Deck 12: Performance Measurement in Decentralized Organizations

Question 1

If a project does not have constant incremental revenues and expenses over its useful life,the simple rate of return will fluctuate from year to year.

Answer 1

True

Question 2

Discounted cash flow techniques do not take into account recovery of initial investment.

Answer 2

False

Question 3

The required rate of return is the minimum rate of return that an investment project must yield to the acceptable.

Answer 3

True

Question 4

One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached.

Question 5

An investment project with a project profitability index of less than one should ordinarily be rejected.

Question 6

For capital budgeting decisions,the simple rate of return method is superior to the net present value method.

Question 7

When considering a number of investment projects,the project that has the shortest payback period does not necessarily have the highest net present value.

Question 8

The project profitability index is computed by dividing the present value of the cash inflows of the project by present value of the cash outflows of the project.

Question 9

In the payback method,depreciation is deducted from net operating income when computing the annual net cash flow.

Question 10

In calculating the payback period where new equipment is replacing old equipment,any salvage value to be received on disposal of the old equipment should be added to the cost of the new equipment.

Question 11

If taxes are ignored,all of the following items are included in a discounted cash flow analysis except:

A)future operating cash savings.
B)depreciation expense.
C)future salvage value.
D)investment in working capital.

Question 12

Preference decisions follow screening decisions and seek to rank investment proposals in order of their desirability.

Question 13

The basic premise of the payback method is that the more quickly the cost of an investment is recovered the more desirable is the investment.

Question 14

The simple rate of return method does not take into account the time value of money.

Question 15

The payback method of making capital budgeting decisions does not give full consideration to the time value of money.

Question 16

When discounted cash flow methods of capital budgeting are used,the working capital required for a project is ordinarily counted as a cash inflow at the beginning of the project and as a cash outflow at the end of the project.

Question 17

In capital budgeting computations,discounted cash flow methods:

A)automatically provide for recovery of initial investment.
B)can't be used unless cash flows are uniform from year to year.
C)assume that all cash flows occur at the beginning of a period.
D)ignore all cash flows after the payback period.

Question 18

The project profitability index is used to compare the net present values of two investments that require different amounts of investment funds.

Question 19

Which of the following will have the largest dollar effect on the net present value of a 10 year investment project?

A)a decrease of $20,000 in the initial investment required with no effect on the expected salvage value in 10 years.
B)an increase of $20,000 in the expected salvage value in 10 years with no effect on the initial investment.
C)a decrease of $20,000 in both the working capital needed to start the project and the amount being released at the end of the 10 years.
D)an increase of $2,000 in the annual cash inflows from this project.

Question 20

In preference decision situations,a project with a lower net present value may be preferable to a project with a higher net present value.

Question 21

A company with $600,000 in operating assets is considering the purchase of a machine that costs $72,000 and which is expected to reduce operating costs by $18,000 each year.These reductions in cost occur evenly throughout the year.The payback period for this machine in years is closest to:

A)4 years
B)8.3 years
C)0.25 years
D)33.3 years

Question 22

The Zinger Corporation is considering an investment that has the following data: Cash inflows occur evenly throughout the year.The payback period for this investment is:

A)3.0 years
B)3.5 years
C)4.0 years
D)4.5 years

Question 23

Bullinger Corporation has provided the following data concerning an investment project that it is considering: The net present value of the project is closest to:

A)$93,000
B)$406,326
C)($63,674)
D)($79,658)

Question 24

Harrison Corporation is studying a project that would have an eight-year life and would require a $300,000 investment in equipment which has no salvage value.The project would provide net operating income each year as follows for the life of the project: The company's required rate of return is 10%.The payback period for this project is closest to:

A)3 years
B)2 years
C)2.5 years
D)2.67 years

Question 25

Naomi Corporation has a capital budgeting project that has a negative net present value of $36,000.The life of this project is 6 years.Naomi's discount rate is 20%.By how much would the annual cash inflows from this project have to increase in order to have a positive net present value?

A)$1,200 or more
B)$2,412 or more
C)$6,000 or more
D)$10,824 or more

Question 26

Jason Corporation has invested in a machine that cost $80,000,that has a useful life of eight years,and that has no salvage value at the end of its useful life.The machine is being depreciated by the straight-line method,based on its useful life.It will have a payback period of five years.Given these data,the simple rate of return on the machine is closest to:

A)6.8%
B)7.5%
C)9%
D)12%

Question 27

The investment required for the project profitability index should:

A)be reduced by the amount of any salvage recovered from the sale of old equipment.
B)be reduced by the amount of any salvage recovered from the sale of the new equipment at the end of its useful life.
C)be reduced by the amount of any salvage recovered from the sale of both the old and new equipment.
D)not be adjusted for the salvage value of old or new equipment.

Question 28

Correl Corporation has provided the following data concerning an investment project that it is considering: The life of the project is 4 years.The company's discount rate is 15%.The net present value of the project is closest to:

A)$38,500
B)$228,500
C)$135,000
D)$24,200

Question 29

The management of Helberg Corporation is considering a project that would require an investment of $203,000 and would last for 6 years.The annual net operating income from the project would be $103,000,which includes depreciation of $30,000.The scrap value of the project's assets at the end of the project would be $23,000.The cash inflows occur evenly throughout the year.The payback period of the project is closest to:

A)1.5 years
B)2.0 years
C)1.4 years
D)1.7 years

Question 30

Czlapinski Corporation is considering a capital budgeting project that would require an initial investment of $440,000 and working capital of $32,000.The working capital would be released for use elsewhere at the end of the project in 4 years.The investment would generate annual cash inflows of $147,000 for the life of the project.At the end of the project,equipment that had been used in the project could be sold for $11,000.The company's discount rate is 7%.The net present value of the project is closest to:

A)$66,282
B)$34,282
C)$159,000
D)$58,698

Question 31

Zabarkes Corporation is considering a capital budgeting project that would require an initial investment of $640,000 and working capital of $79,000.The working capital would be released for use elsewhere at the end of the project in 3 years.The investment would generate annual cash inflows of $205,000 for the life of the project.At the end of the project,equipment that had been used in the project could be sold for $29,000.The company's discount rate is 7%.The net present value of the project is closest to:

A)($13,952)
B)($92,952)
C)($157,416)
D)($25,000)

Question 32

Fimbrez Corporation has provided the following data concerning an investment project that it is considering: The net present value of the project is closest to:

A)$358,484
B)$360,000
C)($1,516)
D)$112,000

Question 33

Riveros,Inc. ,is considering the purchase of a machine that would cost $120,000 and would last for 8 years.At the end of 8 years,the machine would have a salvage value of $29,000.The machine would reduce labor and other costs by $25,000 per year.Additional working capital of $9,000 would be needed immediately.All of this working capital would be recovered at the end of the life of the machine.The company requires a minimum pretax return of 18% on all investment projects.The net present value of the proposed project is closest to:

A)($18,050)
B)($63,683)
C)($10,336)
D)($16,942)

Question 34

Beaver Corporation is investigating the purchase of a new threading machine that costs $18,000.The machine would save about $4,000 per year over the present method of threading component parts,and would have a salvage value of about $3,000 in 6 years when the machine would be replaced.The company's required rate of return is 12%.The machine's net present value is closest to:

A)$1,556
B)($35)
C)$11,000
D)$8,000

Question 35

Frick Road Paving Corporation is considering an investment in a curb-forming machine.The machine will cost $180,000,will last 10 years,and will have a $30,000 salvage value at the end of 10 years.The machine is expected to generate net cash inflows of $40,000 per year in each of the 10 years.Frick's discount rate is 10%.The net present value of the proposed investment is closest to:

A)$250,000
B)$65,800
C)$245,800
D)$77,380

Question 36

Neighbors Corporation is considering a project that would require an investment of $279,000 and would last for 8 years.The incremental annual revenues and expenses generated by the project during those 8 years would be as follows: The scrap value of the project's assets at the end of the project would be $15,000.The cash inflows occur evenly throughout the year.The payback period of the project is closest to:

A)2.0 years
B)2.6 years
C)2.5 years
D)1.9 years

Question 37

The best capital budgeting method for ranking investment projects of different dollar amounts is the:

A)project profitability index.
B)net present value method.
C)simple rate of return method.
D)payback period.

Question 38

The following data on a proposed investment project have been provided: The working capital would be released for use elsewhere at the end of the project.The net present value of the project is closest to:

A)$3,730
B)$0
C)$32,450
D)$88,370

Question 39

Peter wants to buy a computer which he expects to save him $4,000 each year in bookkeeping costs.The computer will last for five years,and at the end of five years it will have no salvage value.If Peter's required rate of return is 12%,what is the maximum price Peter should be willing to pay for the computer now?

A)$20,000
B)$14,420
C)$11,340
D)$10,830

Question 40

Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.The auto was purchased for $28,000 and will have a 6-year useful life and a $4,000 salvage value.Delivering prescriptions (which the pharmacy has never done before)should increase gross revenues by at least $32,000 per year.The cost of these prescriptions to the pharmacy will be about $25,000 per year.The pharmacy depreciates all assets using the straight-line method.The payback period for the auto is closest to:

A)4 years
B)1.8 years
C)2 years
D)1.2 years

Question 41

Schoultz Corporation has provided the following data concerning an investment project that it is considering: The life of the project is 4 years.The company's discount rate is 12%.The net present value of the project is closest to:

A)$700,000
B)$364,000
C)$108,108
D)$808,108

Question 42

Villena Corporation is considering a project that would require an investment of $48,000.No other cash outflows would be involved.The present value of the cash inflows would be $52,800.The profitability index of the project is closest to:

A)0.90
B)0.10
C)1.10
D)0.09

Question 43

The following data pertain to an investment proposal: The net present value of the proposed investment is closest to:

A)$4,713
B)$2,445
C)$2,268
D)$19,000

Question 44

Bevans Corporation is considering a capital budgeting project that would require an initial investment of $190,000.The investment would generate annual cash inflows of $58,000 for the life of the project,which is 4 years.The company's discount rate is 7%.The net present value of the project is closest to:

A)$190,000
B)$6,446
C)$196,446
D)$42,000

Question 45

The management of Cantell Corporation is considering a project that would require an initial investment of $47,000.No other cash outflows would be required.The present value of the cash inflows would be $55,930.The profitability index of the project is closest to:

A)1.19
B)0.81
C)0.19
D)0.16

Question 46

A project requires an initial investment of $70,000 and has a project profitability index of 0.932.The present value of the future cash inflows from this investment is:

A)$70,000
B)$36,231
C)$135,240
D)Cannot be determined from the data provideD.Project profitability index = Net present value of the project ÷ Investment required

Question 47

Tangen Corporation is considering the purchase of a machine that would cost $380,000 and would last for 6 years.At the end of 6 years,the machine would have a salvage value of $80,000.By reducing labor and other operating costs,the machine would provide annual cost savings of $104,000.The company requires a minimum pretax return of 14% on all investment projects.The net present value of the proposed project is closest to:

A)$104,456
B)$24,456
C)$133,753
D)$60,936

Question 48

Vinup Corporation has provided the following data concerning an investment project that it is considering: The working capital would be released for use elsewhere at the end of the project in 4 years.The company's discount rate is 13%.The net present value of the project is closest to:

A)$8,486
B)$36,737
C)$89,000
D)($36,263)

Question 49

Baker Corporation is considering buying a new donut maker.This machine will replace an old donut maker that still has a useful life of 4 years.The new machine will cost $3,500 a year to operate,as opposed to the old machine,which costs $3,900 per year to operate.Also,because of increased capacity,an additional 10,000 donuts a year can be produced.The company makes a contribution margin of $0.15 per donut.The old machine can be sold for $6,000 and the new machine costs $28,000.The incremental annual net cash inflows provided by the new machine would be:

A)$1,500
B)$400
C)$1,900
D)$7,000

Question 50

Crowley Corporation is considering three investment projects: F,G,and H.Project F would require an investment of $21,000,Project G of $49,000,and Project H of $82,000.No other cash outflows would be involved.The present value of the cash inflows would be $21,210 for Project F,$57,820 for Project G,and $95,120 for Project H.Rank the projects according to the profitability index,from most profitable to least profitable.

A)F,H,G
B)G,H,F
C)H,F,G
D)H,G,F

Question 51

Kingsolver Corporation has provided the following data concerning an investment project that it is considering: The working capital would be released for use elsewhere at the end of the project.The net present value of the project is closest to:

A)($118,495)
B)($51,000)
C)($89,791)
D)($105,791)

Question 52

The Gomez Corporation is considering two projects,T and V.The following information has been gathered on these projects: Based on this information,which of the following statements is (are)true? I.Project T has the highest ranking according to the project profitability index criterion.
II)Project V has the highest ranking according to the net present value criterion.

A)Only I
B)Only II
C)Both I and II
D)Neither I nor II

Question 53

Bowen Corporation is considering several investment proposals,as shown below: If the project profitability index is used,the ranking of the projects from most to least profitable would be:

A)D,C,A,B
B)D,B,A,C
C)B,A,C,D
D)D,A,B,C

Question 54

Sturn Corporation purchased a machine with an estimated useful life of seven years.The machine will generate cash inflows of $9,000 each year over the next seven years.If the machine has no salvage value at the end of seven years,if Stutz's discount rate is 10%,and if the net present value of this investment is $17,000 then the purchase price of the machine was closest to:

A)$43,812
B)$26,812
C)$17,000
D)$22,195

Question 55

Dul Corporation has provided the following data concerning an investment project that it is considering: The working capital would be released for use elsewhere at the end of the project in 3 years.The company's discount rate is 7%.The net present value of the project is closest to:

A)($61,872)
B)($9,648)
C)$10,000
D)$54,352

Question 56

Mujalli Corporation is considering a capital budgeting project that would require an initial investment of $200,000.The investment would generate annual cash inflows of $64,000 for the life of the project,which is 4 years.At the end of the project,equipment that had been used in the project could be sold for $10,000.The company's discount rate is 9%.The net present value of the project is closest to:

A)$14,376
B)$66,000
C)$214,376
D)$7,296

Question 57

The management of Edelmann Corporation is considering the following three investment projects: Rank the projects according to the profitability index,from most profitable to least profitable.

A)T,S,R
B)R,T,S
C)S,T,R
D)T,R,S

Question 58

The net present value of an investment project is $28,842 and its project profitability index is 0.1518.The initial investment in this project was:

A)$190,000
B)$25,041
C)$215,800
D)$185,200

Question 59

Valotta Corporation has provided the following data concerning an investment project that it is considering: The working capital would be released for use elsewhere at the end of the project.The net present value of the project is closest to:

A)$178,118
B)$201,988
C)$463,000
D)$131,988

Question 60

(Ignore income taxes in this problem)The management of Urbine Corporation is considering the purchase of a machine that would cost $350,000,would last for 6 years,and would have no salvage value.The machine would reduce labor and other costs by $79,000 per year.The company requires a minimum pretax return of 14% on all investment projects.The net present value of the proposed project is closest to:

A)($42,769)
B)$124,000
C)($93,877)
D)$56,493

Question 61

Chee Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation.Assume cash flows occur uniformly throughout a year except for the initial investment. The net present value on this investment is closest to:

A)$160,000
B)$240,024
C)$58,800
D)$26,750

Question 62

Jimba's,Inc. ,has purchased a new donut maker.It cost $20,000 and has an estimated life of 10 years.The following annual donut sales and expenses are projected: Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period on the new machine is closest to:

A)6.0 years
B)2.9 years
C)4.0 years
D)4.3 years

Question 63

The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000.The equipment would have a useful life of six years,with a salvage value of $29,000.This new equipment would be depreciated over its useful life by the straight-line method.It would replace existing equipment which is fully depreciated.The existing equipment has a salvage value now of $38,000.The anticipated annual revenues and expenses associated with the new equipment are: Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project. For this investment,the simple rate of return to the nearest tenth of a percent is:

A)43.7%
B)25.3%
C)30.4%
D)17.6%

Question 64

Jimba's,Inc. ,has purchased a new donut maker.It cost $20,000 and has an estimated life of 10 years.The following annual donut sales and expenses are projected: Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return on the new machine is closest to:

A)15%
B)16.7%
C)25%
D)23.3%

Question 65

Wombles Corporation is contemplating purchasing equipment that would increase sales revenues by $478,000 per year and cash operating expenses by $249,000 per year.The equipment would cost $738,000 and have a 9 year life with no salvage value.The annual depreciation would be $82,000.The simple rate of return on the investment is closest to:

A)19.9%
B)30.8%
C)31.0%
D)11.1%

Question 66

Carlson Manufacturing has some equipment that needs to be rebuilt or replaced.The following information has been gathered relative to this decision: Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.Regardless of which option is chosen,rebuild or replace,at the end of five years Carlson Manufacturing will have no future use for the equipment. If the new equipment is purchased,the present value of the annual cash operating costs associated with this alternative is:

A)($28,840)
B)($19,160)
C)($14,420)
D)($36,050)

Question 67

Chee Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation.Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the investment is closest to:

A)0.2 years
B)2.5 years
C)4.8 years
D)5.0 years

Question 68

Pro-Mate,Inc.is a producer of athletic equipment.The company is considering the purchase of a machine to produce baseball bats.The machine will cost $60,000 and have a 10-year useful life.The following annual revenues and expenses are projected: The machine will have no salvage value.Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return would be about:

A)26.7%
B)16.7%
C)25.0%
D)40.0%

Question 69

Baldock Inc.is considering the acquisition of a new machine that costs $420,000 and has a useful life of 5 years with no salvage value.The incremental net operating income and incremental net cash flows that would be produced by the machine are: Assume cash flows occur uniformly throughout a year except for the initial investment. If the discount rate is 12%,the net present value of the investment is closest to:

A)$330,000
B)$539,365
C)$119,365
D)$420,000

Question 70

Messersmith Corporation is investigating automating a process by purchasing a machine for $688,000 that would have an 8 year useful life and no salvage value.By automating the process,the company would save $160,000 per year in cash operating costs.The new machine would replace some old equipment that would be sold for scrap now,yielding $19,000.The annual depreciation on the new machine would be $86,000.The simple rate of return on the investment is closest to:

A)23.3%
B)11.1%
C)10.8%
D)12.5%

Question 71

Carlson Manufacturing has some equipment that needs to be rebuilt or replaced.The following information has been gathered relative to this decision: Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.Regardless of which option is chosen,rebuild or replace,at the end of five years Carlson Manufacturing will have no future use for the equipment. If the new equipment is purchased,the present value of the cash flows that occur now is:

A)($48,000)
B)($39,000)
C)($41,000)
D)($37,000)

Question 72

Baldock Inc.is considering the acquisition of a new machine that costs $420,000 and has a useful life of 5 years with no salvage value.The incremental net operating income and incremental net cash flows that would be produced by the machine are: Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period of this investment is closest to:

A)5.0 years
B)3.2 years
C)1.9 years
D)2.8 years

Question 73

The management of Stanforth Corporation is investigating automating a process.Old equipment,with a current salvage value of $24,000,would be replaced by a new machine.The new machine would be purchased for $516,000 and would have a 6 year useful life and no salvage value.By automating the process,the company would save $173,000 per year in cash operating costs.The simple rate of return on the investment is closest to:

A)17.7%
B)16.9%
C)33.5%
D)16.7%

Question 74

The management of Duker Corporation is investigating purchasing equipment that would increase sales revenues by $130,000 per year and cash operating expenses by $39,000 per year.The equipment would cost $328,000 and have an 8 year life with no salvage value.The simple rate of return on the investment is closest to:

A)12.5%
B)27.7%
C)38.5%
D)15.2%

Question 75

An expansion at Fidell,Inc. ,would increase sales revenues by $75,000 per year and cash operating expenses by $38,000 per year.The initial investment would be for equipment that would cost $135,000 and have a 5 year life with no salvage value.The annual depreciation on the equipment would be $27,000.The simple rate of return on the investment is closest to:

A)20.0%
B)7.4%
C)27.4%
D)13.3%

Question 76

Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $250,000 and would have a ten-year useful life.Unfortunately,the new machine would have no salvage value.The new machine would cost $12,000 per year to operate and maintain,but would save $55,000 per year in labor and other costs.The old machine can be sold now for scrap for $10,000.The simple rate of return on the new machine is closest to:

A)17.9%
B)7.5%
C)22.0%
D)7.2%

Question 77

The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000.The equipment would have a useful life of six years,with a salvage value of $29,000.This new equipment would be depreciated over its useful life by the straight-line method.It would replace existing equipment which is fully depreciated.The existing equipment has a salvage value now of $38,000.The anticipated annual revenues and expenses associated with the new equipment are: Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project. The payback period is closest to:

A)5.7 years
B)4.0 years
C)2.3 years
D)1.8 years

Question 78

Carlson Manufacturing has some equipment that needs to be rebuilt or replaced.The following information has been gathered relative to this decision: Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.Regardless of which option is chosen,rebuild or replace,at the end of five years Carlson Manufacturing will have no future use for the equipment. If the equipment is rebuilt,the present value of the cash flows that occur now is:

A)($55,000)
B)($25,000)
C)($16,000)
D)($23,000)

Question 79

Chee Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation.Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return on the investment is closest to:

A)12.5%
B)10.0%
C)20.8%
D)8.3%

Question 80

Pro-Mate,Inc.is a producer of athletic equipment.The company is considering the purchase of a machine to produce baseball bats.The machine will cost $60,000 and have a 10-year useful life.The following annual revenues and expenses are projected: The machine will have no salvage value.Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the new machine is about:

A)6.0 years
B)1.5 years
C)5.4 years
D)3.75 years