Deck 13: Fundamentals of Project Evaluation

Question 1

A project should be accepted as long as the present value of the expected net receipts it generates equals or exceeds its price the net outlay required).

Answer 1

True

Question 2

The net present value NPV) of an investment is the present value of its net cash inflows minus the present value of its cost outlays.

Answer 2

True

Question 3

A project has an anticipated stream of annual net receipts of $1,000. Its life is 12 years. No salvage value is expected. If the project's price is $6,000 and the applicable discount rate is 12%, the net present value of the project is $194.40.

Answer 3

True

Question 4

Discounting is the process of computing the present value of sums of money to be received in the future.

Question 5

A project should be accepted as long as the present value of the expected net receipts it generates is less than its price the net outlay required).

Question 6

The future value of a sum of money held today is the amount that would be accumulated at some future date if we invested that sum of money now at a particular rate of interest.
True

Question 7

A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. If the price of the project is $80,000 and the applicable discount rate is 10%, the net present value of the project is $7,106.

Question 8

Capital budgeting is the analysis of alternative investment opportunities by a firm.

Question 9

An annuity is a variable amount payable at the beginning of each year for an indeterminate number of years.

Question 10

Compounding is the process of computing the value of a current sum of money at some future date.

Question 11

Afterthought Construction Co. is about to sell some used equipment to ABC Leasing. ABC has offered the following two payment schemes: a) $50,000 now and $200,000 at the end of seven years or b) $50,000 now, $50,000 at the end of two years, $50,000 at the end of five years, and $150,000 at the end of ten years. If the applicable discount rate for either transaction is 8%, the better payment scheme is scheme a).

Question 12

The discount rate is the rate of interest used to compute present value.

Question 13

Afterthought Construction Co. is about to sell some used equipment to ABC Leasing. ABC has offered the following two payment schemes: a) $50,000 now and $200,000 at the end of seven years or b) $50,000 now, $50,000 at the end of two years, $50,000 at the end of five years, and $150,000 at the end of ten years. If the applicable discount rate for either transaction is 8%, the net present value of option a) is $166,700 and b) $196,375.

Question 14

The present value of a future payment or series of payments represents the amount received today that would be equivalent in value to the future payment or payments.

Question 15

Compounding is the process of computing the present value of sums of money to be received in the future.

Question 16

An annuity is a constant amount payable at the end of each year for a specified number of years.

Question 17

Discounting is the process of computing the value of a current sum of money at some future date.

Question 18

The future value of a sum of money held today is the amount received today that would be equivalent in value to the future payment or payments.

Question 19

The present value of a future payment or series of payments represents the amount that would be accumulated at some future date if we invested that sum of money now at a particular rate of interest.

Question 20

A project has an anticipated stream of annual net receipts of $25,000. Its life is 10 years. No salvage value is expected at the end of the 10 years. If the price of the project is $150,000 and the applicable discount rate is 8%, the net present value of the project is $167,752.50

Question 21

The amount received today that would be equivalent in value to a future payment or series of payments represents the:

A) present value.
B) discounted value.
C) equivalent value.
D) future value.
E) net present value.

Question 22

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, plus the incremental depreciation associated with the project.

Question 23

The amount that would be accumulated at some future date if we invested a sum of money held today at a particular rate of interest is called the:

A) present value.
B) discounted value.
C) equivalent value.
D) future value.
E) net present value.

Question 24

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, multiplied by 1 - T), where T is the firm's marginal income tax rate.

Question 25

The marginal cost of capital MCC) is calculated as a weighted average of the after-tax cost of funds from each source.

Question 26

In determining the price or initial cash outlay of a project, it is necessary to consider the following items:

A) initial outlays for land, buildings and equipment.
B) developmental costs for the undertaking itself and the product it is intended to produce.
C) the cost to the firm of any increase in working capital requirements attributable to the project.
D) if applicable, the after tax salvage value of any existing equipment.
E) all of the above.

Question 27

An investment project is acceptable if its NPV is less than or equal to zero.

Question 28

The analysis of alternative investment opportunities by a firm is the focus of:

A) the concept of equivalency.
B) compounding.
C) discounting.
D) capital budgeting.
E) cost of capital analysis.

Question 29

An investment project is acceptable if its NPV is greater than or equal to zero.

Question 30

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, multiplied by 1 - T), where T is the firm's marginal income tax rate, plus the incremental depreciation associated with the project.

Question 31

A project should be accepted as long as:

A) the present value of the expected net receipts it generates equals or exceeds its price the net outlay required).
B) the present value of the expected net receipts it generates is less than its price the net outlay required).
C) its NPV is greater than zero.
D) its NPV is less than zero.
E) its IRR is less than the cost of capital.

Question 32

The internal rate of return IRR) for a project is the discount rate that will result in the largest possible net present value for the project.

Question 33

The net present value NPV) of an investment is the present value of its net cash inflows.

Question 34

The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm.

Question 35

The internal rate of return IRR) for a project is the discount rate that will result in a net present value of zero for the project.

Question 36

The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm, and is calculated as a weighted average of the after-tax cost of funds from each source.

Question 37

Capital budgeting is:

A) the analysis of alternative investment opportunities by a firm.
B) the planning of cash flows for projects that last longer than one year.
C) the planning for the investment of excess capital.
D) the planning for obtaining funds to meet short term cash flow needs.
E) the development of methods for obtaining outside capital for firm expansion.

Question 38

The process by which we determine the present value of an amount to be received at some time in the future is called:

A) the concept of equivalency.
B) compounding.
C) discounting.
D) capital budgeting.
E) future value.

Question 39

The process of computing the value of a current sum of money at some future date is called:

A) discounting.
B) capital budgeting.
C) present value analysis.
D) compounding.
E) net present value analysis.

Question 40

The marginal cost of capital MCC) is the discount rate which represents the average cost of investment funds to the firm, and is calculated as a weighted average of the after-tax cost of all funds used in the capital budget.

Question 41

Pronto Delivery is contemplating an investment in a delivery truck. The estimate of the project's price is $22,000. The delivery truck will have a life of 5 years and have a salvage value of $2,000. Annual net cash flows from the five years of operations are expected to be $6,000. If Pronto's applicable discount rate is 10%, what is the net present value of this project? Is the project acceptable?

A) NPV = -$1,986.60 and is unacceptable
B) NPV = -$1,986.60 and is acceptable
C) NPV = $1,986.60 and is unacceptable
D) NPV = $1,986.60 and is acceptable
E) None of the above

Question 42

Pave-It, Inc. is trying to decide whether to purchase a new paving machine, a new mixer or to upgrade the cement finishing machine. All of the alternatives are viewed as having the same ten year project life and none are expected to have any salvage value. However, different project prices are applicable to each and each has a different expected stream of annual net cash inflows. The firm's managers believe that a discount rate of 12 percent is appropriate for evaluating the alternatives. Data are as follows:
Annual
Project Price Net Inflows
A) New Paving Machine $25,000 $5,000
B) New Mixer for the Plant $17,000 $4,000
C) Upgrade Cement Finishing $15,000 $3,000
Machine
After examining the project prices, management finds it has sufficient capital budget to complete two of them. Which two projects will be undertaken and what is their net present value?

A) Paving Machine = 3251, Mixer = 5600.80
B) Paving Machine = 3251, Cement Finisher = 1950.60
C) Mixer = 5600.80, Cement Finisher = 5910.60
D) Mixer = 3251, Paving Machine = 1950.60
E) Cement Finisher = 5600.80, Paving Machine =1950

Question 43

A project has an anticipated stream of annual net receipts of $25,000. Its life is 10 years. No salvage value is expected at the end of the 10 years. Compute the net present value of the project, if its price is $150,000 and the applicable discount rate is 8%.

A) -138,420.00
B) -96,027.50
C) 17,752.50
D) 162,187.50
E) 167,752.50

Question 44

A constant amount payable at the end of each year for a specified number of years is:

A) a present value.
B) a future value.
C) a discounted value.
D) an annuity.
E) a net present value.

Question 45

The discount rate that will result in a net present value of zero for the project is called the:

A) the present value of the project.
B) the internal rate of return of the project.
C) the net present value of the project.
D) net cash flow of the project.
E) profit of the project.

Question 46

The interest rate which is used in the determination of the present value is called the:

A) compounding rate.
B) discount rate.
C) future value rate.
D) internal rate of return.
E) the leverage rate.

Question 47

The present value of an investment's net cash inflows minus the present value of its cost outlays is called the:

A) present value.
B) future value.
C) net present value.
D) discounted value.
E) present annuity value.

Question 48

A project has an anticipated stream of annual net receipts of $25,000. Its life is 10 years. No salvage value is expected at the end of the 10 years. Compute the net present value of the project, if its price is $150,000 and the applicable discount rate is 9%.

Question 49

A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. Compute the net present value of the project, if its price is $80,000 and the applicable discount rate is 8%.

Question 50

A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. Compute the net present value of the project, if its price is $80,000 and the applicable discount rate is 10%.

Question 51

A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. Compute the net present value of the project, if its price is $80,000 and the applicable discount rate is 12%.

Question 52

Afterthought Construction Co. is about to sell some used equipment to ABC Leasing. ABC has offered the following two payment schemes: a) $50,000 now and $200,000 at the end of seven years or b) $50,000 now, $50,000 at the end of two years, $50,000 at the end of five years, and $150,000 at the end of ten years. If the applicable discount rate for either transaction is 8%, what are the net present values for both payment schemes?

A) a) = 162,000 b) = 196,378
B) a) = 162,000 b) = 198,000
C) a) = 166,700 b) = 196,378
D) a) = 166,700 b) = 208,738
E) a) = 183,500 b) = 210,00

Question 53

Any increase in revenues brought about by a project less any increase in operating expenses and depreciation brought about by the project, multiplied by 1 - T), where T is the firm's marginal income tax rate, plus the incremental depreciation associated with the project is called the:

A) the present value of the project.
B) the internal rate of return of the project.
C) the net present value of the project.
D) net cash flow of the project.
E) profit of the project.

Question 54

A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. Compute the net present value of the project, if its price is $80,000 and the applicable discount rate is 9%.

Question 55

A project has an anticipated stream of annual net receipts of $25,000. Its life is 10 years. No salvage value is expected at the end of the 10 years. Compute the net present value of the project, if its price is $150,000 and the applicable discount rate is 8%.

Question 56

The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm, and:

A) is calculated as a weighted average of the after-tax cost of the last dollar raised from each source.
B) is calculated as a weighted average of the after-tax cost of all funds used in the capital budget.
C) is calculated as a weighted average of the before-tax cost of the last dollar raised from each source.
D) calculated as a weighted average of the before-tax cost of all funds used in the capital budget.
E) is calculated as a weighted average of the after-tax cost of funds raised from bank and bond borrowings.

Question 57

A project has an anticipated stream of annual net receipts of $1,000. Its life is 12 years. No salvage value is expected. What is the net present value of the project, if its price is $6,000 and the applicable discount rate is 12%?

A) 194.40
B) 1440.00
C) 6194.40
D) 7440.00
E) none of the above

Question 58

If the internal rate of return project evaluation method is utilized an individual project would be accepted if it had:

A) an IRR greater than the discount rate.
B) a positive IRR.
C) an IRR that was less than the discount rate.
D) an IRR equal to zero.
E) a negative IRR.

Question 59

A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. Compute the net present value of the project, if its price is $80,000 and the applicable discount rate is 10%.

A) -68,710.00
B) -44,568.00
C) 7,106.00
D) 74, 312.00
E) 87,106.00

Question 60

The proposition that discounted future amounts are equal to a specific present amount is known as:

A) the concept of equivalency.
B) compounding.
C) future value.
D) capital budgeting.
E) discounting.

Question 61

Highways, Inc. is trying to decide whether to purchase a new pavement melting machine, purchase a new mobile cement mixer or to computerize its entire estimating, ordering and inventory system. All of the alternatives are viewed as having the same ten year project life and none are expected to have any salvage value. However, different project prices are applicable to each and each has a different expected stream of annual net cash inflows. The firm's managers believe that a discount rate of 9 percent is appropriate for evaluating the alternatives. Data are as follows:

After examining the project prices, management finds it has sufficient capital budget to complete two of them. Assuming that the cash inflows from the project are independent of one another, which two projects should be undertaken?

Question 62

A project has an anticipated stream of annual net receipts of $1,000. Its life is 12 years. No salvage value is expected. What is the net present value of the project, if its price is $6,000 and the applicable discount rate is 12%?

Question 63

A project has an anticipated stream of annual net receipts of $25,000. Its life is 10 years. No salvage value is expected at the end of the 10 years. Compute the net present value of the project, if its price is $150,000 and the applicable discount rate is 10%.

Question 64

Spot Corporation has decided to undertake a capital project that has a useful life of eight years and estimated annual net cash inflows of $28,500. At a discount rate of 10 percent, what is the present value of the eight-year receipts stream?

Question 65

All of the following projects have an initial cost of $10,000. Which are acceptable at a discount rate of 9%?

A) Purchase an oil painting which can be sold in 3 years for $12,000?
B) Purchase a delivery vehicle which will generate net inflows of $2,000 per year for five years and which will have a salvage value of $3,000 at the end of the 5th year?
C) Invest in a video store that will generate net inflows of $3,000 per year for 4 years and which can be sold at the end of the 4th year for $2,000?

Question 66

Pave-It, Inc. is trying to decide whether to purchase a new paving machine, purchase a new mixer for the plant or to upgrade the cement finishing machine. All of the alternatives are viewed as having the same ten year project life and none are expected to have any salvage value. However, different project prices are applicable to each and each has a different expected stream of annual net cash inflows. The firm's managers believe that a discount rate of 12 percent is appropriate for evaluating the alternatives. Data are as follows:

After examining the project prices, management finds it has sufficient capital budget to complete two of them. Assuming that the cash inflows from the project are independent of one another, which two projects should be undertaken?

Question 67

Ye Olde Antique Stock Certificate Company ,Inc. Olde) has recently determined that the optimal capital structure for the firm is 40% debt and 60% equity. The current interest rate for borrowing for Olde is 12 1/2% while its stockholders expect a 20% return on their equity. The company's corporate income tax rate is 40% and interest is a deductible expense for tax purposes.

A) What is Olde's cost of capital?
B) Olde is considering a project to expand to the Europe. The project will cost $200,000, have no salvage value, have an estimated life of 15 years, and have net cash flow benefits of $30,000. Should Olde accept the project? Why or Why not?

Question 68

A project has an anticipated stream of annual net receipts of $25,000. Its life is 10 years. No salvage value is expected at the end of the 10 years. Compute the net present value of the project, if its price is $150,000 and the applicable discount rate is 12%.

Question 69

Run Corporation has decided to undertake a capital project that has a useful life of five years and estimated annual net cash inflows of $38,500. At a discount rate of 12 percent, what is the present value of the five-year receipts stream?

Question 70

Pronto Delivery is contemplating an investment in a delivery truck. The estimate of the project's price is $22,000. The delivery truck will have a life of 5 years and have a salvage value of $2,000. Annual net cash flows from the five years of operations are expected to be $6,000. If Pronto's applicable discount rate is 10%, is the project acceptable? Why or why not?

Question 71

The Flat Tile Company is contemplating an investment in a new 2500 pound per square inch press. The estimate of the project's price is $250,000. The press will have a life of 8 years and have a salvage value of $25,000. Annual net cash flows from the eight years of operations are expected to be $45,000. If Flat's applicable discount rate is 12%, is the project acceptable? Why or why not?

Question 72

The Always Late Construction Co. is about to sell some used equipment to Early Leasing. Always Late has offered the following two payment schemes:
a. $50,000 now and $300,000 at the end of ten years.
b. $50,000 now, $25,000 at the end of each of the next six years.
If the applicable discount rate for either transaction is 12%, which would be the better alternative for Early? Why?