Deck 19: Capital Investment

Question 1

Computation of cash flows is the most critical step in the capital investment process.

Answer 1

True

Question 2

If the net present value is greater than zero, the investment is profitable and acceptable.

Answer 2

True

Question 3

Capital investment decisions are concerned with planning, setting goals, arranging financing, and the selection of long-term assets.

Answer 3

True

Question 4

The internal rate of return (IRR) is the most widely used capital investment technique because it's an easily
understood concept.

Question 5

In an independent project, the required rate of return is used to calculate the future value of future cash flows.

Question 6

Nondiscounting models for making capital investments explicitly consider the time value of money.

Question 7

In today's markets, long­term investments in technology and pollution prevention can provide significant competitive
advantages.

Question 8

Net present value (NPV) is the difference between the present value of cash inflows and outflows associated with a project.

Question 9

the two ways to compute after-tax cash flows are the income method and the composition method.

Question 10

If the internal rate of return (IRR) is less than the cost of capital, then the investment is acceptable.

Question 11

The accounting rate of return considers the profitability of a project as well as the time value of money.

Question 12

Discounted cash flows are used by discounting models which are future cash flows expressed in terms of their present value.

Question 13

When conflicting signals are received from using NPV and IRR, NPV always produces the correct signal to invest.

Question 14

Mutually exclusive projects are those which preclude the acceptance of all other competing projects.

Question 15

Independent projects directly affect the cash flows of other projects once accepted or rejected.

Question 16

NPV is preferred to IRR because it assumes that each cash inflow is not reinvested at the required rate of return.

Question 17

Discounting models for making capital decisions ignore the time value of money.

Question 18

The payback period is the time required for a company to recover its initial investment.

Question 19

NPV reveals the wealth-maximization of a project more consistently than IRR.

Question 20

The internal rate of return (IRR) is the interest rate that sets the present value of cash inflows of a project equal to
the present value of a project's cost.

Question 21

The time required by a firm to recover its original investment is called the period.

Question 22

RentitAll Management Services is considering an investment of $60,000. Data related to the investment are as follows: Cost of capital is 18 percent.
What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

A) 3.00
B) 2.53
C) 2.00
D) 2.22

Question 23

Accelerated methods of are preferred because of the tax benefits created.

Question 24

Mutually exclusive projects do not affect the of other projects.

Question 25

Which of the following is NOT an example of information the payback period can provide to management?

A) Minimize the impact of an investment on a firm's liquidity performance.
B) Help control the risks associated with the uncertainty of future cash flows.
C) Help control the risk of obsolescence.
D) Helps determine the project's total profitability.

Question 26

Capital investment decisions are concerned with planning, setting goals, arranging financing, and the selection of
__________ assets.

Question 27

When comparing the payback method and the accounting rate of return methods, which of the following is true?

A) IV
B) III
C) II
D) I

Question 28

The required is used to calculate the present value of future cash flows.

Question 29

The difference between the present value of future cash flows and the initial investment outlay is called the
__________ value.

Question 30

Which of the following is an example of an independent project?

A) A manufacturing plant considering a major overhaul of an existing machine or replacing the existing machine with a new model.
B) A hospital considering the purchase of a new MRI machine and a new cardiac monitoring system.
C) A bank deciding between keeping a manual check sorting process or an automated sort process.
D) A retailer deciding between an inventory management system offered by two different vendors.

Question 31

Decisions concerned with the process of planning, setting goals and priorities, arranging financing, and using certain criteria to select long-term assets are called:

A) Limited resources
B) Capital investment
C) Sell now or process further
D) Make-or-buy

Question 32

Langueville Manufacturing Company is considering the following investment proposal: The firm uses the straight-line method of depreciation with no mid-year convention.
What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

A) 1.75
B) 1.50
C) 3.0
D) 3.5

Question 33

Projects that, if accepted preclude the acceptance of all other competing projects are called:

A) Mutually exclusive projects
B) Independent projects
C) Dependent projects
D) Both b and c

Question 34

The rate of return sets the present value of cash inflows equal to the present value of a project's
cost.

Question 35

Azimuth Company was considering the purchase of equipment. Details on the equipment are as follows: What is the payback period in years, assuming no taxes are paid?

A) 4.33
B) 4.00
C) 5.00
D) 3.85

Question 36

Projects that if accepted or rejected do NOT affect the cash flows of projects are called:

A) Dependent projects
B) Mutually exclusive projects
C) Independent projects
D) Both b and c

Question 37

The accounting rate of return on original investment is calculated as

A) original investment/net income.
B) net income/debt.
C) average income/original investment.
D) assets/debt.

Question 38

NVP measures the in a firm's wealth caused by a project.

Question 39

The rate of return uses income instead of cash flows.

Question 40

Investment outlays may be affected by substantial resources required by items.

Question 41

Davidson, Inc., is considering the purchase of production equipment that costs $300,000. The equipment is expected to generate an annual cash flow of $100,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 14 percent. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. Payback for the project is

A) 3.00 years.
B) 3.50 years.
C) 5.00 years.
D) 2.38 years.

Question 42

A firm is evaluating a project that has a net present value of $0 when a discount rate of 8 percent is used. A discount rate of 6 percent will result in a

A) negative net present value.
B) positive net present value.
C) net present value of $0.
D) the question cannot be answered based upon the information provided.

Question 43

Avionics Corp. is considering the purchase of a new machine for $76,000. The machine would generate an annual cash flow of $23,214 per year for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention. What is the net present value for the machine, assuming no taxes are paid?

A) $-0-
B) $7,686
C) $76,000
D) $(185,500)

Question 44

Spaniel Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the accounting rate of return on the original investment in the machine approximated to two decimal points?

A) 9.58%
B) 19.17%
C) 15.97%
D) 35.97%

Question 45

Alberto Company is considering the purchase of a new machine for $110,000. The machine generates annual revenues of $68,750 and annual expenses of $41,250, which includes $8,250 of depreciation. What is the payback period in years on the machine approximated to one decimal point?

A) 1.6
B) 1.7
C) 3.1
D) 4.0

Question 46

Evaristo Corporation is considering an investment in equipment for $45,000. Data related to the investment are as follows: Cash Flow before
Year Depreciation and Taxes
1 $30,000
2 30,000
3 30,000
4 30,000
5 30,000
Cost of capital is 18 percent.
Evaristo uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value.
What is the payback period in years approximated to two decimal points?

A) 1.00
B) 0.67
C) 1.50
D) 2.08

Question 47

Los Gatos Shop is considering the purchase of a used wide-format printer costing $9,600. The wide-format printer would generate a net cash inflow of $4,000 per year for three years. At the end of three years, the printer would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid?

A) 8.33%
B) 41.67%
C) 75.00%
D) 10.00%

Question 48

Milagros Company is considering an investment in equipment for $60,000. Milagros uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent and the life of the equipment is five years with no salvage value. The expected income before depreciation and taxes is projected to be $30,000 per year. What is the payback period in years approximated to two decimal points?

A) 4.00
B) 2.63
C) 2.00
D) 1.00

Question 49

A project requires an investment of $40,000 in equipment. Annual cash flows of $8,000 are expected to occur for the next eight years. No salvage value is expected. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The accounting rate of return on the original investment for the project is

A) 6.25%.
B) 7.50%.
C) 16.00%.
D) 20.00%.

Question 50

Melancholy Company is considering the purchase of production equipment that costs $800,000. The equipment is expected to generate an annual cash flow of $250,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 12 percent. The company uses the straight-line method of depreciation with no mid- year convention. There are no income taxes. The payback period in years for the project is

A) 3.20 years.
B) 3.25 years.
C) 2.90 years.
D) 4.20 years.

Question 51

Sansariff Company invests in a new piece of equipment costing $40,000. The equipment is expected to yield the following amounts per year for the equipment's four-year useful life: What is the net present value of this investment in equipment, assuming no taxes are paid?

A) $(4,480)
B) $52,452
C) $41,592
D) $81,592

Question 52

If the net present value is positive, it could signal

A) a return in excess of the initial investment or required rate of return has been received.
B) the required rate of return has not been achieved.
C) the initial investment has not been recovered.
D) a decrease in wealth for the firm.

Question 53

Beduin Services is considering an investment of $25,000. Data related to the investment are as follows: Cost of capital is 14 percent.
What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

A) 2.12
B) 4.00
C) 3.00
D) 2.50

Question 54

A firm is evaluating a project that has a net present value of $0 when a discount rate of 9 percent is used. A discount rate of 7 percent will result in a

A) negative net present value.
B) positive net present value.
C) net present value of $0.
D) the question cannot be answered based upon the information provided.

Question 55

Which of the following methods uses income instead of cash flows?

A) payback
B) accounting rate of return
C) internal rate of return
D) net present value

Question 56

Anselmo Corp. is considering the purchase of a new machine for $76,000. The machine would generate an annual cash flow of $23,214 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention. What is the payback period in years for the machine approximated to two decimal points, assuming no taxes are paid?

A) 3.00
B) 3.27
C) 9.48
D) 4.00

Question 57

Hollister Company is considering the purchase of a new machine for $60,000. The machine would generate an annual cash flow before depreciation and taxes of $25,647 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the accounting rate of return on the original investment in the machine approximated to two decimal points?

A) 17.75%
B) 12%
C) 10.65%
D) 25.65%

Question 58

Joyous Corporation is considering an investment in equipment for $25,000. Data related to the investment are as follows: Cash Flow before
Year Depreciation and Taxes
1 $12,500
2 12,500
3 12,500
4 12,500
Joyous uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent.
What is the payback period in years approximated to two decimal points?

A) 2.00
B) 2.50
C) 3.33
D) 0.40

Question 59

Gunslinger Company is considering the purchase of pipe cutting equipment. Data on the equipment are as follows: The company uses the straight-line method of depreciation with no mid-year convention.
What is the accounting rate of return on original investment rounded to the nearest percent, assuming no taxes are paid?

A) 22.86%
B) 2.86%
C) 18%
D) 4.86%

Question 60

Edmundo Services is considering an investment of $25,000. Data related to the investment are as follows: Cost of capital is 14 percent.
What is the net present value of the investment, assuming no taxes are paid?

A) $14,825
B) $14,294
C) $25,000
D) $39,294

Question 61

The present value of $10,000 to be received ten years from now and earning a 12 percent return (rounded) is

A) $2,200.
B) $2,484.
C) $3,160.
D) $3,220.

Question 62

Los Gatos Shop is considering the purchase of a used wide-format printer costing $9,600. The wide-format printer would generate a net cash inflow of $4,000 per year for three years. At the end of three years, the printer would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the net present value for the press, assuming no taxes are paid?

A) $2,400
B) $9,948
C) $348
D) $9,600

Question 63

Canyon Company is considering an investment of $45,000. Data related to the investment are as follows: Cost of capital is 18 percent.
What is the net present value of the investment, assuming no taxes are paid?

A) $10,500
B) $55,500
C) $61,366
D) $16,367

Question 64

A firm is considering a project with an annual cash flow of $200,000. The project would have a 7-year life, and the company uses a discount rate of 10 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable?

A) $718,200
B) $1,400,000
C) $973,600
D) $200,000

Question 65

Somozas Manufacturing Company is considering the following investment proposal: The firm uses the straight-line method of depreciation with no mid-year convention.
What is the net present value for the investment, assuming no taxes are paid?

A) $500
B) $1,500
C) $12,500
D) $1,802.50

Question 66

A firm is considering a project with an annual cash flow of $80,000. The project would have a 10-year life, and the company uses a discount rate of 8 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

A) $800,000
B) $536,800
C) $406,420
D) $727,208

Question 67

The following information pertains to an investment: Ignoring income taxes, the present value of the salvage value (rounded) is

A) $31,346.
B) $34,614.
C) $35,500.
D) $46,440.

Question 68

The present value of $10,000 to be received each year for ten years and earning a 14 percent return (rounded) is

A) $11,600.
B)$26,000.
C)$52,160.
D)$52,436.

Question 69

The following information pertains to an investment by the Town of Sutton: Ignore income taxes. The present value of the salvage value (rounded) is

A) $5,738.
B) $4,848.
C) $6,228.
D) $6,448.

Question 70

The present value of $7,500 to be received each year for five years and earning an 10 percent return (rounded) is

A) $28,433.
B) $8,250.
C) $14,717.
D) $33,750.

Question 71

Laramie Corporation is considering an investment in equipment for $20,000. Laramie uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value. The expected income before depreciation and taxes is projected to be $10,000 per year. The cost of capital is 20 percent. What is the net present value of the investment?

A) $(1,366)
B) $2,732
C) $22,991
D) $22,000

Question 72

The present value of $4,000 to be received each year for three years and earning a 10 percent return (rounded) is

A) $11,120.
B) $9,948.
C) $9,822.
D) $9,200.

Question 73

Clemente Company is considering the purchase of a new machine for $160,000. The machine would generate an annual cash flow before depreciation and taxes of $62,588 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the net present value for the machine?

A) ($45,952)
B) $162,640
C) $30,080
D) $2,640

Question 74

The present value of $20,000 to be received five years from now and earning a 6 percent return (rounded) is

A) $14,000.
B) $14,940.
C) $15,784.
D) $16,420.

Question 75

Spiritlight Ventures is considering the following investment: Ignore income taxes. The present value of the annual cash flow (rounded) is

A) $218,592.
B) $204,884.
C) $152,538.
D) $136,822.

Question 76

MakeitRite Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the net present value for the machine?

A) $-0-
B) $5,318
C) $85,318
D) $23,744

Question 77

The present value of $4,000 to be received three years from now and earning a 12 percent return (rounded) is

A) $2,848.
B) $2,520.
C) $4,880.
D) $5,440.

Question 78

A capital investment project requires an investment of $100,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Ignoring income taxes, the net present value of the project using a 8 percent discount rate is

A) $20,320
B) $49,680
C) ($49,680)
D) ($20,320)

Question 79

Galveston Corporation is considering an investment in equipment for $45,000. Data related to the investment are as follows: Cash Flow before
Year Depreciation and Taxes 1 $30,000
2 30,000
3 30,000
4 30,000
5 30,000
Cost of capital is 18 percent.
Galveston uses the straight-line method of depreciation with no mid-year convention. In addition, their tax rate is 40 percent, and the life of the equipment is five years with no salvage value.
What is the net present value of the investment?

A) $67,543
B) $22,543
C) $48,810
D) $11,286

Question 80

Jacuzzi Corporation is considering an investment in equipment for $25,000. Data related to the investment are as follows: Cash Flow before
Year Depreciation and Taxes 1 $12,500
2 12,500
3 12,500
4 12,500
Jacuzzi uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent.
What is the net present value of the investment?

A) $5,370
B) $(2,222)
C) $12,962
D) $30,370