Deck 12: Strategy and the Analysis of Capital Investments

Question 1

Accounting makes all of the following contributions to the capital budgeting process except:

A)The theoretical development of appropriate decision models.
B)Linkage of capital investment projects to the organization's Balanced Scorecard (BSC).
C)Conducting post-audits of capital investment decisions.
D)Generation of relevant data for investment-analysis purposes.
E)Performing sensitivity or "what-if" analysis of proposed capital investments.

Answer 1

A

Question 2

Which of the following is not a characteristic of the payback method for making capital budgeting decisions?

A)It is easy to calculate and comprehend.
B)It focuses primarily on liquidity,rather than profitability of an investment project.
C)It can be considered a rough measure of risk.
D)It considers returns over the entire life of the project.
E)It requires estimates of after-tax cash inflows and after-tax cash outflows.

Answer 2

D

Question 3

Which of the following statements regarding capital investment analysis is false?

A)A long-term planning horizon is assumed.
B)Benefits of potential investment projects are conceptually expressed in terms of accounting income (or reduction in costs).
C)Project acceptance decisions are based on models that explicitly incorporate the time value of money.
D)Need to incorporate income-tax effects in the analysis,for both revenues (gains)as well as expenses (losses).
E)Discounted cash flow (DCF)decision models are used by a majority of large organizations.

Answer 3

B

Question 4

In making capital budgeting decisions,the principal focus is on:

A)Cash flows only.
B)Timing of the cash flows only.
C)Cash flows and the timing of the cash flows.
D)Accounting-based measures of revenues and expenses.
E)Nonfinancial performance indicators.

Question 5

Results from the net present value (NPV)method and the internal rate of return (IRR)method may differ between projects if they differ in all of the following except:

A)Required initial investment.
B)Cash-flow pattern.
C)Cost of capital (i.e. ,discount rate).
D)Length of useful life of the two projects.
E)Book (accounting)rate of return on the two projects.

Question 6

The tax impact of a capital investment project (such as the replacement of a major piece of machinery)is present during:

A)The initiation stage and final disposal stage only.
B)All stages: initiation,operation,and final disposal.
C)The initiation stage and the operation stage only.
D)The operation stage only.
E)The disposal stage only.

Question 7

Especially for projects with long lives,estimation of revenues (or benefits),costs,and cash flows of a capital investment project is a difficult task principally because of:

A)The lack of good data.
B)Uncertainty about future events.
C)The large dollar amounts involved.
D)Income tax effects.
E)Lack of available forecasting tools.

Question 8

Given the same total cash flow returns (CFRs),the internal rate of return (IRR)method of capital budgeting would favor a proposal having yearly CFRs that were:

A)Even.
B)Uneven.
C)Heavier towards the end of a proposal's life.
D)Heavier towards the beginning of a proposal's life.
E)Heavier towards the middle of a proposal's life.

Question 9

The capital budgeting method(s)that is (are)most likely to provide consistency between data for capital budgeting and data for subsequent performance evaluation is (are)the:

A)Payback period.
B)Discounted cash flow (DCF)methods.
C)Book (i.e. ,accounting)rate of return method.
D)Discounted payback period.
E)Cash-flow proxy method.

Question 10

Which of the following statements regarding cost of capital is not true?

A)It reflects the perceived level of risk that investors (owners and lenders)in the company require.
B)It is another term for "required rate of return."
C)It is typically defined as a weighted-average of all sources of capital for the company.
D)It is used to calculate the present value of anticipated cash flows for a project.
E)It is used when calculating the internal rate of return (IRR)of a proposed investment.

Question 11

Which of the following is not true regarding the appropriate discount rate to be used in conjunction with discounted cash flow (DCF)decision models?

A)For projects of "above average" risk,the appropriate discount rate is the weighted-average cost of capital (WACC).
B)It includes an estimate of the after-tax cost of debt.
C)It can differ across investment projects,according to perceived risk.
D)It is also sometimes referred to as the "hurdle rate" for capital budgeting purposes.
E)It is also sometimes referred to as the "minimum required rate of return."

Question 12

The internal rate of return (IRR)method favors investment proposals with:

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

Question 13

The process of identifying,evaluating,selecting,and controlling capital investments is referred to as:

A)Investment discounting.
B)Capital rationing.
C)Capital investing.
D)Capital budgeting.
E)Post-audit analysis.

Question 14

For a typical capital investment project,the bulk of the investment-related cash outflow occurs:

A)During the initiation stage of the project.
B)During the operation stage of the project.
C)Either during the initiation stage or the operation stage.
D)During neither the initiation stage nor the operation stage.
E)Evenly during all three stages: initiation,operation,and final disposal.

Question 15

Which of the following can a final disposal of a capital asset not produce?

A)A net cash outflow.
B)A net cash inflow.
C)An income tax consequence.
D)An operating gain or loss.

Question 16

The time value of money is explicitly considered in which of the following capital budgeting method(s)?

A)Payback method.
B)Net present value (NPV)method.
C)Operating cash-flow method.
D)Book (accounting)rate of return method.
E)Residual income method.

Question 17

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

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 18

The Analytic Hierarchy Process (AHP)is:

A)A single-criterion decision technique that can combine qualitative and quantitative factors in the overall evaluation of decision alternatives.
B)A multi-criteria decision technique that can combine qualitative and quantitative factors in the overall evaluation of decision alternatives.
C)A technique that does not use qualitative factors in the evaluation of decision alternatives.
D)A technique that only uses qualitative factors in the evaluation of decision alternatives.
E)Not useful in choosing between two mutually exclusive capital budgeting projects.

Question 19

Which of the following is not a characteristic of capital budgeting post-audits?

A)They provide feedback to managers regarding the soundness of their decision-making.
B)They encourage managers to build slack into capital investment proposals.
C)They are sometimes difficult to implement in practice.
D)They may be cost-prohibitive to accomplish.
E)They help keep actual projects on target (e.g. ,by limiting project managers from diverting project funds,without authorization,to other uses).

Question 20

Which of the following methods is potentially useful for helping an organization align its capital expenditures with its strategy?

A)Multiproduct cost-volume-profit analysis.
B)Analytic hierarchy process (AHP).
C)Multiple regression and correlation analysis.
D)Linear optimization (e.g. ,linear programming models).
E)Strategic cost management.

Question 21

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

A)The actual (economic)rate of return on the project is 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 22

Intolerance of uncertainty often leads managers to:

A)Invest heavily in strategic-related investments.
B)Choose projects with short payback periods.
C)Invest in a few large,sequential investments.
D)Invest in projects with relatively long payback periods.
E)Favor projects that are mutually exclusive.

Question 23

The excess of the present value of future cash flows over the initial investment outlay for a project is the:

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 24

In a discounted cash flow (DCF)analysis,a required incremental investment in net working capital:

A)Should be amortized over the useful life of the equipment.
B)Can be disregarded because the same amount of cash will be recovered at the end of the project's life.
C)Should be treated as a recurring cash outflow over the life of the project.
D)Should be treated as a reduction in the required cash outflow in period 0.
E)Should be treated as an immediate cash outflow that is later recovered when it is no longer needed.

Question 25

Research has shown that in framing capital investment decisions,sunk costs tend to:

A)Have no discernable impact on decisions by managers.
B)Have a slight impact on the decision-making process.
C)Have an impact only when capital funds are limited.
D)Escalate commitment in making capital budgeting decisions.
E)Have a significant impact,but only when dealing with mutually exclusive investment projects.

Question 26

Which one of the following is an advantage of the book (accounting)rate of return method for analyzing capital investment proposals?

A)It is not affected by different accounting methods.
B)It is precise and objective.
C)Data for calculating the return are typically readily available.
D)The method explicitly adjusts for the time value of money.
E)The accounting rate of return is generally approximately equal to a project's internal rate of return (IRR).

Question 27

Which one of the following is true for the IRR method?

A)It assumes cash proceeds can be reinvested to earn the same rate of return as the cost of capital or desired rate of return on that particular project.
B)Unlike the NPV method,it assumes only a single discount rate.
C)IRRs of multiple projects are additive (that is,can be added together).
D)It can be used to make optimal decisions regarding mutually exclusive investment projects.
E)It makes it easy to incorporate multiple costs of capital.

Question 28

Which one of the following statements concerning capital budgeting is not true?

A)A basic objective underlying capital budgeting is to select assets that will earn a satisfactory return.
B)Capital budgeting is the process of planning asset investments.
C)Capital budgeting is based on precise estimates of future events.
D)Capital budgeting involves estimating the revenues and costs of each proposed project,evaluating their merits,and choosing those worthy of investment.
E)Capital budgeting uses after-tax cash flows in the analysis of proposed investments.

Question 29

Which one of the following is calculated by dividing average annual net operating income by the average investment associated with a capital project?

A)Profitability index.
B)Payback period.
C)Book (accounting)rate of return.
D)Internal rate of return (IRR).
E)Net present value (NPV).

Question 30

The internal rate of return (IRR)for an investment:

A)Frequently results in positive net present values on attractive projects.
B)Generally is greater than the company's desired rate of return.
C)Ignores the time value of money.
D)May produce different results than the net present value method (NPV)in evaluating projects with different useful lives.
E)Would tend to be reduced if a company used an accelerated method of depreciation for tax purposes.

Question 31

Which of the following methods can be used to deal formally with uncertainty in the capital-budgeting process?

A)Real options analysis.
B)Net present value (NPV)analysis.
C)Capital rationing analysis.
D)Linear programming optimization.
E)Equivalent annual annuity (EAA)analysis.

Question 32

Which one of the following methods assumes that all interim cash inflows generated by an investment earn a return equal to the internal rate of return (IRR)of the investment?

A)Modified internal rate of return (MIRR).
B)Payback.
C)Net present value (NPV).
D)Present value index (PI).
E)Internal rate of return method (IRR).

Question 33

Two investments have the same total cash inflows and the same payback period.Therefore:

A)These two investments are equally desirable.
B)These two investments must be identical in terms of the present value of the cash inflows.
C)The payback period method can help decision makers choose between these two investments.
D)One pattern of cash inflows may be preferable to the other investment's pattern of cash inflows.
E)Most likely,these two investments required approximately the same initial investment.

Question 34

Which one of the following is the estimated rate (i.e. ,percentage)that makes the discounted present value of future cash flows equal to the initial investment?

A)Weighted-average cost of capital (WACC).
B)Modified internal rate of return (MIRR).
C)Book (accounting)rate of return.
D)Internal rate of return (IRR).
E)Accounting rate of return (ARR),after tax.

Question 35

For a capital investment project,a net present value (NPV)of $500 indicates that the:

A)Project's rate of return exceeds the hurdle (discount)rate.
B)Project's internal rate of return is unacceptable.
C)Present value of cash outflows exceeds the present value of cash inflows.
D)Total cash outflows for the project are expected to be $500.
E)Internal rate of return (IRR)exceeds the accounting rate of return on the project.

Question 36

A composite of the cost of various sources of funds comprising a firm's capital structure is its:

A)Internal rate of return.
B)Weighted-average cost of capital.
C)Book rate of return.
D)Modified internal rate of return (MIRR).
E)Accounting rate of return,after tax.

Question 37

Under conditions of capital rationing (i.e. ,limited capital funds are available),the optimal allocation of funds occurs when management uses which of the following decision models?

A)Discounted payback.
B)Profitability index (PI).
C)Modified internal rate of return (MIRR).
D)Internal rate of return (IRR).
E)Discounted accounting rate of return.

Question 38

Which one of the following is an advantage of the payback method?

A)It provides a (rough)measure of risk.
B)It is linearly related to the net present value (NPV)of a proposed project.
C)It considers all possible future cash flows.
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 39

Which one of the following capital budgeting decision models consists of dividing the total initial investment outlay by annual after-tax cash inflows (when such inflows are assumed equal over time)?

A)Profitability index.
B)Payback period.
C)Book (accounting)rate of return.
D)Internal rate of return.
E)Adjusted payback period.

Question 40

A capital budgeting model that accounts for an assumed rate of return on interim-period cash inflows from an investment is the:

A)Internal rate of return (IRR)model.
B)Present-value payback period model.
C)Net present value (NPV)model.
D)Accounting rate of return (ARR)model.
E)Modified internal rate of return (MIRR)model.

Question 41

What is the present value of $1 received five years from now (rounded to two decimal places)if the discount rate is 12%?

A)$1.76.
B)$0.57.
C)$1.00.
D)$1.60.

Question 42

If an existing asset is sold at a gain,and the gain is taxable,then the after-tax proceeds from this transaction would be equal to:

A)Net proceeds from the sale plus the after-tax gain on the sale.
B)Net proceeds from the sale less the after-tax gain on the sale.
C)Net proceeds from the sale plus the taxes paid on the gain.
D)Net proceeds from the sale less the taxes paid on the gain.
E)The pre-tax proceeds plus taxes on the gain.

Question 43

For a given income tax rate,t,after-tax cash operating receipts are calculated as follows:

A)Taxable cash receipt times (1 - t).
B)Taxable case receipt times t.
C)Taxable cash receipt times (1 + t).
D)Taxable cash receipt divided by (1 - t).
E)Taxable cash receipt divided by t.

Question 44

Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses straight-line depreciation with no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.What is the annual book (accounting)rate of return based on the initial investment?

A)12%.
B)20%.
C)32%.
D)36%.
E)40%.

Question 45

Tyson Company has a pre-tax net cash inflow of $1,200,000.The company can claim depreciation expense of $500,000 this year.The company is subject to a combined income tax rate of 26%.What is the after-tax cash flow for the year?

A)$700,000.
B)$1,018,000.
C)$182,000.
D)$370,000.
E)$1,200,000.

Question 46

Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses straight-line depreciation with no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.
What is the net after-tax cash inflow in Year 1 from the investment?

A)$72,000.
B)$96,000.
C)$108,000.
D)$112,000.
E)$120,000.

Question 47

Which of the following statements regarding the determination of the weighted-average cost of capital is not true:

A)The capital asset pricing model (CAPM)cannot be used to estimate the cost of debt for a company.
B)The capital asset pricing model (CAPM)can be used to estimate the cost of equity for a non-public company.
C)In estimating the cost of debt,the analyst typically estimates the current yield-to-maturity of the debt instruments in the company's capital structure.
D)Market,not book,values of the components of capital are preferable in terms of determining weights for the weighted-average calculation.

Question 48

Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses straight-line depreciation with no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.What is the payback period for the new machine (rounded to nearest one-tenth of a year)? (Assume that the cash inflows occur evenly throughout the year. )

A)2.5 years.
B)2.7 years.
C)3.1 years.
D)3.6 years.
E)4.2 years.

Question 49

When the net present value (NPV)of a project is calculated based on the assumption that the cash flows occurred at the end of the year when they actually occurred uniformly throughout each year,the NPV will:

A)Not be in error.
B)Be slightly overstated.
C)Be unusable for actual decision-making.
D)Be slightly understated but probably usable.
E)Produce an error the direction of which is undeterminable.

Question 50

Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses straight-line depreciation with no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.
What is the amount of net income (after taxes)in Year 2 of the investment?

A)$24,000.
B)$36,000.
C)$48,000.
D)$72,000.
E)$120,000.

Question 51

Omaha Plating Corporation is considering purchasing a machine for $1,500,000.The machine will generate a constant after-tax income of $100,000 per year for 15 years.The firm will use straight-line (SL)depreciation for the new machine over 10 years with no residual value.
What is the payback period for the new machine,under the assumption that cash inflows occur evenly throughout the year?

A)4 years.
B)5 years.
C)6 years.
D)10 years.
E)15 years.

Question 52

Which of the following is not used to deal with uncertainty in the capital budgeting process?

A)What-if analysis.
B)Sensitivity analysis.
C)Monte Carlo simulation.
D)Real options analysis.
E)Linear programming analysis.

Question 53

If a company is in the situation of having unlimited capital funds,the best decision rule,considering only financial factors,is for it to invest in all projects in which:

A)The payback period is short.
B)The book (accounting)rate of return is greater than its current return on invested capital (ROI).
C)The net present value (NPV)is greater than the cost of capital.
D)The internal rate of return (IRR)is greater than zero.
E)The NPV is greater than zero.

Question 54

Which of the following is always true with regard to the NPV decision model?

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 projects in the same order.
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 55

When the internal rate of return (IRR)method and the net present value (NPV)method do not yield the same recommendation for the same investment project,the technique normally selected is:

A)IRR,because all reinvestment of funds occurs at the rate of the cost of capital and because it takes into consideration the relative size of the initial investment.
B)NPV,because it takes into consideration the relative size of the initial investment.
C)IRR,because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.
D)NPV,because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.
E)IRR,because all reinvestment of funds occurs at the rate the project generates and because it takes into consideration the relative size of the initial investment.

Question 56

All of the following capital budgeting decision models,except for this one,use cash flows as the primary basis for the calculation.

A)Net present value (NPV)
B)Internal rate of return (IRR)
C)Payback period
D)Discounted payback period
E)Accounting rate of return (ARR)

Question 57

Omaha Plating Corporation is considering purchasing a machine for $1,500,000.The machine will generate a constant after-tax income of $100,000 per year for 15 years.The firm will use straight-line (SL)depreciation for the new machine over 10 years with no residual value.
What is the annual accounting (book)rate of return (rounded)on the initial investment?

A)6.67%.
B)10.00%.
C)13.33%.
D)16.67%.
E)23.33%.

Question 58

Madson Company is analyzing several proposed investment projects.The firm has resources only for one project.
The company uses the payback period method for capital investment decisions.On the basis of this decision model,which project should be selected? (Ignore taxes. )

A)Project P.
B)Project Q.
C)Project R.
D)Project S.
E)Project T.

Question 59

The term "breakeven after-tax cash flow" represents:

A)A pessimistic estimate in a typical scenario analysis.
B)An optimistic estimate in a typical scenario analysis.
C)The amount of after-tax cash flow needed to generate a return equal to a project's IRR.
D)The cash flow needed to generate an IRR of zero.
E)An estimate that can be arrived at using Goal Seek in Excel.

Question 60

Without knowing its required rate of return (i.e. ,hurdle rate)for use in the evaluation of capital investment projects,a company will be prohibited from calculating a project's:

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

Question 61

Marc Corporation wants to purchase a new machine for $400,000.Management predicts that the machine can 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 as a 3-year property and is not expected to have any significant residual at the end of its useful years.Marc's income tax rate is 40%.Management requires a minimum of 10% return on all investments.A partial MACRS depreciation table is reproduced below.
What is the after-tax cash inflow in Year 1 from the investment (rounded to the nearest thousand)?

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

Question 62

If the net present value (NPV)of an investment proposal is positive,it would indicate that the:

A)PV of cash outflows exceeds the PV of cash inflows
B)Payback period is less than one-half the life of the project
C)Internal rate of return (IRR)is equal to the discount percentage used in the NPV calculation
D)PV index would be less than 100%
E)Rate of return for this project is greater than the discount rate used in the NPV computation

Question 63

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the estimated book (accounting)rate of return based on average investment?

A)12%.
B)14%.
C)17%.
D)24%.
E)34%.

Question 64

Carmino Company is considering an investment in equipment that will generate an after-tax income of $6,000 for each year of its four-year life.The asset has no salvage value.The firm is in the 40% tax bracket.The book values of the investment at the beginning of each year are as follows:
This asset's book (accounting)rate of return on average investment,which is defined as a simple average of the average book value for each of the four years.The final answer should be rounded to the nearest whole %.

A)15%.
B)27%.
C)36%.
D)43%.
E)58%.

Question 65

Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses straight-line depreciation with no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.What is the approximate internal rate of return (IRR)of the investment? (NOTE: To answer this question,students must have access to Table 2 from Appendix C,Chapter 12. )

A)Less than 12%.
B)Somewhere between 12% and 14%.
C)Somewhere between 15% and 20%.
D)Somewhere between 20% and 25%.
E)Over 25%.

Question 66

Which of the following would not be considered a benefit of conducting post-implementation audits of capital investment projects?

A)Such audits ensure the realization of future after-tax cash flows.
B)Such audits facilitate learning from estimation errors.
C)Knowledge that investments are subject to post-implementation audit can counter tendencies to inflate estimates of net cash benefits associated with projects.
D)The use of such audits allows top management to identify and reward good project planners.
E)Such audits reduce the tendency of managers to overstate benefits or understate costs associated with proposed capital investments.

Question 67

When evaluating capital budgeting decision models,the payback period emphasizes:

A)Liquidity
B)Profitability
C)Cost of capital
D)Average net income divided by average investment
E)Average cash flow divided by average investment

Question 68

Carmino Company is considering an investment in equipment that will generate an after-tax income of $6,000 for each year of its four-year life.The asset has no salvage value.The firm is in the 40% tax bracket.The book values of the investment at the beginning of each year are as follows:
The amount of after-tax cash inflow from the asset in Year 3 is:

A)$6,600.
B)$7,500.
C)$8,100.
D)$9,000.
E)$9,750.

Question 69

Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses straight-line depreciation with no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.What is the net present value (NPV)of the investment? (The PV annuity factor for 5 years,10% is 3.791. )Assume that the cash inflows occur at year-end.

A)($270,480).
B)$63,936.
C)$109,428.
D)$154,920.
E)None of the above.

Question 70

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the net after-tax cash inflow in Year 1 from the investment?

A)$72,000.
B)$92,000.
C)$96,000.
D)$102,000.
E)$120,000.

Question 71

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the approximate internal rate of return (IRR)of the proposed investment? (Note: To answer this question,students must have access to Table 2 from Appendix C,Chapter 12. )

A)Less than 12%.
B)Somewhere between 12% and 14%.
C)Somewhere between 14% and 15%.
D)Somewhere between 15% and 20%.
E)Over 20%.

Question 72

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 an income tax rate of 34%.What is the projected after-tax cash flow associated with the sale of the existing asset?

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

Question 73

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the investment's net present value (NPV)of the proposed investment (rounded to the nearest hundred)? (The PV annuity factor for 10%,5 years,is 3.791 and for 4 years it is 3.17.The present value factor for 10%,5 years,is 0.621. )Assume that cash inflows occur at year-end.

A)$48,800.
B)$79,800.
C)$99,000.
D)$112,000.

Question 74

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the annual book (accounting)rate of return based on the initial investment?

A)12%.
B)14%.
C)17%.
D)20%.
E)24%.

Question 75

Brandon Company is contemplating the purchase of a new piece of equipment for $45,000.Brandon is in the 30% income tax bracket.Predicted annual after-tax cash inflows from this investment are $18,000,$15,000,$9,000,$6,000 and $3,000 for years 1 through 5 respectively.The firm uses straight-line depreciation with no residual value at the end of five years.The payback period in years (rounded to the nearest 10^th of a year)for this proposed investment is (assume that the cash inflows occur evenly throughout the year):

A)2.5 years.
B)3.0 years.
C)3.5 years.
D)4.3 years.
E)4.5 years.

Question 76

Income tax effects are associated with all of the following except:

A)Disposition (i.e. ,sale)of an existing asset.
B)Required increase in net working capital associated with an investment project.
C)Sale of an investment asset at the end of the asset's useful life.
D)Effect of depreciation expense associated with an investment project.
E)Annual net benefits associated with a proposed investment.

Question 77

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the present value payback period,rounded to one-tenth of a year? (Note: PV factors for 10% are as follows: year 1 = 0.909;year 2 = 0.826;year 3 = 0.751;year 4 = 0.683;year 5 = 0.621;the PV annuity factor for 10%,5 years = 3.791. )

A)2.5 years.
B)3.0 years.
C)3.6 years.
D)4.1 years.
E)4.8 years.

Question 78

Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses straight-line depreciation with no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.What is the present value payback period,rounded to one-tenth of a year? (Note: PV factors for 10% are as follows: year 1 = 0.909;year 2 = 0.826;year 3 = 0.751;year 4 = 0.683;year 5 = 0.621;the PV annuity factor for 10%,5 years = 3.791. )

A)2.5 years.
B)3.0 years.
C)3.3 years.
D)3.6 years.
E)4.0 years.

Question 79

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the net income (after tax)in Year 3?

A)$28,000.
B)$36,000.
C)$42,000.
D)$70,000.
E)$72,000.

Question 80

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 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 firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the payback period for the new machine (rounded to the nearest one-tenth of a year)? Assume that the cash inflows occur evenly throughout the year.

A)2.7 years.
B)3.0 years.
C)3.3 years.
D)3.6 years.
E)4.2 years.