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# Test Bank Chapter 26 Capital Investment Analysis

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Test Bank Chapter 26 Capital Investment Analysis

*Student: ___________________________________________________________________________*

1. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis.

True False

2. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called cost-volume-profit analysis.

True False

3. Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years.

True False

4. Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals.

True False

5. The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) methods that ignore present value and (2) present values methods.

True False

6. The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) average rate of return and (2) cash payback methods.

True False

7. Average rate of return equals average investment divided by estimated average annual income.

True False

8. Average rate of return equals estimated average annual income divided by average investment.

True False

9. The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method.

True False

10. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.

True False

11. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.

True False

12. The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

True False

13. The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method.

True False

14. Methods that ignore present value in capital investment analysis include the cash payback method.

True False

15. Methods that ignore present value in capital investment analysis include the average rate of return method.

True False

16. Methods that ignore present value in capital investment analysis include the internal rate of return method.

True False

17. Methods that ignore present value in capital investment analysis include the net present value method.

True False

18. The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

True False

19. The cash payback method of capital investment analysis is one of the methods referred to as a present value method.

True False

20. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 30%.

True False

21. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 37.5%.

True False

22. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 for the 5 years. The expected average rate of return on investment is 50%.

True False

23. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 for the 5 years. The expected average rate of return on investment is 25.0%.

True False

24. In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values.

True False

25. The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period.

True False

26. The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period.

True False

27. If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.

True False

28. If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

True False

29. For years one through five, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years.

True False

30. For years one through five, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5 years.

True False

31. In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values.

True False

32. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected.

True False

33. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.

True False

34. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.

True False

35. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis.

True False

36. A present value index can be used to rank competing capital investment proposals when the net present value method is used.

True False

37. The internal rate of return method of analyzing capital investment proposals uses the present value concept to compute an internal rate of return expected from the proposals.

True False

38. A series of equal cash flows at fixed intervals is termed an annuity.

True False

39. A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality.

True False

40. A qualitative characteristic that may impact upon capital investment analysis is manufacturing flexibility.

True False

41. A qualitative characteristic that may impact upon capital investment analysis is employee morale.

True False

42. A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity.

True False

43. A qualitative characteristic that may impact upon capital investment analysis is manufacturing control.

True False

44. The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis.

True False

45. The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing.

True False

46. The payback method can be used only when net cash inflows are the same for each period.

True False

47. The accounting rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

True False

48. The accounting rate of return is a measure of profitability computed by dividing the average annual cash flows from an asset by the average amount invested in the asset.

True False

49. Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions.

True False

50. In calculating the net present value of an investment in equipment, the required investment and its terminal residual value should be subtracted from the present value of all future cash inflows.

True False

51. In calculating the present value of an investment in equipment, the present value of the terminal residual value should be added to the cash inflows.

True False

52. The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

True False

53. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual cash flows from the machine will be $3,500. The payback period for the new machine is 10.5 years.

True False

54. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual cash flows from the machine will be $3,500. The payback period for the new machine is 6 years.

True False

55. A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from the investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4), and $6,000 (year 5). The average income from operations over the 5-year life is $20,400. The payback period is 3.5 years.

True False

56. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 6 years.

True False

57. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years.

True False

58. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The payback period for the machine is 4 years.

True False

59. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The payback period for the machine is 12 years.

True False

60. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The accounting rate of return for the machine is 16.7%.

True False

61. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The accounting rate of return for the machine is 50%.

True False

62. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called:

A. absorption cost analysis

B. variable cost analysis

C. capital investment analysis

D. cost-volume-profit analysis

63. Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of

A. sales mix analysis.

B. variable cost analysis.

C. capital investment analysis.

D. variable cost analysis.

64. Which of the following is important when evaluating long-term investments?

A. Investments must earn a reasonable rate of return

B. The useful life of the asset

C. Proposals should match long term goals.

D. All of the above.

65. Which of the following are present value methods of analyzing capital investment proposals?

A. Internal rate of return and average rate of return

B. Average rate of return and net present value

C. Net present value and internal rate of return

D. Net present value and payback

66. Which of the following is a present value method of analyzing capital investment proposals?

A. Average rate of return

B. Cash payback method

C. Accounting rate of return

D. Net present value

67. By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money:

A. has an international rate of exchange

B. is the language of business

C. is the measure of assets, liabilities, and stockholders' equity on financial statements

D. has a time value

68. Which of the following are two methods of analyzing capital investment proposals that both ignore present value?

A. Internal rate of return and average rate of return

B. Net present value and average rate of return

C. Internal rate of return and net present value

D. Average rate of return and cash payback method

69. The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is:

A. cash payback method

B. net present value method

C. internal rate of return method

D. average rate of return method

70. The primary advantages of the average rate of return method are its ease of computation and the fact that:

A. it is especially useful to managers whose primary concern is liquidity

B. there is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short-term

C. it emphasizes the amount of income earned over the life of the proposal

D. rankings of proposals are necessary

71. The expected average rate of return for a proposed investment of $600,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is:

A. 40%

B. 20%

C. 60%

D. 24%

72. The amount of the average investment for a proposed investment of $90,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years, is:

A. $10,800

B. $21,600

C. $ 5,400

D. $45,000

73. The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $21,600, is:

A. $10,800

B. $21,600

C. $ 5,400

D. $45,000

74. An anticipated purchase of equipment for $580,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows:

__Year__

__Net Income__

__Net Cash Flow__

1

$60,000

$110,000

2

50,000

100,000

3

50,000

100,000

4

40,000

90,000

5

40,000

90,000

6

40,000

90,000

7

40,000

90,000

8

40,000

90,000

What is the cash payback period?

A. 5 years

B. 4 years

C. 6 years

D. 3 years

75. Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?

A. Net present value

B. Average rate of return

C. Internal rate of return

D. Cash payback

76. Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

A. Price-level index

B. Future value index

C. Rate of investment index

D. Present value index

77. An analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested. Which of the following statements best describes the results of this analysis?

A. The proposal is desirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis.

B. The proposal is desirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis.

C. The proposal is undesirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis.

D. The proposal is undesirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis.

78. Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

A. Average rate of return

B. Accounting rate of return

C. Cash payback period

D. Internal rate of return

79. Which of the following is a method of analyzing capital investment proposals that ignores present value?

A. Internal rate of return

B. Net present value

C. Discounted cash flow

D. Average rate of return

80. The methods of evaluating capital investment proposals can be separated into two general groups--present value methods and:

A. past value methods

B. straight-line methods

C. reducing value methods

D. methods that ignore present value

81. The rate of earnings is 10% and the cash to be received in three years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest:

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

A. $13,316

B. $6,830

C. $7,510

D. $8,260

82. Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received four years hence, with earnings at the rate of 10% a year:

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

A. $13,660

B. $12,720

C. $15,840

D. $10,400

83. When several alternative investment proposals of the same amount are being considered, the one with the largest net present value is the most desirable. If the alternative proposals involve different amounts of investment, it is useful to prepare a relative ranking of the proposals by using a(n):

A. average rate of return

B. consumer price index

C. present value index

D. price-level index

84. Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows expected from capital investment proposals?

A. Internal rate of return

B. Cash payback

C. Net present value

D. Average rate of return

85. A series of equal cash flows at fixed intervals is termed a(n):

A. present value index

B. price-level index

C. net cash flow

D. annuity

86. The present value index is computed using which of the following formulas?

A. Amount to be invested/Average rate of return

B. Total present value of net cash flow/Amount to be invested

C. Total present value of net cash flow/Average rate of return

D. Amount to be invested/Total present value of net cash flow

87. Hazard Company is considering the acquisition of a machine that costs $525,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual cash flow of $150,000, and annual operating income of $87,500. What is the estimated cash payback period for the machine?

A. 3 years

B. 4.3 years

C. 3.5 years

D. 5 years

88. The expected average rate of return for a proposed investment of $8,000,000 in a fixed asset, using straight line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $12,000,000 is:

A. 15%

B. 12%

C. 40%

D. 7.5%

89. The present value factor for an annuity of $1 is determined using which of the following formulas?

A. Amount to be invested/Annual average net income

B. Annual net cash flow/Amount to be invested

C. Annual average net income/Amount to be invested

D. Amount to be invested/Equal annual net cash flows

90. The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$100,000

$180,000

2

40,000

120,000

3

40,000

100,000

4

10,000

90,000

5

10,000

120,000

The cash payback period for this investment is:

A. 5 years

B. 4 years

C. 2 years

D. 3 years

91. The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$100,000

$180,000

2

40,000

120,000

3

40,000

100,000

4

10,000

90,000

5

10,000

120,000

The average rate of return for this investment is:

A. 18%

B. 16%

C. 58%

D. 10%

92. The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$100,000

$180,000

2

40,000

120,000

3

40,000

100,000

4

10,000

90,000

5

10,000

120,000

The net present value for this investment is:

A. positive $36,400

B. positive $55,200

C. Negative $16,170

D. Negative $126,800

93. The management of California Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$100,000

$180,000

2

40,000

120,000

3

20,000

100,000

4

10,000

90,000

5

10,000

90,000

The present value index for this investment is:

A. .88

B. 1.45

C. 1.14

D. .70

94. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$18,750

$93,750

2

18,750

93,750

3

18,750

93,750

4

18,750

93,750

5

18,750

93,750

The cash payback period for this investment is:

A. 4 years

B. 5 years

C. 20 years

D. 3 years

95. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$18,750

$93,750

2

18,750

93,750

3

18,750

93,750

4

18,750

93,750

5

18,750

93,750

The average rate of return for this investment is:

A. 5%

B. 10%

C. 25%

D. 15%

96. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$18,750

$93,750

2

18,750

93,750

3

18,750

93,750

4

18,750

93,750

5

18,750

93,750

The net present value for this investment is:

A. Negative $118,145

B. Positive $118,145

C. Positive $19,875

D. Negative $19,875

97. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$18,750

$93,750

2

18,750

93,750

3

18,750

93,750

4

18,750

93,750

5

18,750

93,750

The present value index for this investment is:

A. 1.00

B. .95

C. 1.25

D. 1.05

98. Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for seven years. The present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is:

A. 10%

B. 6%

C. 12%

D. 8%

99. Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for four years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is:

A. 9%

B. 10%

C. 12%

D. 3%

100. Below is a table for the present value of $1 at Compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

5

.747

.621

.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

1.833

1.736

1.690

3

2.673

2.487

2.402

4

3.465

3.170

3.037

5

4.212

3.791

3.605

Using the tables above, what would be the present value of $15,000 (rounded to the nearest dollar) to be received four years from today, assuming an earnings rate of 10%?

A. $11,250

B. $10,245

C. $3,750

D. $47,550

101. Below is a table for the present value of $1 at Compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

5

.747

.621

.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

1.833

1.736

1.690

3

2.673

2.487

2.402

4

3.465

3.170

3.037

5

4.212

3.791

3.605

Using the tables above, what would be the present value of $10,000 (rounded to the nearest dollar) to be received three years from today, assuming an earnings rate of 6%?

A. $8,400

B. $8,900

C. $7,920

D. $11,905

102. Below is a table for the present value of $1 at Compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

5

.747

.621

.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

1.833

1.736

1.690

3

2.673

2.487

2.402

4

3.465

3.170

3.037

5

4.212

3.791

3.605

Using the tables above, what is the present value of $4,000 (rounded to the nearest dollar) to be received at the end of __each__ of the next four years, assuming an earnings rate of 12%?

A. $2,544

B. $1,000

C. $12,148

D. $14,420

103. Below is a table for the present value of $1 at Compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

5

.747

.621

.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

1.833

1.736

1.690

3

2.673

2.487

2.402

4

3.465

3.170

3.037

5

4.212

3.791

3.605

Using the tables above, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years, what would be the net present value (rounded to the nearest dollar) of the investment, (assuming an earnings rate of 10%)?

A. $23,500

B. $16,050

C. $25,360

D. $1,860

104. Below is a table for the present value of $1 at Compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

5

.747

.621

.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

1.833

1.736

1.690

3

2.673

2.487

2.402

4

3.465

3.170

3.037

5

4.212

3.791

3.605

Using the tables above, what would be the internal rate of return of an investment that required an investment of $189,550, and would generate an annual cash inflow of $50,000 for the next 5 years?

A. 6%

B. 10%

C. 12%

D. cannot be determined from the data given.

105. Below is a table for the present value of $1 at Compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

5

.747

.621

.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year

6%

10%

12%

1

.943

.909

.893

2

1.833

1.736

1.690

3

2.673

2.487

2.402

4

3.465

3.170

3.037

5

4.212

3.791

3.605

Using the tables above, what would be the internal rate of return of an investment of $294,840 that would generate an annual cash inflow of $70,000 for the next 5 years?

A. 6%

B. 10%

C. 12%

D. cannot be determined from the data given.

106. The expected average rate of return for a proposed investment of $500,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is:

A. 18%

B. 48%

C. 24%

D. 12%

107. Which of the following is not an advantage of the average rate of return method?

A. It is easy to use.

B. It takes into consideration the time value of money.

C. It includes the amount of income earned over the entire life of the proposal.

D. It emphasizes accounting income.

108. Which of the following is an advantage of the cash payback method?

A. It is easy to use.

B. It takes into consideration the time value of money.

C. It includes the cash flow over the entire life of the proposal.

D. It emphasizes accounting income.

109. An anticipated purchase of equipment for $600,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows:

__Year__

__Net Income__

__Net Cash Flow__

1

$60,000

$120,000

2

50,000

110,000

3

50,000

110,000

4

40,000

100,000

5

40,000

80,000

6

40,000

80,000

7

40,000

60,000

8

40,000

60,000

What is the cash payback period?

A. 5 years

B. 4 years

C. 6 years

D. 3 years

110. Using the following partial table of present value of $1 at compound interest, determine the present value of $30,000 to be received three years hence, with earnings at the rate of 12% a year:

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

A. $14,240

B. $16,800

C. $21,360

D. $15,840

111. The rate of earnings is 10% and the cash to be received in two year is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest:

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

A. $8,900

B. $9,090

C. $7,970

D. $8,260

112. Heather Company is considering the acquisition of a machine that costs $432,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual cash flow of $120,000, and annual operating income of $83,721. What is the estimated cash payback period for the machine?

A. 3.6 years

B. 4.3 years

C. 5.2 years

D. 6 years

113. The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 is:

A. 24%

B. 22%

C. 45%

D. 10%

114. The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$100,000

$180,000

2

40,000

120,000

3

20,000

100,000

4

10,000

90,000

5

10,000

90,000

The cash payback period for this investment is:

A. 5 years

B. 4 years

C. 2 years

D. 3 years

115. The management of Indiana Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$100,000

$180,000

2

60,000

120,000

3

30,000

100,000

4

10,000

90,000

5

10,000

90,000

The average rate of return for this investment is:

A. 18%

B. 21%

C. 53%

D. 10%

116. The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Operations__

Net Cash__Flow__

1

$100,000

$180,000

2

40,000

120,000

3

20,000

100,000

4

10,000

90,000

5

10,000

90,000

The net present value for this investment is:

A. positive $16,400

B. positive $25,200

C. Negative $99,600

D. Negative $126,800

117. The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:

__Year__

Income from__Op __

__
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