Deck 11: Capital Budgeting

Question 1

You can receive $10,000 today or $3,000 per year for the next five years.If the required rate of return is 10%,what option should be selected? (The present value of an ordinary annuity at 10% for five periods is 3.7908.The present value of one at 10% for five periods is 0.6209.)

A)Receive $10,000 today.
B)Receive $3,000 per year for the next five years.
C)The results are the same for both options.
D)Neither option is desirable.

Answer 1

B

Question 2

A manager is considering the following investment: Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A)$(492)
B)$90,270
C)$180,000
D)$360,270

Answer 2

B

Question 3

The minimum desired rate of return on an investment is sometimes referred to as ________.

A)the discount rate
B)the hurdle rate
C)the required rate of return
D)all of the above

Answer 3

D

Question 4

The net present value of a project is zero.The minimum desired rate of return used to obtain the net present value is 8%.Which of the following statements is TRUE?

A)The project is desirable if the minimum desired rate of return is 10%.
B)The project is desirable if the minimum desired rate of return is 6%.
C)The project is desirable if the minimum desired rate of return is 6% or 10%.
D)The project is undesirable if the minimum desired rate of return is 6%.

Question 5

In the net present value method,the world of certainty assumption means that ________.

A)the predicted cash inflows and cash outflows are certain to occur at the times specified
B)the predicted cash inflows and cash outflows are sunk costs
C)the predicted cash inflows and cash outflows are opportunity costs
D)all investments are equal in value

Question 6

A manager is considering the following investment: Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A)$50,310
B)$57,428
C)$90,270
D)$97,388

Question 7

Long-term planning for making investments that require large amounts of resources is called ________.

A)operating budgeting
B)capital budgeting
C)strategic analysis
D)sensitivity analysis

Question 8

In the capital budgeting process,accountants are NOT involved in ________.

A)identifying potential investments
B)choosing which investments to make
C)gathering data to aid the investment decision
D)follow-up monitoring of investments

Question 9

A manager is considering the following investment: Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A)$(4,140)
B)$(39,730)
C)$4,140
D)$360,270

Question 10

The net present value method computes the present value of all ________ using a minimum desired rate of return.

A)expected future cash inflows
B)expected future cash outflows
C)expected future cash inflows and expected future cash outflows
D)past cash inflows

Question 11

A manager is considering the following investment: Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A)$(123,652)
B)$18,952
C)$60,000
D)$198,952

Question 12

In net present value analysis,the minimum desired rate of return for an investment project depends on the ________ of a proposed project.

A)expected return
B)desired return
C)risk
D)payback period

Question 13

When using the NPV method,the higher the minimum desired rate of return,the ________ the ________ value of each future cash inflow.

A)higher; present
B)lower; present
C)higher; future
D)lower: future

Question 14

If the net present value of an investment project is positive,then the project is ________.If the net present value of an investment project is negative,then the project is ________.

A)ignored; accepted
B)desirable; undesirable
C)unacceptable; acceptable
D)rejected; accepted

Question 15

Accepting a project with a ________ NPV makes the firm worse off financially because the cost of the investment exceeds the ________.

A)positive; present value of future benefits
B)negative; present value of future cash flows
C)negative; present value of present cash flows
D)positive; present value of present cash flows

Question 16

The phases of capital budgeting do NOT include ________.

A)a post-audit of the investment
B)the selection of the investment to undertake
C)the identification of potential investments
D)awarding bonuses to managers for good investment decisions

Question 17

The higher the risk of an investment project,the ________ for the project.

A)lower the minimum desired rate of return
B)higher the minimum desired rate of return
C)lower the expected rate of return
D)higher the expected rate of return

Question 18

Using the net present value method,mangers sum the present values of all expected future cash flows from the project and ________.

A)add the initial investment
B)subtract the initial investment
C)ignore the initial investment
D)add the depreciation expense

Question 19

What is the first step in applying the net-present-value method to investment projects?

A)Identify the amount and timing of relevant future cash inflows.
B)Identify the amount and timing of relevant future cash inflows and outflows.
C)Find the present value of each expected cash flow.
D)Find the discount rate to use for the project.

Question 20

Assume the net present value method is used to evaluate investment opportunities.A manager is faced with several investments,but only has funding for one investment.Which investment should be chosen?

A)the investment with the lowest net present value
B)the investment with a net present value equal to zero
C)the investment with a negative net present value
D)the investment with the largest net present value

Question 21

Under the NPV method,the higher the risk of a project,the lower the desired rate of return.

Question 22

The NPV method computes the present value of all expected future cash flows from a project using a maximum desired rate of return.

Question 23

If the internal rate of return on a project is ________ the required rate of return,then the project should be accepted.

A)higher than
B)lower than
C)the same as
D)none of the above

Question 24

As the minimum required rate of return increases for an investment project,the net present value of the project ________.

A)increases
B)does not change
C)decreases
D)becomes positive

Question 25

If the IRR on a project is greater than the required rate of return,then the net present value of the project is ________.

A)less than zero
B)greater than zero
C)equal to zero
D)none of the above

Question 26

When using the net present value method,if the net present value is positive,then the ________.

A)the project should be rejected
B)the project should be stalled
C)the project should be reevaluated
D)the project should be accepted

Question 27

Discounted-cash-flow models do not focus on net income.

Question 28

The internal rate of return model determines the ________ at which the net present value of an investment project equals ________.

A)cost of capital; a positive number
B)hurdle rate; a positive number
C)interest rate; zero
D)discount rate; a positive number

Question 29

The minimum desired rate of return for an investment under the NPV method is based on the cost of capital.

Question 30

When evaluating an investment project,the higher the minimum desired rate of return,the ________ the present value of each ________ cash inflow.

A)higher; present
B)higher; future
C)lower; present
D)lower; future

Question 31

Discounted-cash-flow models focus on a project's cash inflows and cash outflows without regard to the time value of money.

Question 32

When using an NPV model,a world of uncertainty is assumed.

Question 33

The lower the minimum desired rate of return,the lower the present value of each future cash inflow from an investment.

Question 34

Capital-budgeting decisions have significant financial effects beyond the current year.

Question 35

In the absence of taxes,depreciation expense on a long-term asset is a relevant cash flow for the NPV model.

Question 36

When choosing among several investments,managers should pick the project with the lowest net present value.

Question 37

Discounted-cash-flow models are not based on the theory of compound interest.

Question 38

The IRR model determines the interest rate at which the NPV of an investment equals zero.

Question 39

If a company accepts a project with a positive NPV,the project will increase the value of the firm.

Question 40

When using the NPV model,it is assumed that the capital markets are perfect.

Question 41

The differential approach to investments can be used to compare any number of projects.

Question 42

Generally,the most difficult part of capital budgeting decisions is predicting accurately the relevant cash flows.

Question 43

If a project has a positive net present value that will become negative with a ________,it can be considered to be a risky project.

A)large change in cash flows
B)small change in cash flows
C)large change in required rate of return
D)large change in estimated life

Question 44

If the internal rate of return on a project is less than the minimum desired rate of return,the project is not desirable.

Question 45

Dolly Company is contemplating three different equipment investments.The relevant data follows:
The present value factor of an ordinary annuity for 10 periods at 12% is 5.6502.
The present value factor of one for 10 periods at 12% is 0.322.
Required:

A)Compute the net present value of each investment.Ignore income taxes.
B)If only one investment can be acquired,which investment should be chosen?

Question 46

Howell Company has the following information:
Given:
Required:
Determine the missing amounts.Ignore income taxes.

Question 47

The ________ cannot be used to compare more than two investment alternatives.

A)total project approach
B)sensitivity analysis
C)payback method
D)differential approach

Question 48

A company is considering two investment projects.If they use the total project approach and the differential approach,both approaches produce ________.

A)different answers
B)similar answers
C)the same answer
D)not enough information is given to make an assessment

Question 49

If the internal rate of return on a project exceeds the minimum desired rate of return,then the NPV is positive.

Question 50

Mammoth Company is considering the acquisition of two machines.
Assume straight-line depreciation.Ignore income taxes.The present value of an ordinary annuity at 14% and 5 periods is 3.4331.The present value of one at 14% and 5 periods is 0.5194.
Required:

A)Calculate the net present value for both machines.
B)Which is the best alternative?

Question 51

The first step in using the differential approach to investment analysis is to ________.

A)calculate the present value of the differential cash flows
B)sum the individual present values of each investment
C)estimate the difference in cash flows between two projects for each year
D)identify the relevant cash inflows and cash outflows for each project

Question 52

Two common methods for comparing alternative investments are the total project approach and the conversion approach.

Question 53

The ________ approach compares two alternative projects by computing the total cash flows of each alternative and then converting these total cash flows to their present values.

A)differential
B)payback
C)total project
D)sensitivity

Question 54

Which is NOT a relevant cash inflow or cash outflow when using the net present value method? (Ignore income taxes.)

A)depreciation expense in future periods
B)future disposal value of a long-term asset
C)future operating cash inflows
D)acquisition cost of new equipment at time zero

Question 55

The "break-even" cash flow for an investment project is the point at which ________.

A)the present value of the variable cost of future cash flows equals the present value of the fixed cost of future cash flows
B)the present value of the variable cost of future cash flows equals the present value of the variable cost of past cash flows
C)the net present value of the investment project is zero
D)the total cash revenues equal total cash expenses

Question 56

In capital budgeting decisions,the riskiness of a project may be shown by ________.

A)the size of the future cash inflows from the project
B)the size of the future cash outflows from the project
C)the timing of the cash flows from the project
D)the project's sensitivity to changes in cash flows

Question 57

The total project approach to investments can be used to compare any number of projects.

Question 58

When comparing projects using the total project approach,a manager should choose the project with the ________.

A)smallest net present value
B)largest net present value
C)zero net present value
D)largest differential net present value

Question 59

The more sensitive a project is to changes in cash flows,the riskier it is.

Question 60

________ shows the financial consequences that would occur if actual cash flows differ from expected cash flows.

A)Discount analysis
B)Interest rate analysis
C)Sensitivity analysis
D)Budgeting

Question 61

Kobe Company will purchase a van for $50,000.The van's depreciable life is 5 years.The van has no terminal salvage value.Assume a tax rate of 30% and a required after-tax rate of return of 12%.The company uses the straight-line method of depreciation for tax purposes.What is the annual after-tax cash flow from depreciation expense?

A)$3,000 cash outflow
B)$3,000 cash inflow
C)$6,000 cash outflow
D)$6,000 cash inflow

Question 62

Globe Company will purchase a truck for $100,000.The truck's depreciable life is 5 years.The truck has no terminal salvage value.Assume a tax rate of 30% and a required after-tax rate of return of 12%.The company uses the straight-line method of depreciation for tax purposes.What is the annual after-tax cash flow from depreciation expense?

A)$6,000 cash outflow
B)$6,000 cash inflow
C)$12,000 cash outflow
D)$12,000 cash inflow

Question 63

In the net present value method,the disposal value of a long-term asset at the end of its useful life is considered to be a ________.

A)cash outflow at time zero
B)cash inflow at time zero
C)cash outflow in the year of disposal
D)cash inflow in the year of disposal

Question 64

Accelerated depreciation methods ________.

A)reduce an assets' estimated useful life
B)charge a larger proportion of an asset's cost to the earlier years of the asset
C)charge a larger proportion of an asset's cost to the later years of the asset
D)increase the taxes paid

Question 65

In net present value method,the only relevant operating cash flows are the ones that differ among alternatives.

Question 66

A company pays taxes of 25% on their first $25,000 of taxable income and 40% on any taxable income in excess of $25,000.The company's current taxable income is $30,000.What is the marginal tax rate?

A)25%
B)30%
C)40%
D)65%

Question 67

Dove Company pays taxes of 25% on their first $30,000 of pretax income and 40% on any taxable income in excess of $30,000.The current pretax income is $45,000.What is the marginal tax rate for Dove Company?

A)15%
B)25%
C)40%
D)65%

Question 68

A company is considering the acquisition of new equipment to replace old equipment.When using the net present value method,which item is NOT relevant?

A)cash outflow for the purchase of new equipment
B)cash installation costs associated with the new equipment
C)disposal value of old equipment replaced with new equipment
D)book value of old equipment replaced with new equipment

Question 69

In the NPV method,errors in forecasting terminal disposal values are usually not crucial because the present value of these cash flows is small.

Question 70

In net present value analysis,a reduction in a future cash outflow is treated as ________.

A)an irrelevant cash flow
B)a cash inflow
C)a disposal value of a long-term asset
D)an expense

Question 71

When considering the cash operating inflows resulting from an investment,taxes will ________.

A)reduce the amount of the cash inflows by the tax rate
B)reduce the amount of the cash inflows by (1 minus the tax rate)
C)increase the amount of the cash inflows by the tax rate
D)increase the amount of the cash inflows by (1 minus the tax rate)

Question 72

The marginal tax rate for a company is the ________.

A)average tax rate for the company
B)highest possible tax rate that may be imposed on the company by IRS
C)lowest tax rate that may be imposed on the company by IRS
D)tax rate paid on additional amounts of pretax income

Question 73

Ajax Company pays 15% on the first $50,000 of pretax income and 28% on any additional pretax income.Ajax Company currently earns $52,000.An investment under consideration is expected to add $20,000 in pretax income.What is the tax rate on the additional income from the investment?

A)15%
B)22.5%
C)28%
D)43%

Question 74

A company is evaluating two different pieces of equipment for investment.Fixed overhead costs will be the same under each investment alternative.Fixed overhead costs are a(n)________ cost in the net present value method.

A)irrelevant
B)relevant
C)avoidable
D)controllable

Question 75

Vampire Company pays taxes of 15% on their first $20,000 of pretax income and 30% on any taxable income in excess of $20,000.The current pretax income is $50,000.What is the average tax rate?

A)15%
B)21%
C)24%
D)30%

Question 76

A five year recovery period for a long-term asset means ________.

A)the number of years it takes to recover the cost of a long-term asset
B)the number of years a company expects to use a long-term asset
C)the number of years a company can depreciate a long-term asset for tax purposes
D)the number of years a long-term asset will generate future cash inflows

Question 77

Lonesome Company is required to pay taxes of 25% on income up to $20,000 and 35% on any income in excess of $20,000.The company has pretax income of $80,000.What is the average tax rate for Lonesome Company?

A)25.0%
B)26.5%
C)30.0%
D)32.5%

Question 78

The book value of an asset that is being replaced is a relevant cash flow in the net present value method.

Question 79

In the NPV method,the cash outflow for the purchase of equipment is an example of an operating cash flow.

Question 80

In the net present value method,a reduction in a cash outflow is not treated the same way as a cash inflow.