Please refer to the following data concerning 4 investment alternatives: $\begin{array}{|l|r|r|r|r} \hline & \text { Praject A } & { \text { Praject B } } & { \text { Praject C } } & { \text { Praject D } } \\ \hline \text { Initial investment } & \$ 210,000 & \$ 400,000 & \$ 550,000 & \$ 1,000,000 \\ \hline \text { PV of cash } \\ \text { Inflows } & \$ 285,000 & \$ 490,000 & \$ 800,000 & \$ 990,000 \\ \hline \text { Payback period } & \\ \text { (years) } & 7.2 & 6.0 & 9.5 & 2.0 \\ \hline \text { NPV of project } & \$ 75,000 & \$ 90,000 & \$ 250,000 & (\$ 10,000 \\ \hline \end{array}$ - Which project has the highest profitability index?

A) Project A B) Project B C) Project C D) Project D A) Project A B) Project B C) Project C D) Project D

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 B?

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

Please refer to the following data about an investment opportunity: \[\begin{array} { | r | r | } \hline \text { Initial investment } & \$ 1,000,000 \\ \hline \text { Discount rate } & 7 \% \\ \hline \text { Yearly cash flows } & \\ \hline \text { Year 1 } & \$ 250,000 \\ \hline \text { Year 2 } & \$ 350,000 \\ \hline \text { Year 3 } & \$ 400,000 \\ \hline \text { Year 4 } & \$ 150,000 \\ \hline \end{array}\] Refer to the following PV factors: \[\begin{array} { | r | r | r | r | r | r | r | } \hline \text { Preant Value of } & & & & & & \\ \$1\\ \hline &5\%&6\%&7\%&8\%&9\%&10\%\\ \hline 1 & 0.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \\ \hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \\ \hline 4 & 0.823 & 0.79 & 0.763 & 0.735 & 0.708 & 0.683 \\ \hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \\ \hline 6 & 0.746 & 0.705 & 0.666 & 0.630 & 0.596 & 0.564 \\ \hline 7 & 0.711 & 0.665 & 0.623 & 0.583 & 0.547 & 0.513 \\ \hline 8 & 0.677 & 0.627 & 0.582 & 0.540 & 0.502 & 0.467 \\ \hline 9 & 0.645 & 0.592 & 0.544 & 0.500 & 0.460 & 0.424 \\ \hline 10 & 0.614 & 0.558 & 0.508 & 0.463 & 0.422 & 0.386 \\ \hline \end{array}\] What is the NPV of the project?

A) $150,000 negative B) $19,000 positive C) $21,455 positive D) $19,850 negative A) $150,000 negative B) $19,000 positive C) $21,455 positive D) $19,850 negative

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash flows as follows: \[\begin{array} { | l | l | } \hline \text { Year 1 } & 100,000 \\ \hline \text { Year 2 } & 100,000 \\ \hline \text { Year 3 } & \$ 125,000 \\ \hline \text { Year 4 } & \$ 125,000 \\ \hline \text { Year 5 } & \$ 75,000 \\ \hline \end{array}\] What is the payback period?

A) 4 years B) 3.2 years C) 3.5 years D) 3 years A) 4 years B) 3.2 years C) 3.5 years D) 3 years

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 rate of return for Project A?

A) 50% B) 4% C) 16% D) 10% A) 50% B) 4% C) 16% D) 10%

If Alice Godfried invests $14,000 today at a rate of 4% compounding yearly, what will the value of the investment be in 8 years? $\begin{array}{|c|c|c|c|c|c|c|} \hline\text { Future } \\ \text { Value of } \\ \$ 1\\ \hline&4\%&5\%&6\%&7\%&8\%&9\%\\ \hline 1& 1.040 & 1.050 & 1.060 & 1.070 & 1.080 & 1.090 \\ \hline 2& 1.082 & 1.103 & 1.124 & 1.145 & 1.166 & 1 .188 \\ \hline 3 & 1.125 & 1.158 & 1.191 & 1.225 & 1.260 &1.295 \\ \hline 4 & 1.170 & 1.216 & 1.261 & 1.311 & 1.360 &1.412 \\ \hline 5 & 1.217 & 1.276 & 1.338 & 1.403 & 1.469 & 1.539\\ \hline 6 & 1.265 & 1.340 & 1.410 & 1.501 & 1.587 &1.677 \\ \hline 7 & 1.316 & 1.407 & 1.504 & 1.606 & 1.714 &1.828 \\ \hline 8 & 1.369 & 1.477 & 1.594 & 1.718 & 1.851 &1.993 \\ \hline 9 & 1.423 & 1.551 & 1.689 & 1.838 & 1.999 & 2.172 \\ \hline 10& 1.480 & 1.629 & 1.791 &1.967 & 2.159 &2.367 \\ \hline \end{array}$

A) $18,311 B) $19,967 C) $19,166 D) $19,000 A) $18,311 B) $19,967 C) $19,166 D) $19,000

Please refer to the following data concerning 4 investment alternatives: $\begin{array}{|l|r|r|r|r} \hline & \text { Praject A } & { \text { Praject B } } & { \text { Praject C } } & { \text { Praject D } } \\ \hline \text { Initial investment } & \$ 210,000 & \$ 400,000 & \$ 550,000 & \$ 1,000,000 \\ \hline \text { PV of cash } \\ \text { Inflows } & \$ 285,000 & \$ 490,000 & \$ 800,000 & \$ 990,000 \\ \hline \text { Payback period } & \\ \text { (years) } & 7.2 & 6.0 & 9.5 & 2.0 \\ \hline \text { NPV of project } & \$ 75,000 & \$ 90,000 & \$ 250,000 & (\$ 10,000 \\ \hline \end{array}$ - What is the profitability index for Project B?

A) 1.98 B) 1.38 C) 1.26 D) 1.23 A) 1.98 B) 1.38 C) 1.26 D) 1.23

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

Please refer to the following data concerning 4 investment alternatives: Praject A Praject B Praject C Praject D Initial investment \ 210,000 \ 400,000 \ 550,000 \ 1,000,000 PV of cash Inflows \ 285,000 \ 490,000 \ 800,000 \ 990,000 Payback period (years) 7.2 6.0 9.5 2.0 NPV of project \ 75,000 \ 90,000 \ 250,000 (\ 10,000 - Which project has the highest profitability index?

(Multiple Choice)

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Question 41

Capital budgeting applies to which of the following?

(Multiple Choice)

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Question 42

Neither the payback period nor the rate of return capital budgeting method recognizes the time value of money.

(True/False)

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Question 43

When calculating the net present value of future cash streams, dollars that are received sooner are worth more than dollars received later.

(True/False)

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Question 44

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 B?

(Multiple Choice)

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Question 45

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash inflows as follows: Year 1 \ 100,000 Year 2 \ 100,000 Year 3 \ 125,000 Year 4 \ 125,000 Year 5 \ 75,000 Using the factors in the table below, please calculate the net present value of the investment project (including initial investment plus the NPV of the net cash inflows above) using a discount rate of 10%. Please round all calculations to the nearest whole dollar. Prasent 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

(Multiple Choice)

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Question 46

Cash flows used in NPV and IRR analyses include all of the following EXCEPT:

(Multiple Choice)

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Question 47

Please refer to the following data about an investment opportunity: Initial investment \ 1,000,000 Discount rate 7\% Yearly cash flows Year 1 \ 250,000 Year 2 \ 350,000 Year 3 \ 400,000 Year 4 \ 150,000 Refer to the following PV factors: 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 What is the NPV of the project?

(Multiple Choice)

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Question 48

The payback method and the rate of return method are powerful, comprehensive evaluation tools, and would normally be sufficient to make a final investment decision.

(True/False)

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Question 49

Short-term investment decisions are inherently riskier than long-term decisions because they have a shorter period in which to recoup the investment.

(True/False)

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Question 50

Under conditions of limited resources, when a company is comparing several investments with the different amounts for their initial outlay, the decision should be made on the basis of which of the following?

(Multiple Choice)

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Question 51

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash flows as follows: Year 1 100,000 Year 2 100,000 Year 3 \ 125,000 Year 4 \ 125,000 Year 5 \ 75,000 What is the payback period?

(Multiple Choice)

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Question 52

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 rate of return for Project A?

(Multiple Choice)

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Question 53

If Alice Godfried invests $14,000 today at a rate of 4% compounding yearly, what will the value of the investment be in 8 years? Future Value of \ 1 4\% 5\% 6\% 7\% 8\% 9\% 1 1.040 1.050 1.060 1.070 1.080 1.090 2 1.082 1.103 1.124 1.145 1.166 1.188 3 1.125 1.158 1.191 1.225 1.260 1.295 4 1.170 1.216 1.261 1.311 1.360 1.412 5 1.217 1.276 1.338 1.403 1.469 1.539 6 1.265 1.340 1.410 1.501 1.587 1.677 7 1.316 1.407 1.504 1.606 1.714 1.828 8 1.369 1.477 1.594 1.718 1.851 1.993 9 1.423 1.551 1.689 1.838 1.999 2.172 10 1.480 1.629 1.791 1.967 2.159 2.367

(Multiple Choice)

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Question 54

Which of the following best describes the term opportunity cost?

(Multiple Choice)

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Question 55

La Grange Company is evaluating an opportunity to invest $50,000 in new manufacturing equipment. It will have a useful life of 3 years, and will generate $10,000 cash flows at the end of Year 1; $20,000 of cash flows at the end of Year 2; and $30,000 of cash flows at the end of Year 3. If La Grange uses a discount rate of 10% to calculate NPV, they will accept the opportunity as a good investment. Present Value 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 56

Which of the following BEST describes a post-audit?

(Multiple Choice)

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Question 57

Compound interest used in discounted cash flow calculations assumes that companies will reinvest future cash flows when they are received.

(True/False)

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Question 58

Please refer to the following data concerning 4 investment alternatives: Praject A Praject B Praject C Praject D Initial investment \ 210,000 \ 400,000 \ 550,000 \ 1,000,000 PV of cash Inflows \ 285,000 \ 490,000 \ 800,000 \ 990,000 Payback period (years) 7.2 6.0 9.5 2.0 NPV of project \ 75,000 \ 90,000 \ 250,000 (\ 10,000 - What is the profitability index for Project B?

(Multiple Choice)

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Question 59

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash inflows as follows: Year 1 \ 100,000 Year 2 \ 100,000 Year 3 \ 125,000 Year 4 \ 125,000 Year 5 \ 75,000 Using the factors in the table below, please calculate the net present value of the net cash inflows above, Using a discount rate of 10%. Please round all calculations to the nearest whole dollar. Prasent 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

(Multiple Choice)

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Question 60

Capital budgeting applies to which of the following?

Neither the payback period nor the rate of return capital budgeting method recognizes the time value of money.

When calculating the net present value of future cash streams, dollars that are received sooner are worth more than dollars received later.

Cash flows used in NPV and IRR analyses include all of the following EXCEPT:

The payback method and the rate of return method are powerful, comprehensive evaluation tools, and would normally be sufficient to make a final investment decision.

Short-term investment decisions are inherently riskier than long-term decisions because they have a shorter period in which to recoup the investment.

Under conditions of limited resources, when a company is comparing several investments with the different amounts for their initial outlay, the decision should be made on the basis of which of the following?

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash flows as follows: Year 1 100,000 Year 2 100,000 Year 3 \ 125,000 Year 4 \ 125,000 Year 5 \ 75,000 What is the payback period?

Which of the following best describes the term opportunity cost?

Which of the following BEST describes a post-audit?

Compound interest used in discounted cash flow calculations assumes that companies will reinvest future cash flows when they are received.

Corporations: Paid-In Capital and the Balance Sheet

Corporations: Effects on Retained Earnings and the Income Statement

The Statement of Cash Flows

Financial Statement Analysis

Introduction to Management Accounting

Job Order and Process Costing

Activity-Based Costing and Other Cost Management Tools

Cost-Volume-Profit Analysis

Short-Term Business Decisions

The Master Budget and Responsibility Accounting

Flexible Budgets and Standard Costs

Performance Evaluation and the Balanced Scorecard

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