
A)prime rate.
B)discount rate.
C)cutoff rate.
D)internal rate of return.

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Q 59Q 59

A firm's discount rate is typically based on
A)the interest rates related to the firm's bonds.
B)a project's internal rate of return.
C)its cost of capital.
D)the corporate Aa bond yielD.

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Multiple Choice

Q 60Q 60

Which of the following capital budgeting techniques may potentially ignore part of a project's relevant cash flows?
A)net present value
B)internal rate of return
C)payback period
D)profitability index

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Multiple Choice

Q 61Q 61

The combined weighted average interest rate that a firm incurs on its long-term debt,preferred stock,and common stock is the
A)cost of capital.
B)discount rate.
C)cutoff rate.
D)internal rate of return.

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Q 62Q 62

The weighted average cost of capital that is used to evaluate a specific project should be based on the
A)mix of capital components that was used to finance a project from last year.
B)overall capital structure of the corporation.
C)cost of capital for other corporations with similar investments.
D)mix of capital components for all capital acquired in the most recent fiscal year.

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Q 63Q 63

Debt in the capital structure could be treated as if it were common equity in computing the weighted average cost of capital if the debt were
A)callable.
B)participating.
C)cumulative.
D)convertible.

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Q 64Q 64

The weighted average cost of capital approach to decision making is not directly affected by the
A)value of the common stock.
B)current budget for capital expansion.
C)cost of debt outstanding.
D)proposed mix of debt,equity,and existing funds used to implement the project.

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Multiple Choice

Q 65Q 65

In comparing two projects,the ____ is often used to evaluate the relative riskiness of the projects.
A)payback period
B)net present value
C)internal rate of return
D)discount rate

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Multiple Choice

Q 66Q 66

Which of the following capital budgeting techniques does not routinely rely on the assumption that all cash flows occur at the end of the period?
A)internal rate of return
B)net present value
C)profitability index
D)payback period

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Multiple Choice

Q 67Q 67

Assume that a project consists of an initial cash outlay of $100,000 followed by equal annual cash inflows of $40,000 for 4 years.In the formula X = $100,000/$40,000,X represents the
A)payback period for the project.
B)profitability index of the project.
C)internal rate of return for the project.
D)project's discount rate.

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Multiple Choice

Q 68Q 68

All other factors equal,a large number is preferred to a smaller number for all capital project evaluation measures except
A)net present value.
B)payback period.
C)internal rate of return.
D)profitability index.

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Multiple Choice

Q 69Q 69

The payback method measures
A)how quickly investment dollars may be recovered.
B)the cash flow from an investment.
C)the economic life of an investment.
D)the profitability of an investment.

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Multiple Choice

Q 70Q 70

The payback period is the
A)length of time over which the investment will provide cash inflows.
B)length of time over which the initial investment is recovered.
C)shortest length of time over which an investment may be depreciated.
D)shortest length of time over which the net present value will be positive.

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Multiple Choice

Q 71Q 71

The time value of money is considered in long-range investment decisions by
A)assuming equal annual cash flow patterns.
B)investing only in short-term projects.
C)assigning greater value to more immediate cash flows.
D)ignoring depreciation and tax implications of the investment.

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Multiple Choice

Q 72Q 72

The time value of money is explicitly recognized through the process of
A)interpolating.
B)discounting.
C)annuitizing.
D)budgeting.

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Multiple Choice

Q 73Q 73

When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project,which of the following factors is generally not important?
A)method of financing the project under consideration
B)timing of cash flows relating to the project
C)impact of the project on income taxes to be paid
D)amounts of cash flows relating to the project

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Multiple Choice

Q 74Q 74

In a discounted cash flow analysis,which of the following would not be consistent with adjusting a project's cash flows to account for higher-than-normal risk?
A)increasing the expected amount for cash outflows
B)increasing the discounting period for expected cash inflows
C)increasing the discount rate for cash outflows
D)decreasing the amount for expected cash inflows

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Multiple Choice

Q 75Q 75

In capital budgeting,a firm's cost of capital is frequently used as the
A)internal rate of return.
B)accounting rate of return.
C)discount rate.
D)profitability index.

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Multiple Choice

Q 76Q 76

The net present value method assumes that all cash inflows can be immediately reinvested at the
A)cost of capital.
B)discount rate.
C)internal rate of return.
D)rate on the corporation's short-term debt.

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Multiple Choice

Q 77Q 77

Which of the following changes would not decrease the present value of the future depreciation deductions on a specific depreciable asset?
A)a decrease in the marginal tax rate
B)a decrease in the discount rate
C)a decrease in the rate of depreciation
D)an increase in the life expectancy of the depreciable asset

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Multiple Choice

Q 78Q 78

To reflect greater uncertainty (greater risk)about a future cash inflow,an analyst could
A)increase the discount rate for the cash flow.
B)decrease the discounting period for the cash flow.
C)increase the expected value of the future cash flow before it is discounted.
D)extend the acceptable length for the payback perioD.

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Multiple Choice

Q 79Q 79

For a project such as plant investment,the return that should leave the market price of the firm's stock unchanged is known as the
A)cost of capital.
B)net present value.
C)payback rate.
D)internal rate of return.

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Multiple Choice

Q 80Q 80

A change in the discount rate used to evaluate a specific project will affect the project's
A)life.
B)payback period.
C)net present value.
D)total cash flows.

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Q 81Q 81

The pre-tax cost of capital is higher than the after-tax cost of capital because
A)interest expense is deductible for tax purposes.
B)principal payments on debt are deductible for tax purposes.
C)the cost of capital is a deductible expense for tax purposes.
D)dividend payments to stockholders are deductible for tax purposes.

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Multiple Choice

Q 82Q 82

The basis for measuring the cost of capital derived from bonds and preferred stock,respectively,is the
A)pre-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock.
B)pre-tax rate of interest for bonds and stated annual dividend rate for preferred stock.
C)after-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock.
D)after-tax rate of interest for bonds and stated annual dividend rate for preferred stock.

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Multiple Choice

Q 83Q 83

The ____ is the highest rate of return that can be earned from the most attractive,alternative capital project available to the firm.
A)accounting rate of return
B)internal rate of return
C)hurdle rate
D)opportunity cost of capital

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Multiple Choice

Q 84Q 84

The salvage value of an old lathe is zero.If instead,the salvage value of the old lathe was $20,000,what would be the impact on the net present value of the proposal to purchase a new lathe?
A)It would increase the net present value of the proposal.
B)It would decrease the net present value of the proposal.
C)It would not affect the net present value of the proposal.
D)Potentially it could increase or decrease the net present value of the new lathe.

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Multiple Choice

Q 85Q 85

The net present value method of evaluating proposed investments
A)measures a project's internal rate of return.
B)ignores cash flows beyond the payback period.
C)applies only to mutually exclusive investment proposals.
D)discounts cash flows at a minimum desired rate of return.

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Multiple Choice

Q 86Q 86

Which of the following statements is trueregarding capital budgeting methods?
A)The Fisher rate can never exceed a company's cost of capital.
B)The internal rate of return measure used for capital project evaluation has more conservative assumptions than the net present value method,especially for projects that generate a positive net present value.
C)The net present value method of project evaluation will always provide the same ranking of projects as the profitability index method.
D)The net present value method assumes that all cash inflows can be reinvested at the project's cost of capital.

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Multiple Choice

Q 87Q 87

If a project generates a net present value of zero,the profitability index for the project will
A)equal zero.
B)equal 1.
C)equal -1.
D)be undefineD.

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Multiple Choice

Q 88Q 88

If the profitability index for a project exceeds 1,then the project's
A)net present value is positive.
B)internal rate of return is less than the project's discount rate.
C)payback period is less than 5 years.
D)accounting rate of return is greater than the project's internal rate of return.

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Multiple Choice

Q 89Q 89

If a project's profitability index is less than 1,the project's
A)discount rate is above its cost of capital.
B)internal rate of return is less than zero.
C)payback period is infinite.
D)net present value is negative.

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Multiple Choice

Q 90Q 90

The profitability index is
A)the ratio of net cash flows to the original investment.
B)the ratio of the present value of cash flows to the original investment.
C)a capital budgeting evaluation technique that doesn't use discounted values.
D)a mandatory technique when capital rationing is useD.

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Multiple Choice

Q 91Q 91

Which method of evaluating capital projects assumes that cash inflows can be reinvested at the discount rate?
A)internal rate of return
B)payback period
C)profitability index
D)accounting rate of return

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Multiple Choice

Q 92Q 92

If the total cash inflows associated with a project exceed the total cash outflows associated with the project,the project's
A)net present value is greater than zero.
B)internal rate of return is greater than zero.
C)profitability index is greater than 1.
D)payback period is acceptable.

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Multiple Choice

Q 93Q 93

The rate of interest that produces a zero net present value when a project's discounted cash operating advantage is netted against its discounted net investment is the
A)cost of capital.
B)discount rate.
C)cutoff rate.
D)internal rate of return.

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Multiple Choice

Q 94Q 94

For a profitable company,an increase in the rate of depreciation on a specific project could
A)increase the project's profitability index.
B)increase the project's payback period.
C)decrease the project's net present value.
D)increase the project's internal rate of return.

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Multiple Choice

Q 95Q 95

Which of the following capital expenditure planning and control techniques has been criticized because it might mistakenly imply that earnings are reinvested at the rate of return earned by the investment?
A)payback method
B)accounting rate of return
C)net present value method
D)internal rate of return

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Multiple Choice

Q 96Q 96

If the discount rate that is used to evaluate a project is equal to the project's internal rate of return,the project's ____ is zero.
A)profitability index
B)internal rate of return
C)present value of the investment
D)net present value

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Multiple Choice

Q 97Q 97

As the marginal tax rate goes up,the benefit from the depreciation tax shield
A)decreases.
B)increases.
C)stays the same.
D)can move up or down depending on whether the firm's cost of capital is high or low.

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Multiple Choice

Q 98Q 98

When a profitable corporation sells an asset at a loss,the after-tax cash flow on the sale will
A)exceed the pre-tax cash flow on the sale.
B)be less than the pre-tax cash flow on the sale.
C)be the same as the pre-tax cash flow on the sale.
D)increase the corporation's overall tax liability.

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Multiple Choice

Q 99Q 99

In a typical (conservative assumptions)after-tax discounted cash flow analysis,depreciation expense is assumed to accrue at
A)the beginning of the period.
B)the middle of the period.
C)the end of the period.
D)irregular intervals over the life of the investment.

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Multiple Choice

Q 100Q 100

The pre-tax and after-tax cash flows would be the same for all of the following items except
A)the liquidation of working capital at the end of a project's life.
B)the initial (outlay)cost of an investment.
C)the sale of an asset at its book value.
D)a cash payment for salaries and wages.

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Multiple Choice

Q 101Q 101

The after-tax net present value of a project is affected by
A)tax-deductible cash flows.
B)non-tax-deductible cash flows.
C)accounting accruals.
D)all of the above.

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Multiple Choice

Q 102Q 102

A project's after-tax net present value is increased by all of the following except
A)revenue accruals.
B)cash inflows.
C)depreciation deductions.
D)expense accruals.

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Q 103Q 103

Multiplying the depreciation deduction by the tax rate yields a measure of the depreciation tax
A)deferral.
B)benefit.
C)payable.
D)loss.

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Q 104Q 104

Annual after-tax corporate net income can be converted to annual after-tax cash flow by
A)adding back the depreciation amount.
B)deducting the depreciation amount.
C)adding back the quantity (t ´ depreciation deduction),where t is the corporate tax rate.
D)deducting the quantity [(1- t)´ depreciation deduction],where t is the corporate tax rate.

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Multiple Choice

Q 105Q 105

Income taxes are levied on
A)net cash flow.
B)income as measured by accounting rules.
C)net cash flow plus depreciation.
D)income as measured by tax rules.

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Multiple Choice

Q 106Q 106

The payback method typically assumes that all cash inflows are reinvested to yield a return equal to
A)the discount rate.
B)the hurdle rate.
C)the internal rate of return.
D)zero.

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Multiple Choice

Q 107Q 107

Which of the following capital budgeting techniques has been criticized because it fails to consider investment profitability?
A)payback method
B)accounting rate of return
C)net present value method
D)internal rate of return

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Multiple Choice

Q 108Q 108

If an analyst desires a conservative net present value estimate,he/she will assume that all cash inflows occur at
A)mid year.
B)the beginning of the year.
C)year end.
D)irregular intervals.

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Multiple Choice

Q 109Q 109

The net present value and internal rate of return methods of decision making in capital budgeting are superior to the payback method in that they
A)are easier to implement.
B)consider the time value of money.
C)require less input.
D)reflect the effects of sensitivity analysis.

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Multiple Choice

Q 110Q 110

If an investment has a positive net present value,the
A)internal rate of return is higher than the discount rate.
B)discount rate is higher than the hurdle rate of return.
C)internal rate of return is lower than the discount rate of return.
D)hurdle rate of return is higher than the discount rate.

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Multiple Choice

Q 111Q 111

Which of the following are tax deductible under U.S.tax law?
A)interest payments to bondholders
B)preferred stock dividends
C)common stock dividends
D)all of the above

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Multiple Choice

Q 112Q 112

Which of the following best represents a screening decision?
A)determining which project has the highest net present value
B)determining if a project's internal rate of return exceeds the firm's cost of capital
C)determining which projects are mutually exclusive
D)determining which are the best projects

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Multiple Choice

Q 113Q 113

Sensitivity analysis is
A)an appropriate response to uncertainty in cash flow projections.
B)useful in measuring the variance of the Fisher rate.
C)typically conducted in the post investment audit.
D)useful to compare projects requiring vastly different levels of initial investment.

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Multiple Choice

Q 114Q 114

If management judges one project in a mutually inclusive set to be acceptable for investment,
A)all the other projects in the set are rejected.
B)only one other project in the set can be accepted.
C)all other projects in the set are also accepted.
D)only one project in the set will be rejecteD.

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Multiple Choice

Q 115Q 115

All other factors equal,which of the following would affect a project's internal rate of return,net present value,and payback period?
A)an increase in the discount rate
B)a decrease in the life of the project
C)an increase in the initial cost of the project
D)all of the above

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Multiple Choice

Q 116Q 116

Freeman Corporation bought a piece of machinery.Selected data is presented below:
Present value tables or a financial calculator are required.
The initial cost of the machinery was
A)$157,392.
B)$174,992.
C)$165,812.
D)$170,303.

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Multiple Choice

Q 117Q 117

Lynch Corporation bought a piece of machinery.Selected data is presented below:
Present value tables or a financial calculator are required.
The initial cost of the machinery was
A)$201,496
B)$208,493
C)$215,390
D)$230,342

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Multiple Choice

Q 118Q 118

Broncho Industries is considering the purchase of a $100,000 machine that is expected to result in a decrease of $15,000 per year in cash expenses.This machine,which has no residual value,has an estimated useful life of 10 years and will be depreciated on a straight-line basis.For this machine,the accounting rate of return would be
A)10 percent.
B)15 percent.
C)30 percent.
D)35 percent.

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Multiple Choice

Q 119Q 119

McDonald Industries is considering the purchase of a $180,000 machine that is expected to result in a decrease of $20,000 per year in cash expenses.This machine,which has no residual value,has an estimated useful life of 15 years and will be depreciated on a straight-line basis.For this machine,the accounting rate of return would be
A)4.4 percent
B)8.9 percent
C)11.1 percent
D)22.2 percent

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Multiple Choice

Q 120Q 120

An investment project is expected to yield $10,000 in annual revenues,has $2,000 in fixed costs per year,and requires an initial investment of $5,000.Given a cost of goods sold of 60 percent of sales,what is the payback period in years?
A)2.50
B)5.00
C)2.00
D)1.25

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Multiple Choice

Q 121Q 121

An investment project is expected to yield $12,000 in annual revenues,has $3,000 in fixed costs per year,and requires an initial investment of $6,000.Given a cost of goods sold of 50 percent of sales,what is the payback period in years?
A)1.00
B)1.50
C)2.00
D)4.00

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Multiple Choice

Q 122Q 122

A project has an initial cost of $100,000 and generates a present value of net cash inflows of $120,000.What is the project's profitability index?
A).20
B)1.20
C).80
D)5.00

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Multiple Choice

Q 123Q 123

A project has an initial cost of $125,000 and generates a present value of net cash inflows of $150,000.What is the project's profitability index?
A).20
B)1.20
C).83
D)5.00

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Multiple Choice

Q 124Q 124

Kempf Corporation faces a marginal tax rate of 35 percent.One project that is currently under evaluation has a cash flow in the fourth year of its life that has a present value of $10,000 (after-tax).Kempf Corporation assumes that all cash flows occur at the end of the year and the company uses 11 percent as its discount rate.What is the pre-tax amount of the cash flow in year 4? (Round to the nearest dollar. )Present value tables or a financial calculator are required.
A)$15,181
B)$23,356
C)$ 9,868
D)$43,375

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Multiple Choice

Q 125Q 125

Miller Corporation faces a marginal tax rate of 30 percent.One project that is currently under evaluation has a cash flow in the fifth year of its life that has a present value of $12,000 (after-tax).Miller Corporation assumes that all cash flows occur at the end of the year and the company uses 13 percent as its discount rate.What is the pre-tax amount of the cash flow in year 5? (Round to the nearest dollar. )Present value tables or a financial calculator are required.
A)$15,475
B)$22,108
C)$31,582
D)$73,692

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Multiple Choice

Q 126Q 126

Atlantic Princess Corporation
Atlantic Princess Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years.At the end of 10 years,the ship will have no value and will be scuttled.Atlantic Princess's cost of capital is 12 percent,and its marginal tax rate is 40 percent.
Refer to Atlantic Princess Corporation.What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar. )Present value tables or a financial calculator are required.
A)$113,004
B)$282,510
C)$169,506
D)$200,000

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Multiple Choice

Q 127Q 127

Atlantic Princess Corporation
Atlantic Princess Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years.At the end of 10 years,the ship will have no value and will be scuttled.Atlantic Princess's cost of capital is 12 percent,and its marginal tax rate is 40 percent.
Refer to Atlantic Princess Corporation.If the ship produces equal annual labor cost savings over its 10-year life,how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar. )Present value tables or a financial calculator are required.
A)$68,492
B)$115,154
C)$88,492
D)$157,487

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Multiple Choice

Q 128Q 128

Galveston Excursons Corporation
Galveston Excursons Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $600,000 and would be fully depreciated by the straight-line method over 15 years.At the end of 15 years,the ship will have no value and will be scuttled.Galveston Excursons' cost of capital is 14 percent,and its marginal tax rate is 35 percent.
Refer to Galveston Excursons Corporation.What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar. )Present value tables or a financial calculator are required.
A)$ 85,991
B)$159,697
C)$210,000
D)$245,688

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Multiple Choice

Q 129Q 129

Galveston Excursons Corporation
Galveston Excursons Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $600,000 and would be fully depreciated by the straight-line method over 15 years.At the end of 15 years,the ship will have no value and will be scuttled.Galveston Excursons' cost of capital is 14 percent,and its marginal tax rate is 35 percent.
Refer to Galveston Excursons Corporation.If the ship produces equal annual labor cost savings over its 10-year life,how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar. )Present value tables or a financial calculator are required.
A)$ 83,685
B)$ 97,685
C)$146,906
D)$226,008

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Multiple Choice

Q 130Q 130

Crosson Corporation recently sold a used machine for $40,000.The machine had a book value of $60,000 at the time of the sale.What is the after-tax cash flow from the sale,assuming the company's marginal tax rate is 20 percent?
A)$40,000
B)$60,000
C)$44,000
D)$32,000

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Multiple Choice

Q 131Q 131

Louwers Corporation recently sold a used machine for $50,000.The machine had a book value of $75,000 at the time of the sale.What is the after-tax cash flow from the sale,assuming the company's marginal tax rate is 25 percent?
A)$43,750
B)$50,000
C)$56,250
D)$75,000

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Multiple Choice

Q 132Q 132

Mapleton Company
Mapleton Company is considering an investment in a machine that would reduce annual labor costs by $30,000.The machine has an expected life of 10 years with no salvage value.The machine would be depreciated according to the straight-line method over its useful life.The company's marginal tax rate is 30 percent.
Refer to Mapleton Company.Assume that the company will invest in the machine if it generates an internal rate of return of 16 percent.What is the maximum amount the company can pay for the machine and still meet the internal rate of return criterion? Present value tables or a financial calculator are required.
A)$144,990
B)$180,000
C)$187,500
D)$210,000

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Multiple Choice

Q 133Q 133

Mapleton Company
Mapleton Company is considering an investment in a machine that would reduce annual labor costs by $30,000.The machine has an expected life of 10 years with no salvage value.The machine would be depreciated according to the straight-line method over its useful life.The company's marginal tax rate is 30 percent.
Refer to Mapleton Company.Assume the company pays $250,000 for the machine.What is the expected internal rate of return on the machine? Present value tables or a financial calculator are required.
A)between 8 and 9 percent
B)between 3 and 4 percent
C)between 17 and 18 percent
D)less than 1 percent

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Multiple Choice

Q 134Q 134

A project under consideration by Radisson Corporation would require a working capital investment of $200,000.The working capital would be liquidated at the end of the project's 10-year life.If Radisson Corporation has an after-tax cost of capital of 10 percent and a marginal tax rate of 30 percent,what is the present value of the working capital cash flow expected to be received in year 10? Present value tables or a financial calculator are required.
A)$36,868
B)$77,100
C)$53,970
D)$23,130

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Multiple Choice

Q 135Q 135

Warning Industries is considering two alternative ways to depreciate a proposed investment.The investment has an initial cost of $100,000 and an expected five-year life.The two alternative depreciation schedules follow:
Assuming that the company faces a marginal tax rate of 40 percent and has a cost of capital of 10 percent,what is the difference between the two methods in the present value of the depreciation tax benefit? Present value tables or a financial calculator are required.
A)$7,196
B)$0
C)$2,878
D)$6,342

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Multiple Choice

Q 136Q 136

Jennings Creations
Jennings Creations is considering an investment in a computer that is capable of producing various images that are useful in the production of commercial art.The computer would cost $20,000 and have an expected life of eight years.The computer is expected to generate additional annual net cash receipts (before-tax)of $6,000 per year.The computer will be depreciated according to the straight-line method and the firm's marginal tax rate is 25 percent.
Refer to Jennings Creations.What is the after-tax payback period for the computer project?
A)7.62 years
B)3.90 years
C)4.44 years
D)3.11 years

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Multiple Choice

Q 137Q 137

Jennings Creations
Jennings Creations is considering an investment in a computer that is capable of producing various images that are useful in the production of commercial art.The computer would cost $20,000 and have an expected life of eight years.The computer is expected to generate additional annual net cash receipts (before-tax)of $6,000 per year.The computer will be depreciated according to the straight-line method and the firm's marginal tax rate is 25 percent.
Refer to Jennings Creations.What is the after-tax net present value of the proposed project (using a 16 percent discount rate)? Present value tables or a financial calculator are required.
A)$2,261
B)$(454)
C)$6,062
D)$(4,797)

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Multiple Choice

Q 138Q 138

Griffith Corporation
Griffith Corporation is considering an investment in a labor-saving machine.Information on this machine follows:
Refer to Griffith Corporation.What is the internal rate of return on this project (round to the nearest 1/2%)? Present value tables or a financial calculator are required.
A)37.5%
B)25.0%
C)10.5%
D)13.5%

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Multiple Choice

Q 139Q 139

Griffith Corporation
Griffith Corporation is considering an investment in a labor-saving machine.Information on this machine follows:
Refer to Griffith Corporation.Assume for this question only that Griffith Corporation uses a discount rate of 16 percent to evaluate projects of this type.What is the project's net present value? Present value tables or a financial calculator are required.
A)$(6,283)
B)$(3,806)
C)$(23,451)
D)$(22,000)

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Multiple Choice

Q 140Q 140

Griffith Corporation
Griffith Corporation is considering an investment in a labor-saving machine.Information on this machine follows:
Refer to Griffith Corporation.What is the payback period on this investment?
A)4 years
B)2.14 years
C)3.75 years
D)5 years

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Multiple Choice

Q 141Q 141

Sunderland Wood Creations
Sunderland Wood Creations is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe.Information on the existing lathe and the computer-operated lathe follow:
Refer to Sunderland Wood Creations.What is the payback period for the computer-operated lathe?
A)1.87 years
B)2.00 years
C)3.53 years
D)3.29 years

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Multiple Choice

Q 142Q 142

Sunderland Wood Creations
Sunderland Wood Creations is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe.Information on the existing lathe and the computer-operated lathe follow:
Refer to Sunderland Wood Creations.If the company uses 10 percent as its discount rate,what is the net present value of the proposed new lathe purchase? Present value tables or a financial calculator are required.
A)$236,465
B)$256,465
C)$195,485
D)$30,422

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Multiple Choice

Q 143Q 143

Duval Corporation
The Duval Corporation has recently evaluated a proposal to invest in cost-reducing production technology.According to the evaluation,the project would require an initial investment of $17,166 and would provide equal annual cost savings for five years.Based on a 10 percent discount rate,the project generates a net present value of $1,788.The project is not expected to have any salvage value at the end of its five-year life.
Refer to Duval Corporation.What are the expected annual cost savings of the project? Present value tables or a financial calculator are required.
A)$3,500
B)$4,000
C)$4,500
D)$5,000

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Multiple Choice

Q 144Q 144

Duval Corporation
The Duval Corporation has recently evaluated a proposal to invest in cost-reducing production technology.According to the evaluation,the project would require an initial investment of $17,166 and would provide equal annual cost savings for five years.Based on a 10 percent discount rate,the project generates a net present value of $1,788.The project is not expected to have any salvage value at the end of its five-year life.
Refer to Duval Corporation.What is the project's expected internal rate of return? Present value tables or a financial calculator are required.
A)10%
B)11%
C)13%
D)14%

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Multiple Choice

Q 145Q 145

Smith Corporation
Smith Corporation is involved in the evaluation of a new computer-integrated manufacturing system.The system has a projected initial cost of $1,000,000.It has an expected life of six years,with no salvage value,and is expected to generate annual cost savings of $250,000.Based on Smith Corporation's analysis,the project has a net present value of $57,625.
Refer to Smith Corporation.What discount rate did the company use to compute the net present value? Present value tables or a financial calculator are required.
A)10%
B)11%
C)12%
D)13%

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Multiple Choice

Q 146Q 146

Smith Corporation
Smith Corporation is involved in the evaluation of a new computer-integrated manufacturing system.The system has a projected initial cost of $1,000,000.It has an expected life of six years,with no salvage value,and is expected to generate annual cost savings of $250,000.Based on Smith Corporation's analysis,the project has a net present value of $57,625.
Refer to Smith Corporation.What is the project's profitability index?
A)1.058
B).058
C).945
D)1.000

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Multiple Choice

Q 147Q 147

Smith Corporation
Smith Corporation is involved in the evaluation of a new computer-integrated manufacturing system.The system has a projected initial cost of $1,000,000.It has an expected life of six years,with no salvage value,and is expected to generate annual cost savings of $250,000.Based on Smith Corporation's analysis,the project has a net present value of $57,625.
Refer to Smith Corporation.What is the project's internal rate of return? Present value tables or a financial calculator are required.
A)between 12.5 and 13.0 percent
B)between 11.0 and 11.5 percent
C)between 11.5 and 12.0 percent
D)between 13.0 and 13.5 percent

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Multiple Choice

Q 148Q 148

Julie Collins recently invested in a project that promised an internal rate of return of 15 percent.If the project has an expected annual cash inflow of $12,000 for six years,with no salvage value,how much did Julie pay for the project?
Present value tables or a financial calculator are required.
A)$35,000
B)$45,414
C)$72,000
D)$31,708

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Multiple Choice

Q 149Q 149

Fred Hammond recently invested in a project that has an expected annual cash inflow of $7,000 for 10 years,and an expected payback period of 3.6 years.How much did Fred invest in the project?
A)$19,444
B)$36,000
C)$25,200
D)$40,000

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Multiple Choice

Q 150Q 150

The Mahan Corporation is considering an investment in a project that generates a profitability index of 1.3.The present value of the cash inflows on the project is $44,000.What is the net present value of this project?
A)$10,154
B)$13,200
C)$57,200
D)$33,846

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Multiple Choice

Q 151Q 151

If r is the discount rate,the formula [1/(1 + r)] refers to the
A)future value interest factor associated with r for one period.
B)present value of some future cash flow.
C)present value interest factor associated with r for one period.
D)future value interest factor for an annuity with a duration of r periods.

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Q 152Q 152

All other things being equal,as the time period for receiving an annuity lengthens,
A)the related present value factors increase.
B)the related present value factors decrease.
C)the related present value factors remain constant.
D)it is impossible to tell what happens to present value factors from the information given.

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Multiple Choice

Q 153Q 153

Which of the following indicates that the first cash flow is at the end of a period?
A)yes no
B)yes yes
C)no yes
D)no no

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Q 154Q 154

Assume that X represents a sum of money that Bill has available to invest in a project that will yield a return of r.In the formula Y = X(1 + r),Y represents the
A)future value of X in one period.
B)future value interest factor associated with r.
C)present value of X.
D)present value interest factor associated with r.

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Multiple Choice

Q 155Q 155

The capital budgeting technique known as accounting rate of return uses
A)no no
B)no yes
C)yes yes
D)yes no

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Q 156Q 156

In computing the accounting rate of return,the ____ level of investment should be used as the denominator.
A)average
B)initial
C)residual
D)cumulative

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Multiple Choice

Q 157Q 157

Ellis Retail
Ellis Retail is considering an investment in a delivery truck.Ellis has found a used truck that he can purchase for $8,000.He estimates the truck would last six years and increase his store's net cash revenues by $2,000 per year.At the end of six years,the truck would have no salvage value and would be discarded.Ellis will depreciate the truck using the straight-line method.
Refer to Ellis Retail.What is the accounting rate of return on the truck investment (based on average profit and average investment)?
A)25.0%
B)50.0%
C)16.7%
D)8.3%

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Multiple Choice

Q 158Q 158

Ellis Retail
Ellis Retail is considering an investment in a delivery truck.Ellis has found a used truck that he can purchase for $8,000.He estimates the truck would last six years and increase his store's net cash revenues by $2,000 per year.At the end of six years,the truck would have no salvage value and would be discarded.Ellis will depreciate the truck using the straight-line method.
Refer to Ellis Retail.What is the payback period on the investment in the new truck?
A)12 years
B)6 years
C)4 years
D)2 years

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Multiple Choice

Q 159Q 159

Gwen Taylor borrows $50,000 from her bank on January 1.She is to repay the loan in equal annual installments over 30 years.How much is her annual repayment if the bank charges 10 percent interest? Present value tables or a financial calculator are required.
A)$1,667
B)$4,200
C)$2,865
D)$5,304

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Multiple Choice

Q 160Q 160

Alan Arnold has just turned 65.He has $100,000 to invest in a retirement annuity.One investment company has offered to pay Alan $10,000 per year for 15 years (payments to begin in one year)in exchange for an immediate $100,000 payment.If Alan accepts the offer from the investment company,what is his expected return on the $100,000 investment (assume a return that is compounded annually)? Present value tables or a financial calculator are required.
A)between 5 and 6 percent
B)between 6 and 7 percent
C)between 7 and 8 percent
D)between 8 and 9 percent

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Multiple Choice

Q 161Q 161

Superior Armored Car Co.is considering the acquisition of a new armored truck.The truck is expected to cost $300,000.The company's discount rate is 12 percent.The firm has determined that the truck generates a positive net present value of $17,022.However,the firm is uncertain as to whether it has determined a reasonable estimate of the salvage value of the truck.In computing the net present value,the company assumed that the truck would be salvaged at the end of the fifth year for $60,000.What expected salvage value for the truck would cause the investment to generate a net present value of $0? Ignore taxes.Present value tables or a financial calculator are required.
A)$30,000
B)$0
C)$55,278
D)$42,978

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Multiple Choice

Q 162Q 162

Patterson Publishers is considering an investment that would require an initial cash outlay of $400,000 and would have no salvage value.The project would generate annual cash inflows of $75,000.The firm's discount rate is 8 percent.How many years must the annual cash flows be generated for the project to generate a net present value of $0? Present value tables or a financial calculator are required.
A)between 5 and 6 years
B)between 6 and 7 years
C)between 7 and 8 years
D)between 8 and 9 years

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Multiple Choice

Q 163Q 163

If it is assumed that managers act to maximize the value of the firm,what can also be assumed about the existing mix of capital components relative to the set of all viable alternative mixes of capital components?

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Q 164Q 164

In a net present value analysis,how can an analyst explicitly and formally consider the influence of risk on the present value of certain cash flows?

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Q 168Q 168

Does a project that generates a positive internal rate of return also have a positive net present value? Explain.

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Q 169Q 169

Why is the profitability index a better basis than net present value to compare projects that require different levels of investment?

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Q 170Q 170

What is the major advantage of the accounting rate of return relative to the other techniques that can be used to evaluate capital projects?

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Q 171Q 171

Why is it important for organizations to conduct post investment audits of capital projects?

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Q 172Q 172

How are capital budgeting models affected by potential investments in automated equipment investment decisions?

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Q 173Q 173

Riley Industries is considering an investment that will require an initial cash outlay of $200,000 to purchase non-depreciable assets.The project promises to return $60,000 per year (after-tax)for eight years with no salvage value.The company's cost of capital is 11 percent.
The company is uncertain about its estimate of the life expectancy of the project.How many years must the project generate the $60,000 per year return for the company to at least be indifferent about its acceptance? (Do not consider the possibility of partial year returns. )
Present value tables or a financial calculator are required.

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Q 174Q 174

Weaver Corporation
Weaver Corporation is considering an investment in a new product line.The investment would require an immediate outlay of $100,000 for equipment and an immediate investment of $200,000 in working capital.The investment is expected to generate a net cash inflow of $100,000 in year 1,$150,000 in year 2,and $200,000 in years 3 and 4.The equipment would be scrapped (for no salvage)at the end of the fourth year and the working capital would be liquidated.The equipment would be fully depreciated by the straight-line method over its four-year life.
Refer to Weaver Corporation.If Weaver uses a discount rate of 16 percent,what is the NPV of the proposed product line investment?
Present value tables or a financial calculator are required.

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Q 175Q 175

Weaver Corporation
Weaver Corporation is considering an investment in a new product line.The investment would require an immediate outlay of $100,000 for equipment and an immediate investment of $200,000 in working capital.The investment is expected to generate a net cash inflow of $100,000 in year 1,$150,000 in year 2,and $200,000 in years 3 and 4.The equipment would be scrapped (for no salvage)at the end of the fourth year and the working capital would be liquidated.The equipment would be fully depreciated by the straight-line method over its four-year life.
Refer to Weaver Corporation.What is the payback period for the investment?

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Q 176Q 176

Donald Hughes has an opportunity to invest in a project that will yield four annual payments of $12,000 with no salvage.The first payment will be received in exactly one year.On low-risk projects of this type,Hughes requires a return of 6 percent.Based on this requirement,the project generates a profitability index of 1.03953.
Present value tables or a financial calculator are required.

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Q 177Q 177

Merrill Productions is considering the purchase of a new movie camera,which will be used for major motion pictures.The new camera will cost $30,000,have an eight-year life,and create cost savings of $5,000 per year.The new camera will require $700 of maintenance each year.Merrill Productions uses a discount rate of 9 percent.
Present value tables or a financial calculator are required.

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Q 178Q 178

Stone Corporation is interested in purchasing a state-of-the-art widget machine for its manufacturing plant.The new machine has been designed to basically eliminate all errors and defects in the widget-making production process.The new machine will cost $150,000,and have a salvage value of $70,000 at the end of its seven-year useful life.Stone has determined that cash inflows for years 1 through 7 will be as follows: $32,000;$57,000;$15,000;$28,000;$16,000;$10,000,and $15,000,respectively.Maintenance will be required in years 3 and 6 at $10,000 and $7,000 respectively.Stone uses a discount rate of 11 percent and wants projects to have a payback period of no longer than five years.
Present value tables or a financial calculator are required.

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Q 179Q 179

Webber Corporation is interested in purchasing a state-of-the-art stamping machine for its manufacturing plant.The new machine has been designed to basically eliminate all errors and defects in the production process.The new machine will cost $180,000,and have a salvage value of $80,000 at the end of its eight-year useful life.Stone has determined that cash inflows for years 1 through 8 will be as follows: $33,000;$58,000;$28,000;$39,000;$27,000;$22,000,$27,000 and $29,000,respectively.Maintenance will be required in years 3 and 6 at $14,000 and $9,000 respectively.Webber uses a discount rate of 12 percent and wants projects to have a payback period of no longer than six years.
Present value tables or a financial calculator are required.

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Q 180Q 180

The Meyer Company has been operating a small lunch counter for the convenience of employees.The counter occupies space that is not needed for any other business purpose.The lunch counter has been managed by a part-time employee whose annual salary is $3,000.Yearly operations have consistently shown a loss as follows:

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Q 181Q 181

The Awesome Automobile Corporation is contemplating the acquisition of an automatic car wash.The following information is relevant:

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Q 182Q 182

The Logan Publishing Corporation is contemplating the acquisition of a state of the art printing press.The following information is relevant:

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