A company is evaluating 3 possible investments. Each uses straight-line depreciation. See data below: $\begin{array}{|c|c|c|c|} \hline & \text { Project A } & \text { Project B } & \text { Project C } \\ \hline \text { Investment } & \$ 400,000 & \$ 20,000 & \$ 100,000 \\ \hline \text { Salvage value } & \$ 0 & \$ 2,000 & \$ 5,000 \\ \hline\\ \hline \text { Net cash flows: } & & & \\ \hline \text { Year 1 } & \$ 100,000 & \$ 10,000 & \$ 40,000 \\ \hline \text { Year 2 } & \$ 100,000 & \$ 8,000 & \$ 25,000 \\ \hline \text { Year 3 } & \$ 100,000 & \$ 5,000 & \$ 30,000 \\ \hline \text { Year 4 } & \$ 100,000 & \$ 3,000 & \$ 10,000 \\ \hline \text { Year 5 } & \$ 100,00 & \$ 0 & \$ 0 \\ \hline \end{array}$ - What is the payback period for Project C?

A) 3.5 years B) 2.5 years C) 2.4 years D) 3.0 years A) 3.5 years B) 2.5 years C) 2.4 years D) 3.0 years A

Simms Manufacturing is considering two alternative investment proposals with the following data: $\begin{array}{|l|r|r|r|} \hline &\text { Proposal X } & \text { Proposal Y } \\ \hline \text { Investment } & \$ 620,000 & \$ 400,000 \\ \hline \text { Useful life } & 8 \text { years } & 8 \text { years } \\ \hline \text { Estimated annual net cash inflows for 8 years } & \$ 130,000 & \$ 80,000 \\ \hline \text { Residual value } & \$ 60,000 & \$ 0 \\ \hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \\ \hline \text { Required rate of return } & 14 \% & 10 \%\\ \hline \end{array}$ - What is the accounting rate of return for Proposal Y?

A) 15.0% B) 16.0% C) 20.0% D) 40.0% A) 15.0% B) 16.0% C) 20.0% D) 40.0%

Farragut Company is evaluating an opportunity to invest $45,000 in new manufacturing equipment. It will have a useful life of 3 years, and will generate $20,000 cash flows at the end of Year 1, $30,000 of cash flows at the end of Year 2, and $10,000 of cash flows at the end of Year 3. If Farragut uses a discount rate of 5%, what is the NPV of the project? \[\begin{array} { | r | r | r | r | r | r | r | } \hline \text { Preant Value of } & & & & & & \\ \$1\\ \hline &5\%&6\%&7\%&8\%&9\%&10\%\\ \hline 1 & 0.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \\ \hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \\ \hline 4 & 0.823 & 0.79 & 0.763 & 0.735 & 0.708 & 0.683 \\ \hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \\ \hline 6 & 0.746 & 0.705 & 0.666 & 0.630 & 0.596 & 0.564 \\ \hline 7 & 0.711 & 0.665 & 0.623 & 0.583 & 0.547 & 0.513 \\ \hline 8 & 0.677 & 0.627 & 0.582 & 0.540 & 0.502 & 0.467 \\ \hline 9 & 0.645 & 0.592 & 0.544 & 0.500 & 0.460 & 0.424 \\ \hline 10 & 0.614 & 0.558 & 0.508 & 0.463 & 0.422 & 0.386 \\ \hline \end{array}\]

A) $944 negative B) $1,008 positive C) $4,100 positive D) $9,890 positive A) $944 negative B) $1,008 positive C) $4,100 positive D) $9,890 positive

John Doe wins the lottery and may pick from the following three choices: Take $750,000 now. Take $1,000,000 ten years from now. Take $90,000 at the end of this year, and at the end of each following year for ten installments in total. Assume that John Doe uses a discount rate of 5% to evaluate his choices. If he selects the second option, how much is the present value of that alternative? \[\begin{array} { | r | r | r | r | r | r | r | } \hline\begin{array} { l } \text { Present } \\ \text { Value of } \\ \text {\$1 } \end{array} & & & & & & \\ \hline& 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\\ \hline 1 & 0.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \\ \hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \\ \hline 4 & 0.823 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \\ \hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \\ \hline 6 & 0.746 & 0.705 & 0.666 & 0.630 & 0.596 & 0.564 \\ \hline 7 & 0.711 & 0.665 & 0.623 & 0.583 & 0.547 & 0.513 \\ \hline 8 & 0.677 & 0.627 & 0.582 & 0.540 & 0.502 & 0.467 \\ \hline 9 & 0.645 & 0.592 & 0.544 & 0.500 & 0.460 & 0.424 \\ \hline 10 & 0.614 & 0.558 & 0.508 & 0.463 & 0.422 & 0.386 \\ \hline \end{array}\]

A) $614,000 B) $1,000,000 C) $750,000 D) $798,000 A) $614,000 B) $1,000,000 C) $750,000 D) $798,000

Carte Blanco Company is evaluating an investment of $1,000,000 which will yield cash flows of $257,000 per year for 5 years with no residual value. What is the internal rate of return? (Please choose the rate that is closest to the actual solution.) $\begin{array}{|c|c|c|c|c|c|c|} \hline \text {Present Value of}\\ \text {an Annuity of }\\ \$1\\ \hline&5\%&6\%&7\%&8\%&9\%&10\%\\ \hline1 & 0.952& 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\ \hline 2& 1.859 & 1.833 & 1.808 & 1.783 & 1.759 & 1.736 \\ \hline 3& 2.723 & 2.673 & 2.624 & 2.577 & 2.531 & 2 .487 \\ \hline 4& 3.546 & 3.465 & 3.387 & 3.311 & 3.240 &3.170 \\ \hline 5& 4.329 & 4.212 & 4.100 & 3.993 & 3.890 & 3 .791 \\ \hline \end{array}$

A) 7% B) 8% C) 9% D) 10% A) 7% B) 8% C) 9% D) 10%

A company is evaluating 3 possible investments. Each uses straight-line depreciation. See data below: $\begin{array}{|c|c|c|c|} \hline & \text { Project A } & \text { Project B } & \text { Project C } \\ \hline \text { Investment } & \$ 400,000 & \$ 20,000 & \$ 100,000 \\ \hline \text { Salvage value } & \$ 0 & \$ 2,000 & \$ 5,000 \\ \hline\\ \hline \text { Net cash flows: } & & & \\ \hline \text { Year 1 } & \$ 100,000 & \$ 10,000 & \$ 40,000 \\ \hline \text { Year 2 } & \$ 100,000 & \$ 8,000 & \$ 25,000 \\ \hline \text { Year 3 } & \$ 100,000 & \$ 5,000 & \$ 30,000 \\ \hline \text { Year 4 } & \$ 100,000 & \$ 3,000 & \$ 10,000 \\ \hline \text { Year 5 } & \$ 100,00 & \$ 0 & \$ 0 \\ \hline \end{array}$ - What is the payback period for Project A?

A) 3.5 years B) 4.5 years C) 4.0 years D) 5.0 years A) 3.5 years B) 4.5 years C) 4.0 years D) 5.0 years

If you invest $1,000 at the end of each of the next 5 years and the investment earns 4% interest, what is the value of the investment at the end of 5 years? $\begin{array}{|r|l|l|l|l|l|l|} \hline \text {Future}\\ \text {Value of an }\\ \text { Annuity of }\\ \$ 1\\ \hline &4\%&5\%&6\%&7\%&8\%&9\%\\ \hline1 & 1.000 & 1.000 & 1.000 & 1.000 & 1.000 & 1.000 \\ \hline 2& 2.040 & 2.050 & 2.060 & 2.070 & 2.080 & 2.090 \\ \hline 3 & 3.129 & 3.153 & 3.184 & 3.215 & 3.246 & 3.278 \\ \hline 4 & 4.246 & 4.310 & 4.375 & 4.440 & 4.506 & 4.573 \\ \hline 5 & 5.416 & 5.526 & 5.637 & 5.751 & 5.867 & 5.985 \\ \hline 6 & 6.63 & 6.80 & 6.97 & 7.153 & 7.336 & 7.523 \\ \hline 7 & 7.898 & 8.142 & 8.394 & 8.654 & 8.923 & 9.200 \\ \hline 8 & 9.214 & 9.549 & 9.897 & 10.26 & 10.64 & 11.03 \\ \hline 9 & 10.58 & 11.03 & 11.49 & 11.98 & 12.49 & 13.02 \\ \hline 10 & 12.01 & 12.58 & 13.19 & 13.82 & 14.49 & 15.19 \\ \hline \end{array}$

A) $5,416 B) $4,310 C) $5,000 D) $5,200 A) $5,416 B) $4,310 C) $5,000 D) $5,200

Exam 21: Capital Investment Decisions and the Time Value of Money

Dylan Company is considering an investment in new equipment costing $720,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to have a salvage value of $45,000. The equipment is expected to generate net cash flows totaling $970,000 during the five years. What is the rate of return associated with the equipment investment?

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(Multiple Choice)

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Question 1

Correct Answer:

Verified

A

Which of the following is a common capital budgeting method?

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(Multiple Choice)

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Question 2

Correct Answer:

Verified

B

A company is evaluating 3 possible investments. Each uses straight-line depreciation. See data below: Project A Project B Project C Investment \ 400,000 \ 20,000 \ 100,000 Salvage value \ 0 \ 2,000 \ 5,000 Net cash flows: Year 1 \ 100,000 \ 10,000 \ 40,000 Year 2 \ 100,000 \ 8,000 \ 25,000 Year 3 \ 100,000 \ 5,000 \ 30,000 Year 4 \ 100,000 \ 3,000 \ 10,000 Year 5 \ 100,00 \ 0 \ 0 - What is the payback period for Project C?

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Question 3

Correct Answer:

Verified

A

Alpha Company is considering an investment of $1,000,000 in a land development project. It will yield cash flows of $300,000 for 5 years. Alpha uses a discount rate of 7%. If the company analyzes the project using NPV, this should be considered a good investment opportunity. Present Value of an Annuity of \ 1 5\% 6\% 7\% 8\% 9\% 10\% 1 0.95 0.943 0.93 0.926 0.917 0.909 2 1.859 1.833 1.809 1.783 1.759 1.736 3 2.729 2.673 2.624 2.577 2.531 2.487 4 3.546 3.465 3.387 3.312 3.240 3.170 5 4.329 4.212 4.10d 3.993 3.890 3.791

(True/False)

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Question 4

Which of the following is TRUE of discounted cash flow methods like NPV and IRR?

(Multiple Choice)

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Question 5

Simms Manufacturing is considering two alternative investment proposals with the following data: Proposal X Proposal Y Investment \ 620,000 \ 400,000 Useful life 8 years 8 years Estimated annual net cash inflows for 8 years \ 130,000 \ 80,000 Residual value \ 60,000 \ 0 Depreciation method Straight-line Straight-line Required rate of return 14\% 10\% - What is the accounting rate of return for Proposal Y?

(Multiple Choice)

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Question 6

Which of the following describes the purpose of a post-audit?

(Multiple Choice)

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Question 7

Farragut Company is evaluating an opportunity to invest $45,000 in new manufacturing equipment. It will have a useful life of 3 years, and will generate $20,000 cash flows at the end of Year 1, $30,000 of cash flows at the end of Year 2, and $10,000 of cash flows at the end of Year 3. If Farragut uses a discount rate of 5%, what is the NPV of the project? Preant Value of \1 5\% 6\% 7\% 8\% 9\% 10\% 1 0.952 0.943 0.935 0.926 0.917 0.909 2 0.907 0.890 0.873 0.857 0.842 0.826 3 0.864 0.840 0.816 0.794 0.772 0.751 4 0.823 0.79 0.763 0.735 0.708 0.683 5 0.784 0.747 0.713 0.681 0.650 0.621 6 0.746 0.705 0.666 0.630 0.596 0.564 7 0.711 0.665 0.623 0.583 0.547 0.513 8 0.677 0.627 0.582 0.540 0.502 0.467 9 0.645 0.592 0.544 0.500 0.460 0.424 10 0.614 0.558 0.508 0.463 0.422 0.386

(Multiple Choice)

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Question 8

A post-audit is an analysis of an investment that is made after the investment is underway or completed.

(True/False)

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Question 9

John Doe wins the lottery and may pick from the following three choices: Take $750,000 now. Take $1,000,000 ten years from now. Take $90,000 at the end of this year, and at the end of each following year for ten installments in total. Assume that John Doe uses a discount rate of 5% to evaluate his choices. If he selects the second option, how much is the present value of that alternative? Present Value of \1 5\% 6\% 7\% 8\% 9\% 10\% 1 0.952 0.943 0.935 0.926 0.917 0.909 2 0.907 0.890 0.873 0.857 0.842 0.826 3 0.864 0.840 0.816 0.794 0.772 0.751 4 0.823 0.792 0.763 0.735 0.708 0.683 5 0.784 0.747 0.713 0.681 0.650 0.621 6 0.746 0.705 0.666 0.630 0.596 0.564 7 0.711 0.665 0.623 0.583 0.547 0.513 8 0.677 0.627 0.582 0.540 0.502 0.467 9 0.645 0.592 0.544 0.500 0.460 0.424 10 0.614 0.558 0.508 0.463 0.422 0.386

(Multiple Choice)

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Question 10

Which two methods are typically used for initial screening of investments, rather than for detailed in-depth analysis?

(Multiple Choice)

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Question 11

Considering the four common methods of evaluating investments payback, rate of return, net present value, and internal rate of return the discounted cash flow methods are superior because they consider both the time value of money and the profitability of the investment.

(True/False)

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Question 12

Simms Manufacturing is considering two alternative investment proposals with the following data: Proposal X Proposal Y Investment \ 620,000 \ 400,000 Useful life 8 years 8 year Estimated annual net cash inflows for years \ 130,000 \ 80,000 Residual value \ 60,000 \ 0 Depreciation method Straight-line Straight-line Discount rate 14\% 10\% What is the net present value of Proposal Y, taking into consideration the initial outlay and the subsequent Cash inflows? Prefent Value of an Annuity of \1 5\% 6\% 7\% 8\% 9\% 10\% 1 0.952 0.943 0.935 0.926 0.917 0.909 2 1.859 1.833 1.808 1.783 1.759 1.736 3 2.723 2.83 1.808 1.783 1.759 1.736 4 3.546 3.465 2.624 2.577 2.531 2.487 5 4.329 4.21 4.100 3.312 3.240 3.170 6 5.076 4.917 4.767 4.623 3.890 3.79 7 5.786 5.58 5.389 5.206 5.033 4.355 8 6.463 6.210 5.971 5.747 5.535 5.335 9 7.108 6.80 6.515 6.247 5.995 5.759 10 7.722 7.360 7.024 6.710 6.418 6.145

(Multiple Choice)

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Question 13

Dakka Company is considering an investment of $500,000 in a financial instrument that is expected to return cash flows of $80,000 a year for 10 years. The operations manager says that it is a "no-brainer" because the total cash flows are $800,000, and it has a payback of just over six years. The VP Finance expresses caution. He says that because Dakka uses a 10% hurdle rate, a more thorough analysis may show that the investment does not qualify under the company's investment criteria. Considering the information provided, the company should reject the investment. Present Value of an Annuity of \ 1 5\% 6\% 7\% 8\% 9\% 10\% 1 0.952 0.943 0.939 0.92 0.917 0.909 2 1.859 1.833 1.809 1.78 1.759 1.736 3 2.723 2.673 2.624 2.577 2.531 2.487 4 3.546 3.465 3.387 3.31 3.240 3.170 5 4.329 4.212 4.10 3.99 3.890 3.791 6 5.076 4.917 4.767 4.623 4.486 4.355 7 5.780 5.582 5.389 5.206 5.033 4.355 8 6.463 6.210 5.971 5.747 5.535 5.335 9 7.108 6.802 6.513 6.247 5.995 5.759 10 7.722 7.360 7.024 6.710 6.418 6.145

(True/False)

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Question 14

An investment would be considered a good prospect under which of the following conditions?

(Multiple Choice)

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Question 15

Carte Blanco Company is evaluating an investment of $1,000,000 which will yield cash flows of $257,000 per year for 5 years with no residual value. What is the internal rate of return? (Please choose the rate that is closest to the actual solution.) Present Value of an Annuity of \1 5\% 6\% 7\% 8\% 9\% 10\% 1 0.952 0.943 0.935 0.926 0.917 0.909 2 1.859 1.833 1.808 1.783 1.759 1.736 3 2.723 2.673 2.624 2.577 2.531 2.487 4 3.546 3.465 3.387 3.311 3.240 3.170 5 4.329 4.212 4.100 3.993 3.890 3.791

(Multiple Choice)

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Question 16

A company has policy to invest in new opportunities if the investment has a positive NPV. See data below: Initial investment \ 105,000 Yearly cash flows \ 30,000 Number of years 4 Residual value \ 10,000 Present Value of an Annuity of \ 1 5\% 6\% 7\% 8\% 9\% 10\% 1 0.95 0.943 0.93 0.926 0.917 0.909 2 1.859 1.833 1.809 1.783 1.759 1.736 3 2.729 2.673 2.624 2.577 2.531 2.487 4 3.546 3.465 3.387 3.312 3.240 3.170 5 4.329 4.212 4.10d 3.993 3.890 3.791 Present Value of \ 1 5\% 6\% 7\% 8\% 9\% 10\% 1 0.952 0.943 0.935 0.92 0.917 0.909 2 0.907 0.890 0.873 0.857 0.84 0.826 3 0.864 0.840 0.816 0.794 0.777 0.751 4 0.823 0.792 0.763 0.733 0.70 0.683 5 0.784 0.747 0.713 0.681 0.650 0.621 If the company has a hurdle rate of 9%, this investment will yield a positive NPV and should be accepted.

(True/False)

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Question 17

Simms Manufacturing is considering two alternative investment proposals with the following data: Proposal X Proposal Y Investment \ 620,000 \ 400,000 Useful life 8 years 8 year Estimated annual net cash inflows for years \ 130,000 \ 80,000 Residual value \ 60,000 \ 0 Depreciation method Straight-line Straight-line Discount rate 14\% 10\% What is the total present value of future cash inflows from Proposal Y? Prefent Value of an Annuity of \1 5\% 6\% 7\% 8\% 9\% 10\% 1 0.952 0.943 0.935 0.926 0.917 0.909 2 1.859 1.833 1.808 1.783 1.759 1.736 3 2.723 2.83 1.808 1.783 1.759 1.736 4 3.546 3.465 2.624 2.577 2.531 2.487 5 4.329 4.21 4.100 3.312 3.240 3.170 6 5.076 4.917 4.767 4.623 3.890 3.79 7 5.786 5.58 5.389 5.206 5.033 4.355 8 6.463 6.210 5.971 5.747 5.535 5.335 9 7.108 6.80 6.515 6.247 5.995 5.759 10 7.722 7.360 7.024 6.710 6.418 6.145

(Multiple Choice)

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Question 18

A company is evaluating 3 possible investments. Each uses straight-line depreciation. See data below: Project A Project B Project C Investment \ 400,000 \ 20,000 \ 100,000 Salvage value \ 0 \ 2,000 \ 5,000 Net cash flows: Year 1 \ 100,000 \ 10,000 \ 40,000 Year 2 \ 100,000 \ 8,000 \ 25,000 Year 3 \ 100,000 \ 5,000 \ 30,000 Year 4 \ 100,000 \ 3,000 \ 10,000 Year 5 \ 100,00 \ 0 \ 0 - What is the payback period for Project A?

(Multiple Choice)

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Question 19

If you invest $1,000 at the end of each of the next 5 years and the investment earns 4% interest, what is the value of the investment at the end of 5 years? Future Value of an Annuity of \ 1 4\% 5\% 6\% 7\% 8\% 9\% 1 1.000 1.000 1.000 1.000 1.000 1.000 2 2.040 2.050 2.060 2.070 2.080 2.090 3 3.129 3.153 3.184 3.215 3.246 3.278 4 4.246 4.310 4.375 4.440 4.506 4.573 5 5.416 5.526 5.637 5.751 5.867 5.985 6 6.63 6.80 6.97 7.153 7.336 7.523 7 7.898 8.142 8.394 8.654 8.923 9.200 8 9.214 9.549 9.897 10.26 10.64 11.03 9 10.58 11.03 11.49 11.98 12.49 13.02 10 12.01 12.58 13.19 13.82 14.49 15.19

(Multiple Choice)

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Question 20

Which of the following is a common capital budgeting method?

Which of the following is TRUE of discounted cash flow methods like NPV and IRR?

Which of the following describes the purpose of a post-audit?

A post-audit is an analysis of an investment that is made after the investment is underway or completed.

Which two methods are typically used for initial screening of investments, rather than for detailed in-depth analysis?

Considering the four common methods of evaluating investments payback, rate of return, net present value, and internal rate of return the discounted cash flow methods are superior because they consider both the time value of money and the profitability of the investment.

An investment would be considered a good prospect under which of the following conditions?

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The Statement of Cash Flows

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