Question 1

A 15% internal rate of return (IRR) on a proposed capital investment indicates all of the following except:

Accepted Answer

A)  The economic rate of return on the project is expected to be 15%. 
B)  Use of a 15% discount rate would result in an estimated project NPV of zero. 
C)  An acceptable capital project if the cost of capital is 16 percent or higher. 
D)  A positive net present value (NPV) if the cost of capital is less than 15%. 
E)  An acceptable project, in a present value sense, if the discount rate is less than 15%. 
A)  The economic rate of return on the project is expected to be 15%. 
B)  Use of a 15% discount rate would result in an estimated project NPV of zero. 
C)  An acceptable capital project if the cost of capital is 16 percent or higher. 
D)  A positive net present value (NPV) if the cost of capital is less than 15%. 
E)  An acceptable project, in a present value sense, if the discount rate is less than 15%.

Question 2

Nelson Inc. is considering the purchase of a $600,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Nelson can sell all that it can manufacture each year for the next 10 years. To spur economic growth, the government currently exempts taxes on profits from investments like the equipment under consideration. This legislation will most likely remain in effect in the foreseeable future. The equipment is expected to have 10 years of useful life with no salvage value. The firm uses the double-declining-balance (DDB) depreciation method and switches to the straight-line depreciation method in the last four years of the asset's 10-year life. Nelson uses a rate of 10% (weighted-average cost of capital) in evaluating its capital investments. The net cash inflows are expected to be as follows:$$\begin{array} { | c | r | } 
\hline \text { Year } & \begin{array} { c } 
\text { Cash } \
\text { Inflow }
\end{array} \
\hline 1 & \$ 40,000 \
\hline 2 & 70,000 \
\hline 3 & 100,000 \
\hline 4 & 170,000 \
\hline 5 & 200,000 \
\hline 6 & 250,000 \
\hline 7 & 230,000 \
\hline 8 & 200,000 \
\hline 9 & 100,000 \
\hline 10 & 40,000 \
\hline
\end{array}$$ Required:
1. Under the assumption that cash inflows occur evenly throughout the year, what is the estimated payback period for this investment (rounded to two decimal places, e.g., 4.781 years = 4.78 years)?
2. What is the estimated accounting (book) rate of return (ARR) based on initial investment (rounded to two decimal places, e.g., 12.348% = 12.35%)?
3. What is the estimated accounting (book) rate of return (ARR) based on average investment, where "average investment" is defined as a simple average of the beginning-of-project book value and the end-of-project book value of the asset? Round your answer to two decimal places.

Accepted Answer

@#IMG-DLM& 1.1. As can be seen from the accompanyi

Question 3

Ignoring income tax considerations, how is depreciation handled by the following capital budgeting techniques?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
E)  Option E 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
E)  Option E

Question 4

Which of the following is always true regarding the NPV decision model?

Accepted Answer

A)  If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach. 
B)  The NPV and the IRR approaches will always rank two projects in the same order of preference. 
C)  If a project is found to be acceptable under the NPV approach, it would also be acceptable under the payback approach. 
D)  If a project is found to be acceptable under the NPV approach, it would also be acceptable under the book (accounting) rate of return approach. 
E)  If a project is rejected under the NPV approach, it would also be rejected under the payback approach. 
A)  If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach. 
B)  The NPV and the IRR approaches will always rank two projects in the same order of preference. 
C)  If a project is found to be acceptable under the NPV approach, it would also be acceptable under the payback approach. 
D)  If a project is found to be acceptable under the NPV approach, it would also be acceptable under the book (accounting) rate of return approach. 
E)  If a project is rejected under the NPV approach, it would also be rejected under the payback approach.

Question 5

Marc Corporation wants to purchase a new machine for $400,000. Management predicts that the machine will produce sales of $275,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The company uses MACRS for depreciation. The machine is considered to be a 3-year property and is not expected to have any significant residual value at the end of its useful life. Marc's combined income tax rate, t, is 40%. Management requires a minimum after-tax rate of return of 10% on all investments. A partial MACRS depreciation table is reproduced below. What is the after-tax cash inflow in Year 1 from the proposed investment (rounded to the nearest thousand)?

Accepted Answer

A)  $62,000. 
B)  $114,000. 
C)  $170,000. 
D)  $240,000. 
E)  $37,000. 
A)  $62,000. 
B)  $114,000. 
C)  $170,000. 
D)  $240,000. 
E)  $37,000.

Question 6

Which of the following characteristics is not true of the modified internal rate of return (MIRR)?

Accepted Answer

A)  Unlike IRR, MIRR does not consider the time value of money. 
B)  It focuses on after-tax cash flows, rather than accounting income amounts. 
C)  It cannot be used reliably to choose between mutually exclusive projects. 
D)  Its use may not lead to an optimum capital budget. 
E)  It is complex to compute, if done manually. 
A)  Unlike IRR, MIRR does not consider the time value of money. 
B)  It focuses on after-tax cash flows, rather than accounting income amounts. 
C)  It cannot be used reliably to choose between mutually exclusive projects. 
D)  Its use may not lead to an optimum capital budget. 
E)  It is complex to compute, if done manually.

Question 7

Olsen Inc. purchased a $600,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the next 10 years. To encourage capital investments, the government exempts taxes on profits from new investments in this type of machinery. This legislation most likely will remain in effect in the foreseeable future. The equipment is expected to have 10 years of useful life and no salvage value at the end of this 10-year period. The firm uses straight-line depreciation. The net cash inflow is expected to be $144,000 each year. Olsen uses a discount rate of 10% in evaluating its capital investments.

The estimated accounting (book) rate of return (to two decimal places) based on average investment for this proposed investment is:

Accepted Answer

A)  12.73%. 
B)  14.00%. 
C)  25.45%. 
D)  28.00%. 
E)  50.90%. 
A)  12.73%. 
B)  14.00%. 
C)  25.45%. 
D)  28.00%. 
E)  50.90%.

Question 8

Fitzgerald Company is planning to acquire a $250,000 machine that will provide increased efficiencies, thereby reducing annual cash operating costs by $80,000. The machine will be depreciated by the straight-line method over a five-year life, with no salvage value at the end of five years. Assuming a 40% income tax rate, t, and that cash flows occur evenly throughout the year, the machine's estimated payback period (rounded to two decimal places) is:

Accepted Answer

A)  3.13 years. 
B)  3.21 years. 
C)  3.68 years. 
D)  4.81 years. 
E)  5.21 years. 
A)  3.13 years. 
B)  3.21 years. 
C)  3.68 years. 
D)  4.81 years. 
E)  5.21 years.

Question 9

Megan Inc. has a policy of not accepting any investment proposal that requires more than three years to payback. The company is considering the purchase of new drafting equipment for $630,000. The equipment has an estimated useful life of seven years. Megan will use straight-line depreciation for this asset, with no salvage value. Megan's income tax rate, t, is approximately 25%.
Required:
Determine the required before-tax savings per year (rounded to nearest whole number) for the drafting equipment to meet the company's three-year payback requirement.

Accepted Answer

Let X = Total savings in annua

Question 10

Which one of the following is an advantage of the payback method of evaluating capital investment proposals?

Accepted Answer

A)  It provides a (rough) measure of project risk. 
B)  It is linearly related to the net present value (NPV) of a proposed project. 
C)  It considers all possible future cash flows of the project. 
D)  It applies conventional discounting procedures to anticipated future cash flows. 
E)  It allows managers to choose between competing projects with different useful lives. 
A)  It provides a (rough) measure of project risk. 
B)  It is linearly related to the net present value (NPV) of a proposed project. 
C)  It considers all possible future cash flows of the project. 
D)  It applies conventional discounting procedures to anticipated future cash flows. 
E)  It allows managers to choose between competing projects with different useful lives.

Question 11

Within the context of capital budgeting, a primary goal-congruency problem exists when discounted cash flow (DCF) models are used for decision-making purposes, but accrual-based earnings figures are used for subsequent performance-evaluation purposes. Which of the following items is not likely to be useful for addressing this goal-congruency problem?

Accepted Answer

A)  Monte Carlo simulation. 
B)  Use of EVA® as the financial-performance metric. 
C)  Separating incentive compensation (i.e., "reward") from budgeted performance. 
D)  Conducting post-audits of capital investment decisions. 
A)  Monte Carlo simulation. 
B)  Use of EVA® as the financial-performance metric. 
C)  Separating incentive compensation (i.e., "reward") from budgeted performance. 
D)  Conducting post-audits of capital investment decisions.

Question 12

George's Garage is considering purchasing a machine for $75,000. The machine is expected to generate a net after-tax income of $11,250 per year. This machine is to be depreciated over a 10-year period with no residual value.
Required:
What is the payback period, in years, for this machine (round answer to one decimal place)? (Assume that the cash inflows from this investment occur evenly throughout the year.)

Accepted Answer

●	Depreciation expense/year = $75,000/10

Question 13

Grey Inc. is considering purchasing a machine for $50,000, which is expected to generate an annual after-tax income of $10,000; this machine is to be depreciated over 5 years with no residual value.
Required:
1. Under the assumption that cash inflows occur evenly throughout the year, what is the payback period for this machine? (Round answer to one decimal place.)
2. Based on the initial investment outlay, what is the anticipated accounting rate of return (ARR) on this investment, rounded to one decimal place?
3. What is the anticipated internal rate of return (IRR) on this investment? (Note: To answer this question, you will need to have access to Excel or the present value tables presented as Appendix C to Chapter 12.)
4. Assume a discount rate (i.e., cost of capital) of 15%:
(a) What is the modified rate of return (MIRR) on this investment, under the assumption that the interim cash inflows can be reinvested at an estimated rate of 15%? (Note: To answer this question, you will need access to Excel.) Round answer to nearest whole number.
(b) What is the MIRR of the project under the assumption that the interim cash flows can be reinvested at a rate of 28.65%? (Note: To answer this question, you will need access to Excel.)

Accepted Answer

1. Annual depreciation expense = $50,000

Question 14

XYZ Corporation is contemplating the replacement of an existing asset used in the operation of its business. The original cost of this asset was $28,000; since date of acquisition, the company has taken a total of $20,000 of depreciation expense on this asset. The current disposal (market) value of this asset is estimated as $18,000. XYZ is subject to a combined income tax rate, t, of 34%. What is the projected after-tax cash flow associated with the sale of the existing asset, rounded to nearest hundred dollars?

Accepted Answer

A)  $18,000. 
B)  $10,000. 
C)  $14,600. 
D)  $8,000. 
E)  $11,400. 
A)  $18,000. 
B)  $10,000. 
C)  $14,600. 
D)  $8,000. 
E)  $11,400.

Question 15

In terms of evaluating mutually exclusive projects, the internal rate of return (IRR) method may mistakenly favor investment proposals with:

Accepted Answer

A)  Short useful lives. 
B)  Long useful lives. 
C)  Moderate cash flow returns. 
D)  Large residual values. 
E)  Large initial investment. 
A)  Short useful lives. 
B)  Long useful lives. 
C)  Moderate cash flow returns. 
D)  Large residual values. 
E)  Large initial investment.

Question 16

The net present value (NPV) method and the internal rate of return (IRR) method are used to analyze proposed capital expenditures. The IRR method, as contrasted with the NPV method:

Accepted Answer

A)  Is considered inferior because it fails to calculate compounded rates of return. 
B)  Incorporates the time value of money, while the NPV method does not. 
C)  Almost always gives a different decision that the NPV method as to the acceptability ("go" versus "no go") of a given proposed investment. 
D)  Assumes (according to some commentators) that the rate of return on the reinvestment of the cash proceeds is at the indicated rate of return of the project analyzed rather than at the discount rate used. 
E)  Is preferred in practice because it can handle multiple desired rates of return, which is impossible to do with the NPV method. 
A)  Is considered inferior because it fails to calculate compounded rates of return. 
B)  Incorporates the time value of money, while the NPV method does not. 
C)  Almost always gives a different decision that the NPV method as to the acceptability ("go" versus "no go") of a given proposed investment. 
D)  Assumes (according to some commentators) that the rate of return on the reinvestment of the cash proceeds is at the indicated rate of return of the project analyzed rather than at the discount rate used. 
E)  Is preferred in practice because it can handle multiple desired rates of return, which is impossible to do with the NPV method.

Question 17

Green Leaf Inc. is considering the purchase of a new piece of equipment for $30,000. The projected after-tax net income per year on this investment is estimated to be $5,000. The firm uses straight-line depreciation. This asset is expected to have a useful life of 5 years and no salvage value at the end of its useful life. Management of the company estimates that the company's weighted-average cost of capital (WACC) is 10%. The present value factor for 10%, 5 years = 0.621, while the present value annuity factor for 5 years at 10% is 3.791.
Required:
1. What is the estimated net present value (NPV) of the machine, rounded to nearest whole dollar?
2. What is the profitability index (PI) for this proposed investment, rounded to two decimal places (e.g., 0.4412 = 0.44)?
3. For what purpose is the profitability index (PI) useful, in a capital budgeting context?
4. Use the built-in function in Excel to estimate this project's internal rate of return (IRR), to two decimal places (e.g., 13.568% = 13.57%).
5. Use the built-in function in Excel to estimate the project's modified internal rate of return (MIRR), to two decimal places, under the assumption that the interim cash flows from the investment generate a rate of return of: (a) 10%, and (b) 20%.
6. How does the MIRR measure differ from the conventional IRR calculation?

Accepted Answer

1. Annual after-tax cash inflow = after-

Question 18

Which of the following is not one of the more common strategic benefits provided by capital investment projects?

Accepted Answer

A)  Being able to deliver a product that competitors cannot (i.e., product differentiation). 
B)  Improving product quality. 
C)  Reducing manufacturing cycle time. 
D)  Reducing the number of short-term (i.e., operational) decisions that management must make. 
E)  Providing significant cost reductions, in terms of production and/or marketing costs. 
A)  Being able to deliver a product that competitors cannot (i.e., product differentiation). 
B)  Improving product quality. 
C)  Reducing manufacturing cycle time. 
D)  Reducing the number of short-term (i.e., operational) decisions that management must make. 
E)  Providing significant cost reductions, in terms of production and/or marketing costs.

Question 19

The difference between the present value of future after-tax cash inflows and the present value of future cash outflows of an investment project is the:

Accepted Answer

A)  Internal rate of return (IRR) of the project. 
B)  Modified internal rate of return (MIRR) on the project. 
C)  Book (accounting) rate of return for the project. 
D)  Net present value (NPV) of the project. 
E)  Modified internal rate of return (MIRR) of the project. 
A)  Internal rate of return (IRR) of the project. 
B)  Modified internal rate of return (MIRR) on the project. 
C)  Book (accounting) rate of return for the project. 
D)  Net present value (NPV) of the project. 
E)  Modified internal rate of return (MIRR) of the project.

Question 20

Consider two projects, A and B. The present value (PV) of after-tax cash inflows for project A is $55,000, while the original investment outlay for this project is $50,000. Project B, on the other hand, has the following characteristics: PV of after-tax cash inflows = $24,000; original investment outlay = $20,000. Assume that these two projects are mutually exclusive and that the company has adequate capital to fund either investment option. All the following statements are true except:

Accepted Answer

A)  The NPV of Project A is $5,000. 
B)  The IRR of Project A is greater than the cost of capital (discount rate). 
C)  The profitability index (PI) for Project A is 1:1. 
D)  Project A is preferable to Project B (all else held constant). 
E)  The economic rate of return on Project A exceeds the discount rate. 
A)  The NPV of Project A is $5,000. 
B)  The IRR of Project A is greater than the cost of capital (discount rate). 
C)  The profitability index (PI) for Project A is 1:1. 
D)  Project A is preferable to Project B (all else held constant). 
E)  The economic rate of return on Project A exceeds the discount rate.

A 15% internal rate of return (IRR) on a proposed capital investment indicates all of the following except:

Ignoring income tax considerations, how is depreciation handled by the following capital budgeting techniques?

Which of the following is always true regarding the NPV decision model?

Which of the following characteristics is not true of the modified internal rate of return (MIRR)?

Which one of the following is an advantage of the payback method of evaluating capital investment proposals?

In terms of evaluating mutually exclusive projects, the internal rate of return (IRR) method may mistakenly favor investment proposals with:

The net present value (NPV) method and the internal rate of return (IRR) method are used to analyze proposed capital expenditures. The IRR method, as contrasted with the NPV method:

Which of the following is not one of the more common strategic benefits provided by capital investment projects?

The difference between the present value of future after-tax cash inflows and the present value of future cash outflows of an investment project is the:

Cost Management and Strategy

Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

Basic Cost Management Concepts

Job Costing

Activity-Based Costing and Customer Profitability Analysis

Process Costing

Cost Allocation: Departments, Joint Products, and By-Products

Cost Estimation

Short-Term Profit Planning: Cost-Volume-Profit CVP Analysis

Strategy and the Master Budget

Decision Making With a Strategic Emphasis

Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing

Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management

Operational Performance Measurement: Further Analysis of Productivity and Sales

The Management and Control of Quality

Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard

Strategic Performance Measurement: Investment Centers and Transfer Pricing

Management Compensation, Business Analysis, and Business Valuation

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Exam 12: Strategy and the Analysis of Capital Investments

A 15% internal rate of return (IRR) on a proposed capital investment indicates all of the following except:

Ignoring income tax considerations, how is depreciation handled by the following capital budgeting techniques?

Which of the following is always true regarding the NPV decision model?

Which of the following characteristics is not true of the modified internal rate of return (MIRR)?

Which one of the following is an advantage of the payback method of evaluating capital investment proposals?

In terms of evaluating mutually exclusive projects, the internal rate of return (IRR) method may mistakenly favor investment proposals with:

The net present value (NPV) method and the internal rate of return (IRR) method are used to analyze proposed capital expenditures. The IRR method, as contrasted with the NPV method:

Which of the following is not one of the more common strategic benefits provided by capital investment projects?

The difference between the present value of future after-tax cash inflows and the present value of future cash outflows of an investment project is the:

Cost Management and Strategy

Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

Basic Cost Management Concepts

Job Costing

Activity-Based Costing and Customer Profitability Analysis

Process Costing

Cost Allocation: Departments, Joint Products, and By-Products

Cost Estimation

Short-Term Profit Planning: Cost-Volume-Profit CVP Analysis

Strategy and the Master Budget

Decision Making With a Strategic Emphasis

Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing

Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management

Operational Performance Measurement: Further Analysis of Productivity and Sales

The Management and Control of Quality

Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard

Strategic Performance Measurement: Investment Centers and Transfer Pricing

Management Compensation, Business Analysis, and Business Valuation

Filters