Question 1

Which of the following must be estimated in order to compute the net present value of an investment?

Accepted Answer

A)  Cost of capital,future cash flows,and initial cost
B)  Cost of capital,future cash flows,or initial cost
C)  Initial cost,future cash flows,and residual value
D)  Initial cost,future income tax rates,and residual value A

Question 2

Mendocino Company is contemplating the acquisition of a new copier that will cost the company $10,900.The copier is expected to last 6 years,after which it will be discarded.Mendocino's cost of capital is 9%,and the copier is expected to reduce annual cash expenditures by the following amounts:
  Ignoring income taxes,determine the net-present-value of the investment in the copier.Should Mendocino purchase the copier?

Accepted Answer

Net-present value = $9,618 - $10,900 = $(1,282)
Mendocino should not purchase the copier because given the projected cash flow this investment will not generate the 9% return required.

Question 3

If the net-present value of an investment is negative,which of the following is true?

Accepted Answer

A)  The negative amount represents the cash the company will lose if it makes theInvestment.
B)  The negative amount represents the amount the price of the investment must decreaseBefore the company would consider buying the operational asset.
C)  The negative amount represents the difference between actual return and expectedRate of return.
D)  The negative amount represents the difference in the expected rate of return and theCost of capital. B

Question 4

Use the following to answer questions 
Forecaster Industries is considering the purchase of a new machine that will cost the company $65,750. The machine is estimated to have a 5 year life and no salvage value. The machine is expected to generate $23,000 of cash inflows each year over the life of the asset. Forecaster's cost of capital is 12%.
-Ignoring income taxes,the net-present-value of the investment in the machine is:

Accepted Answer

A)  $(16,500) 
B)  $(499) 
C)  $ 14,614
D)  $ 17,160

Question 5

Burke Shoes sold machinery with a cost of $96,300 and accumulated depreciation of $54,200 for $32,500 cash.If Burke's income tax rate is 30%,the after-tax cash inflow from the sale of the machinery was:

Accepted Answer

A)  $39,220
B)  $32,500
C)  $22,750
D)  $35,380

Question 6

Champion Contractors had earnings before interest of $3,500,000 for its most recent year-end.Total debt amounted to $5,000,000 and total stockholders' equity was $20,000,000.The debt carried an interest rate of 7%,while stockholders were demanding an 15% rate of return.Ignoring income taxes,determine the firm's cost of capital.

Accepted Answer

The answer of Champion Contractors had earnings before interest of...

Question 7

Use the following to answer questions 
Briarwood Enterprises is considering the purchase of some new equipment that will cost the company $151,800. The equipment is estimated to have a 6 year life and no salvage value. The equipment is expected to generate $34,000 of cash inflows each year over the life of the asset. Briarwood's cost of capital is 10%.
-Ignoring income taxes,the net-present-value of the investment in the equipment is:

Accepted Answer

A)  $(41,270) 
B)  $(3,721) 
C)  $4,800
D)  $40,130

Question 8

Horizons,Inc.paid $232,500 for a machine shipped FOB shipping point.Freight costs totaled $4,500,the sales tax was $11,300,and installation amounted to $9,800,with an additional $1,600 spent to repair the machine after a worker dropped it during installation.The total cost of the machine for accounting purposes was:

Accepted Answer

A)  $232,500
B)  $248,400
C)  $258,100
D)  $259,700

Question 9

All of the following are operational investments except an investment in:

Accepted Answer

A)  corporate bonds
B)  machinery
C)  a building
D)  a patent

Question 10

The net-present-value method uses a discount rate equal to the:

Accepted Answer

A)  prime rate
B)  firm's cost of capital
C)  firm's return on assets
D)  rate of return demanded by stockholders

Question 11

A method for assessing how changes in cash flows and/or cost of capital would affect a investment decision is

Accepted Answer

A)  capital budgeting
B)  sensitivity analysis
C)  net present value analysis
D)  time-adjusted rate of return analysis

Question 12

Huntel Systems,Inc.is considering the purchase of a new machine that will cost the company $309,700.The machine is estimated to have a 7 year life and no salvage value.The machine is expected to generate $61,500 of net cash inflows each year over its useful life.Huntel's cost of capital is 12%.Ignoring income taxes,determine the maximum price Huntel should pay for this machine.What is the net-present-value of the investment in the machine? Should Huntel purchase the machine?

Accepted Answer

The answer of Huntel Systems,Inc.is considering the purchase of a...

Question 13

After arriving at a positive net present value,you recently presented an investment proposal to the CFO of your company.The CFO remarks that income tax rates are expected to decrease in the next few years.How will a decrease in estimated tax rates affect the net present value?

Accepted Answer

A)  increase
B)  decrease
C)  no effect
D)  unable to determine from the information given

Question 14

Use the following to answer questions 
Union Company is contemplating the acquisition of a new computer that will cost the company $19,500. The computer is expected to last 4 years, after which time it will be discarded. Union's cost of capital is 10%, and use of the computer is expected to reduce the company's annual cash operating costs by the following amounts:
 
-Ignoring income taxes,the net-present-value of the investment in the computer is:

Accepted Answer

A)  $(3,791) 
B)  $(709) 
C)  $3,500
D)  $10,781

Question 15

Londo Company has a zero net present value based on a 10% cost of capital.What is the expected rate of return for this project?

Accepted Answer

A)  10%
B)  less than 10%
C)  more than 10%
D)  unable to determine from the information given

Question 16

In which of the following steps in the capital budgeting process would net present value be used?

Accepted Answer

A)  Identifying long-term investment opportunities
B)  Selecting the appropriate investments
C)  Financing the selected investments
D)  Evaluating the investments

Question 17

The last step in the capital budgeting process is:

Accepted Answer

A)  Identifying long-term investment opportunities
B)  Selecting the appropriate investments
C)  Financing the selected investments
D)  Evaluating the investments

Question 18

Which of the following statements about the effect of depreciation on cash flows is correct?

Accepted Answer

A)  It does not affect cash flows because it is a non-cash expense
B)  It directly increases cash outflows,just like any other expense
C)  It decreases cash outflows because it reduces a firm's income tax liability
D)  It affects cash flows only in those cases where an investment produces future revenues

Question 19

If a firm sells an asset at a gain,this indicates that the sales proceeds exceeded the

Accepted Answer

A)  cost of the asset
B)  fair value of the asset
C)  book value of the asset
D)  accumulated depreciation on the asset

Question 20

Which one of the following is not a reason for making an operational investment?

Accepted Answer

A)  Need to replace worn-out equipment or facilities.
B)  Need to keep up with technological advances.
C)  To take advantage of low interest rate financing.
D)  To expand operating capacity.
E)  All of the above are reasons to acquire long-term operating investment.

Exam 12: Planning Investments: Capital Budgeting