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16.
C
Medium
|
An increase in the discount rate:
a. will increase the present value of
future cash flows.
b. will have no effect on net present
value.
c. will reduce the present value of future
cash flows.
d. is one method of compensating for reduced risk.
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17.
B
Medium
|
Suppose an investment has cash inflows of R
dollars at the end of each year for two years. The present value of these
cash inflows using a 12% discount rate will be:
a. greater than under a 10% discount rate.
b. less than under a 10% discount rate.
c. equal to that under a 10% discount rate.
d. sometimes greater than under a 10% discount rate and sometimes less; it depends on R.
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18.
B
Medium
CPA adapted
|
The net present value and internal rate of
return methods of 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 depreciation and income taxes.
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19.
C
Medium
CPA adapted
|
How are the following used in the calculation of the net present value
of a proposed project? Ignore income tax considerations.
Depreciation expense Salvage value
a. Include Include
b. Include Exclude
c. Exclude Include
d.
Exclude Exclude
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20.
D
Medium
CPA adapted
|
The net present value method takes into account:
Cash Flow Over Time Value
Life of Project of Money
a. No Yes
b. No No
c. Yes No
d. Yes Yes
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21.
C
Easy
CMA adapted
|
The net present value method of capital budgeting assumes that cash
flows are reinvested at:
a. the internal rate of return on the project.
b. the rate of return on the company's debt.
c. the discount rate used in the analysis.
d. a zero rate of return.
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22.
C
Medium
|
Some investment projects require that a company expand its working
capital to service the greater volume of business that will be generated.
Under the net present value method, the investment of working capital should
be treated as:
a. an initial cash outflow for which no discounting is necessary.
b. a future cash inflow for which discounting is necessary.
c. both an initial cash outflow for which no discounting is necessary and a future cash inflow for
which discounting is necessary.
d. irrelevant to the net present value analysis.
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23.
A
Medium
CMA adapted
|
(Ignore income taxes in this problem.) How is depreciation handled by
the following capital budgeting techniques?
Internal Simple
Rate of Return Rate of Return Payback
a. Excluded Included Excluded
b. Included Excluded Included
c. Excluded Excluded Included
d. Included Included Excluded
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|
24.
B
Easy
CPA adapted
|
Which of the following capital budgeting techniques consider(s) cash
flow over the entire life of the project?
Internal rate of return Payback
a. Yes Yes
b. Yes No
c. No Yes
d. No No
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|
25.
C
Medium
CMA adapted
|
A weakness of the internal rate of return method for screening
investment projects is that it:
a. does not consider the time value of money.
b. implicitly assumes that the company is able to reinvest cash flows from the project at the company's
discount rate.
c. implicitly assumes that the company is able to reinvest cash flows from the project at the internal
rate of return.
d. does not take into account all of the cash flows from a project.
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|
26.
A
Medium
|
If the net present value of a project is zero based on a discount rate
of sixteen percent, then the time-adjusted rate of return:
a. is equal to sixteen percent.
b. is less than sixteen percent.
c. is greater than sixteen percent.
d. cannot be determined from the information given.
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|
27.
A
Easy
CMA adapted
|
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.
|
|
28.
B
Medium
|
An investment project that requires a present investment of $210,000 will
have cash inflows of "R" dollars each year for the next five years.
The project will terminate in five years. Consider the following statements
(ignore income tax considerations):
I. If "R" is less
than $42,000, the payback period exceeds the
life of the project.
II. If "R" is greater
than $42,000, the payback period exceeds the
life of the project.
III. If "R" equals $42,000, the payback period equals the
life of the project.
Which statement(s) is (are) true?
a. Only I and II.
b. Only I and III.
c. Only II and III.
d. I, II, and III.
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|
29.
A
Easy
CMA adapted
|
Which one of the following statements about the payback method of
capital budgeting is correct?
a. The payback method does not consider the time value of money.
b. The payback method considers cash flows after the payback has been reached.
c. The payback method uses discounted cash flow techniques.
d. The payback method will lead to the same decision as other methods of capital budgeting.
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|
30.
B
Medium
|
The evaluation of an investment having uneven cash flows using the
payback method:
a. cannot be done.
b. can be done only by matching cash inflows and investment outflows on a year-by-year basis.
c. will product essentially the same results as those obtained through the use of discounted cash flow
techniques.
d. requires the use of a sophisticated calculator or computer software.
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|
31.
B
Medium
CMA adapted
|
The capital budgeting method that divides a project's annual
incremental net income by the initial investment is the:
a. internal rate of return method.
b. the simple ( or accounting) rate of return method.
c. the payback method.
d. the net present value method.
|
|
32.
B
Medium
CMA adapted
|
When determining a net present value in an inflationary environment,
adjustments should be made to:
a. decrease the discount rate only.
b. increase the estimated cash flows and increase the discount rate.
c. increase the estimated cash flows only.
d. increase the estimated cash flows and decrease the discount rate.
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|
33.
B
Hard
CPA adapted
|
(Ignore income taxes in this problem.) Kipling Company has invested in
a project that has an eight-year life. It is expected that the annual cash
inflow from the project will be $20,000. Assuming that the project has a
internal rate of return of 12%, how much was the initial investment in the
project?
a. $160,000
b. $99,360
c. $80,800
d. $64,640
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|
34.
D
Medium
|
(Ignore income taxes in this problem.) White Company's required rate of
return on capital budgeting projects is 12%. The company is considering an investment
opportunity which would yield a cash flow of $10,000 in five years. What is
the most that the company should be willing to invest in this project?
a. $36,050.
b. $2,774.
c. $17,637.
d. $5,670.
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|
35.
C
Easy
|
(Ignore income taxes in this problem.) In order to receive $12,000 at
the end of three years and $10,000 at the end of five years, how much must be
invested now if you can earn 14% rate of return?
a. $12,978.
b. $8,100.
c. $13,290.
d. $32,054.
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|
36.
C
Hard
|
(Ignore income taxes in this problem.) Sue Falls is the president of
Sports, Inc. She is considering buying a new machine that would cost $14,125.
Sue has determined that the new machine promises a internal rate of return of
12%, but Sue has misplaced the paper which tells the annual cost savings
promised by the new machine. She does remember that the machine has a
projected life of 10 years. Based on these data, the annual cost savings are:
a. it is impossible to determine from the data given.
b. $1,412.50.
c. $2,500.00.
d. $1,695.00.
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|
37.
C
Hard
|
(Ignore income taxes in this problem.) The following information is
available on a new piece of equipment:
Cost of the equipment
...... $21,720
Annual cash inflows
........ $5,000
Internal rate of return ...
16%
Required rate of return ...
10%
The life of the equipment is approximately:
a. 6 years.
b. 4.3 years.
c. 8 years.
d. it is impossible to determine from the data given.
|
|
38.
C
Hard
CPA adapted
|
(Ignore income taxes in this problem.) A planned factory expansion
project has an estimated initial cost of $800,000. Using a discount rate of
20%, the present value of future cost savings from the expansion is $843,000.
To yield exactly a 20% internal rate of return, the actual investment cost
cannot exceed the $800,000 estimate by more than:
a. $160,000.
b. $20,000.
c. $43,000.
d. $1,075.
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|
39.
D
Hard
CPA adapted
|
(Ignore income taxes in this problem.) Hilltop Company invested
$100,000 in a two-year project. The cash flow was $40,000 for the first year.
Assuming that the internal rate of return was exactly 12%, what was the cash
flow for the second year of the project?
a. $51,247.
b. $60,000.
c. $64,284.
d. $80,652.
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|
40.
C
Hard
|
(Ignore income taxes in this problem.) Joe Flubup is the president of
Flubup, Inc. He is considering buying a new machine that would cost $25,470.
Joe has determined that the new machine promises a internal rate of return of
14%, but Joe has misplaced the paper which tells the annual cost savings
promised by the new machine. He does remember that the machine has a
projected life of 12 years. Based on these data, the annual cost savings are:
a. impossible to determine from the data given.
b. $2,122.50.
c. $4,500.00.
d. $4,650.00.
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|
41.
B
Hard
|
(Ignore income taxes in this problem.) The Baker Company purchased a
piece of equipment with the following expected results:
Useful life
................... 7 years
Yearly net cash inflow
........ $50,000
Salvage value
................. -0-
Internal rate of return
....... 20%
Discount rate ................. 16%
The initial cost of the equipment was:
a. $300,100.
b. $180,250
c. $190,600.
d. Cannot be determined from the information given.
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|
42.
B
Hard
|
(Ignore income taxes in this problem.) Highpoint, Inc., is considering
investing in automated equipment with a ten-year useful life. Managers at
Highpoint have estimated the cash flows associated with the tangible costs
and benefits of automation, but have been unable to estimate the cash flows
associated with the intangible benefits. Using the company's 10% discount
rate, the net present value of the cash flows associated with just the
tangible costs and benefits is a negative $184,350. How large would the
annual net cash inflows from the intangible benefits have to be to make this
a financially acceptable investment?
a. $18,435.
b. $30,000.
c. $35,000.
d. $37,236.
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|
43.
B
Hard
|
(Ignore income taxes in this problem.) Given the following data:
Present investment required
.. $12,000
Net present value
............ $ 430
Annual cost savings
.......... $ ?
Discount rate
................ 12%
Life of the project
.......... 10 years
Based on the data given, the annual cost savings would be:
a. $1,630.00.
b. $2,200.00.
c. $2,123.89.
d. $2,553.89.
|
|
44.
A
Medium
|
(Ignore income taxes in this problem.) The following data pertain to an
investment in equipment:
Investment in the project
.......... $10,000
Net annual cash inflows
............ 2,400
Working capital required
........... 5,000
Salvage value of the
equipment ..... 1,000
Life of the project
................ 8 years
At the completion of the project, the working capital will be released
for use elsewhere. Compute the net present value of the project, using a
discount rate of 10%:
a. $606.
b. $8,271.
c. ($1,729).
d. $1,729.
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