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Capital Budgeting Decisions

True/False

1. The present value of a given sum to be received in five years will be exactly twice as great as the present value of an equal
sum to be received in ten years. (F, medium)

2. An increase in the discount rate will result in an increase in the present value of a given cash flow. (F, Medium)

3. The present value of a cash flow decreases as it moves further into the future. (T, Easy)

4. When the net present value method is used, the internal rate of return is the discount rate used to compute the net present
value of a project. (F, Medium)

5. If net present value is negative, then interpolation is needed in order to make a proposed investment acceptable. (F, Medium)

6. The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to
the discount rate. (T, Medium)

7. When using internal rate of return to evaluate investment projects, if the internal rate of return is less than the required rate of
return, the project should be accepted. (F, Easy)

8. The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero. (T,
Easy)

9. In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using
the total cost approach will be the same as the net present value obtained using the incremental cost approach. (T, Medium)

10. The payback period is the length of time it takes for an investment to recoup its own initial cost out of the cash receipts it
generates. (T, Easy)

11. Projects with shorter payback periods are always more profitable than projects with longer payback periods. (F, Medium)

12. The payback method of making capital budgeting decisions gives full consideration to the time value of money. (F, Easy)

13. If new equipment is replacing old equipment, any salvage received from sale of the old equipment should not be considered
in computing the payback period of the new equipment. (F, Easy)

14. One strength of the simple rate of return method is that it takes into account the time value of money in computing the return
on an investment project. (F, Easy)

15. The preference rule for ranking projects by the profitability index is: the higher the profitability index, the more desirable
the project. (T, Easy)

Multiple Choice

16. An increase in the discount rate:


a. will increase the present value of future cash flows.
b. will have no effect on net present value.
c. will reduce the present value of future cash flows.
d. is one method of compensating for reduced risk.

17. Suppose an investment has cash inflows of R dollars at the end of each year for two years. The present value of these cash
inflows using a 12% discount rate will be:
a. greater than under a 10% discount rate.
b. less than under a 10% discount rate.
c. equal to that under a 10% discount rate.
d. sometimes greater than under a 10% discount rate and sometimes less; it depends on R.
18. The net present value and internal rate of return methods of capital budgeting are superior to the payback method in that
they:
a. are easier to implement.
b. consider the time value of money.
c. require less input.
d. reflect the effects of depreciation and income taxes.

19. How are the following used in the calculation of the net present value of a proposed project? Ignore income tax
considerations.

Depreciation expense Salvage value


a. Include Include
b. Include Exclude
c. Exclude Include
d. Exclude Exclude

20.The net present value method takes into account:

Cash Flow Over Time Value


Life of Project of Money
a. No Yes
b. No No
c. Yes No
d. Yes Yes

21. The net present value method of capital budgeting assumes that cash flows are reinvested at:
a. the internal rate of return on the project.
b. the rate of return on the company's debt.
c. the discount rate used in the analysis.
d. a zero rate of return.

22. Some investment projects require that a company expand its working capital to service the greater volume of business that
will be generated. Under the net present value method, the investment of working capital should be treated as:
a. an initial cash outflow for which no discounting is necessary.
b. a future cash inflow for which discounting is necessary.
c. both an initial cash outflow for which no discounting is necessary and a future cash inflow for which discounting is
necessary.
d. irrelevant to the net present value analysis.

23. (Ignore income taxes in this problem.) How is depreciation handled by the following capital budgeting techniques?

Internal Simple
Rate of Return Rate of Return Payback
a. Excluded Included Excluded
b. Included Excluded Included
c. Excluded Excluded Included
d. Included Included Excluded

24. Which of the following capital budgeting techniques consider(s) cash flow over the entire life of the project?

Internal rate of return Payback


a. Yes Yes
b. Yes No
c. No Yes
d. No No

25. A weakness of the internal rate of return method for screening investment projects is that it:
a. does not consider the time value of money.
b. implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate.
c. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return.
d. does not take into account all of the cash flows from a project.

26. If the net present value of a project is zero based on a discount rate of sixteen percent, then the time-adjusted rate of return:
a. is equal to sixteen percent.
b. is less than sixteen percent.
c. is greater than sixteen percent.
d. cannot be determined from the information given.

27. The payback method measures:


a. how quickly investment dollars may be recovered.
b. the cash flow from an investment.
c. the economic life of an investment.
d. the profitability of an investment.

28. An investment project that requires a present investment of $210,000 will have cash inflows of "R" dollars each year for the
next five years. The project will terminate in five years. Consider the following statements (ignore income tax considerations):

I. If "R" is less than $42,000, the payback period exceeds the life of the project.
II. If "R" is greater than $42,000, the payback period exceeds the life of the project.
III. If "R" equals $42,000, the payback period equals the life of the project.

Which statement(s) is (are) true?


a. Only I and II.
b. Only I and III.
c. Only II and III.
d. I, II, and III.

29. Which one of the following statements about the payback method of capital budgeting is correct?
a. The payback method does not consider the time value of money.
b. The payback method considers cash flows after the payback has been reached.
c. The payback method uses discounted cash flow techniques.
d. The payback method will lead to the same decision as other methods of capital budgeting.

30. The evaluation of an investment having uneven cash flows using the payback method:
a. cannot be done.
b. can be done only by matching cash inflows and investment outflows on a year-by-year basis.
c. will product essentially the same results as those obtained through the use of discounted cash flow techniques.
d. requires the use of a sophisticated calculator or computer software.

31. The capital budgeting method that divides a project's annual incremental net income by the initial investment is the:
a. internal rate of return method.
b. the simple ( or accounting) rate of return method.
c. the payback method.
d. the net present value method.

32. When determining a net present value in an inflationary environment, adjustments should be made to:
a. decrease the discount rate only.
b. increase the estimated cash flows and increase the discount rate.
c. increase the estimated cash flows only.
d. increase the estimated cash flows and decrease the discount rate.
33. (Ignore income taxes in this problem.) Kipling Company has invested in a project that has an eight-year life. It is expected
that the annual cash inflow from the project will be $20,000. Assuming that the project has a internal rate of return of 12%, how
much was the initial investment in the project?
a. $160,000
b. $99,360
c. $80,800
d. $64,640

34. (Ignore income taxes in this problem.) White Company's required rate of return on capital budgeting projects is 12%. The
company is considering an investment opportunity which would yield a cash flow of $10,000 in five years. What is the most
that the company should be willing to invest in this project?
a. $36,050.
b. $2,774.
c. $17,637.
d. $5,670.

35. (Ignore income taxes in this problem.) In order to receive $12,000 at the end of three years and $10,000 at the end of five
years, how much must be invested now if you can earn 14% rate of return?
a. $12,978.
b. $8,100.
c. $13,290.
d. $32,054.

36. (Ignore income taxes in this problem.) Sue Falls is the president of Sports, Inc. She is considering buying a new machine
that would cost $14,125. Sue has determined that the new machine promises a internal rate of return of 12%, but Sue has
misplaced the paper which tells the annual cost savings promised by the new machine. She does remember that the machine has
a projected life of 10 years. Based on these data, the annual cost savings are:
a. it is impossible to determine from the data given.
b. $1,412.50.
c. $2,500.00.
d. $1,695.00.

37. (Ignore income taxes in this problem.) The following information is available on a new piece of equipment:

Cost of the equipment ...... $21,720


Annual cash inflows ........ $5,000
Internal rate of return ... 16%
Required rate of return ... 10%

The life of the equipment is approximately:


a. 6 years.
b. 4.3 years.
c. 8 years.
d. it is impossible to determine from the data given.

38. (Ignore income taxes in this problem.) A planned factory expansion project has an estimated initial cost of $800,000. Using
a discount rate of 20%, the present value of future cost savings from the expansion is $843,000. To yield exactly a 20% internal
rate of return, the actual investment cost cannot exceed the $800,000 estimate by more than:
a. $160,000.
b. $20,000.
c. $43,000.
d. $1,075.

39. (Ignore income taxes in this problem.) Hilltop Company invested $100,000 in a two-year project. The cash flow was
$40,000 for the first year. Assuming that the internal rate of return was exactly 12%, what was the cash flow for the second year
of the project?
a. $51,247.
b. $60,000.
c. $64,284.
d. $80,652.

40. (Ignore income taxes in this problem.) Joe Flubup is the president of Flubup, Inc. He is considering buying a new machine
that would cost $25,470. Joe has determined that the new machine promises a internal rate of return of 14%, but Joe has
misplaced the paper which tells the annual cost savings promised by the new machine. He does remember that the machine has
a projected life of 12 years. Based on these data, the annual cost savings are:
a. impossible to determine from the data given.
b. $2,122.50.
c. $4,500.00.
d. $4,650.00.

41. (Ignore income taxes in this problem.) The Baker Company purchased a piece of equipment with the following expected
results:

Useful life ................... 7 years


Yearly net cash inflow ........ $50,000
Salvage value ................. -0-
Internal rate of return ....... 20%
Discount rate ................. 16%

The initial cost of the equipment was:


a. $300,100.
b. $180,250
c. $190,600.
d. Cannot be determined from the information given.

42. (Ignore income taxes in this problem.) Highpoint, Inc., is considering investing in automated equipment with a ten-year
useful life. Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation,
but have been unable to estimate the cash flows associated with the intangible benefits. Using the company's 10% discount rate,
the net present value of the cash flows associated with just the tangible costs and benefits is a negative $184,350. How large
would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment?
a. $18,435.
b. $30,000.
c. $35,000.
d. $37,236.

43. (Ignore income taxes in this problem.) Given the following data:

Present investment required .. $12,000


Net present value ............ $ 430
Annual cost savings .......... $ ?
Discount rate ................ 12%
Life of the project .......... 10 years

Based on the data given, the annual cost savings would be:
a. $1,630.00.
b. $2,200.00.
c. $2,123.89.
d. $2,553.89.

44. (Ignore income taxes in this problem.) The following data pertain to an investment in equipment:

Investment in the project .......... $10,000


Net annual cash inflows ............ 2,400
Working capital required ........... 5,000
Salvage value of the equipment ..... 1,000
Life of the project ................ 8 years

At the completion of the project, the working capital will be released for use elsewhere. Compute the net present value of the
project, using a discount rate of 10%:
a. $606.
b. $8,271.
c. ($1,729).
d. $1,729.

45. (Ignore income taxes in this problem.) A piece of equipment has a cost of $20,000. The equipment will provide cost savings
of $3,500 each year for ten years, after which time it will have a salvage value of $2,500. If the company's discount rate is 12%,
the equipment's net present value is:
a. $580.
b. ($225).
c. $17,500.
d. $2,275.

46. (Ignore income taxes in this problem.) Parks Company is considering an investment proposal in which a working capital
investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The
working capital would be released for use elsewhere when the project is completed. If the company's discount rate is 10%, the
investment's net present value is:
a. $1,290.
b. ($1,290).
c. $2,000.
d. $4,350.

47. (Ignore income taxes in this problem.) The following data pertain to an investment proposal:

Investment in the project (equipment) .. $14,000


Net annual cash inflows promised ....... 2,800
Working capital required ............... 5,000
Salvage value of the equipment ......... 1,000
Life of the project .................... 10 years

The working capital would be released for use elsewhere when the project is completed. What is the net present value of the
project, using a discount rate of 8%?
a. $2,566.
b. ($251).
c. $251.
d. $5,251.

48. (Ignore income taxes in this problem.) Boston Company is contemplating the purchase of a new machine on which the
following information has been gathered:

Cost of the machine ............... $38,900


Annual cash inflows expected ...... $10,000
Salvage value ..................... $ 5,000
Life of the machine ............... 6 years

The company's discount rate is 16%, and the machine will be depreciated using the straight-line method. Given these data, the
machine has a net present value of:
a. -$26,100.
b. -$23,900.
c. $0.
d. +$26,100.
49. (Ignore income taxes in this problem.) Benz Company is considering the purchase of a machine that costs $100,000 and has
a useful life of 18 years. The company's required discount rate is 12%. If the machine's net present value is $5,850, then the
annual cash inflows associated with the machine must be (round to the nearest whole dollar):
a. $42,413.
b. $14,600.
c. $13,760.
d. it is impossible to determine from the data given.

50. (Ignore income taxes in this problem.) Horn Corporation is considering investing in a four-year project. Cash inflows from
the project are expected to be as follows: Year 1, $2,000; Year 2, $2,200; Year 3, $2,400; Year 4, $2,600. If using a discount
rate of 8%, the project has a positive net present value of $500, what was the amount of the original investment?
a. $1,411.
b. $2,411.
c. $7,054.
d. $8,054.

51. (Ignore income taxes in this problem.) The Whitton Company uses a discount rate of 16%. The company has an opportunity
to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years. The machine
would have no salvage value. The net present value of this machine to the nearest whole dollar is:
a. $22,460.
b. $4,460.
c. $(9,980).
d. $12,000.

52. (Ignore income taxes in this problem.) The following data pertain to an investment:

Cost of the investment ........ $18,955


Life of the project ........... 5 years
Annual cost savings ........... $ 5,000
Estimated salvage value ....... $ 1,000
Discount rate ................. 10%

The net present value of the proposed investment is:


a. $3,355.
b. ($3,430).
c. $-0-.
d. $621.

53. (Ignore income taxes in this problem.) The following data pertain to an investment proposal:

Cost of the investment .......... $20,000


Annual cost savings ............. $ 5,000
Estimated salvage value ......... $ 1,000
Life of the project ............. 8 years
Discount rate ................... 16%

The net present value of the proposed investment is:


a. $1,720.
b. $6,064.
c. $2,154.
d. $2,025.

54. (Ignore income taxes in this problem.) Stratford Company purchased a machine with an estimated useful life of seven years.
The machine will generate cash inflows of $90,000 each year over the next seven years. If the machine has no salvage value at
the end of seven years, and assuming the company's discount rate is 10%, what is the purchase price of the machine if the net
present value of the investment is $170,000?
a. $221,950.
b. $170,000.
c. $268,120.
d. $438,120.

55. (Ignore income taxes in this problem.) Sam Weller is thinking of investing $70,000 to start a bookstore. Sam plans to
withdraw $15,000 from the business at the end of each year for the next five years. At the end of the fifth year, Sam plans to sell
the business for $110,000 cash. At a 12% discount rate, what is the net present value of the investment?
a. $54,075.
b. $62,370.
c. $46,445.
d. $70,000.

56. (Ignore income taxes in this problem.) Arthur operates a part-time auto repair service. He estimates that a new diagnostic
computer system will result in increased cash inflows of $2,100 in Year 1, $3,200 in Year 2, and $4,000 in Year 3. If Arthur's
discount rate is 10%, then the most he would be willing to pay for the new computer system would be:
a. $6,652.
b. $6,984.
c. $7,747.
d. $7,556.

57. (Ignore income taxes in this problem.) The following data pertain to an investment proposal:

Present investment required ........ $26,500


Annual cost savings ................ $ 5,000
Projected life of the investment ... 10 years
Projected salvage value ............ $ -0-

The internal rate of return, interpolated to the nearest tenth of a percent, would be:
a. 11.6%.
b. 12.8%.
c. 13.6%.
d. 12.4%.

58. (Ignore income taxes in this problem.) The following data are available on a proposed investment project:

Initial investment ......... $142,500


Annual cash inflows ........ $30,000
Life of the investment ..... 8 years
Required rate of return .... 10%

The internal rate of return, interpolated to the nearest tenth of a percent, would be:
a. 13.3%.
b. 12.1%.
c. 15.3%.
d. 12.7%.

59. (Ignore income taxes in this problem.) The following data pertain to an investment proposal:

Present investment required ........ $14,000


Annual cost savings ................ $ 2,500
Projected life of the investment ... 8 years
Projected salvage value ............ $ -0-
Required rate of return ............ 6%

The internal rate of return, interpolated to the nearest tenth of a percent, would be:
a. 6.7%.
b. 9.3%.
c. 8.7%.
d. 7.3%.

60. (Ignore income taxes in this problem.) Overland Company has gathered the following data on a proposed investment
project:

Investment in depreciable equipment .... $150,000


Annual cash flows ...................... $ 40,000
Life of the equipment .................. 10 years
Salvage value .......................... -0-
Discount rate .......................... 10%

The internal rate of return on this investment is closest to:


a. 23.4%.
b. 25.4%.
c. 22.7%
d. 22.1%

61. (Ignore income taxes in this problem.) The following information concerns a proposed investment:

Investment required ........ $14,150


Annual savings ............. $ 2,500
Life of the project ........ 12 years

The internal rate of return is (do not interpolate):


a. 14%.
b. 12%.
c. 10%.
d. 5%.

62. (Ignore income taxes in this problem.) Jarvey Company is studying a project that would have a ten-year life and would
require a $450,000 investment in equipment that has no salvage value. The project would provide net income each year as
follows for the life of the project:

Sales ............................ $500,000


Less cash variable expenses ...... 200,000
Contribution margin .............. 300,000
Less fixed expenses:
Fixed cash expenses ............ $150,000
Depreciation expenses .......... 45,000 195,000
Net income ....................... $105,000

The company's required rate of return is 12%. What is the payback period for this project?
a. 3 years
b. 2 years
c. 4.28 years
d. 9 years

63. (Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto
was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value. Delivering prescriptions (which the
pharmacy has never done before) should increase gross revenues by at least $5,000 per year. The cost of these prescriptions to
the pharmacy will be about $2,000 per year. The pharmacy depreciates all assets using the straight-line method. The payback
period for the auto is:
a. 3.0 years.
b. 1.8 years.
c. 2.0 years.
d. 1.2 years.
64. (Ignore income taxes in this problem.) A company with $800,000 in operating assets is considering the purchase of a
machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year. The payback period for this
machine in years is closest to:
a. 0.27 years.
b. 10.7 years.
c. 3.75 years.
d. 40 years.

65. (Ignore income taxes in this problem.) The Higgins Company has just purchased a piece of equipment at a cost of $120,000.
This equipment will reduce operating costs by $40,000 each year for the next eight years. This equipment replaces old
equipment that was sold for $8,000 cash. The new equipment has a payback period of:
a. 8.0 years.
b. 2.8 years.
c. 10.0 years.
d. 3.0 years.

66. (Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment that has an
estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the
investment.

Year Cash Inflows


1 $120,000
2 60,000
3 40,000
4 40,000
5 40,000
Total $300,000

Assuming that the cash inflows occur evenly over the year, the payback period for the investment is:
a. 0.75 years.
b. 1.67 years.
c. 4.91 years.
d. 2.50 years.

67. (Ignore income taxes in this problem.) Denny Corporation is considering replacing a technologically obsolete machine with
a new state-of-the-art numerically controlled machine. The new machine would cost $450,000 and would have a ten-year useful
life. Unfortunately, the new machine would have no salvage value. The new machine would cost $20,000 per year to operate
and maintain, but would save $100,000 per year in labor and other costs. The old machine can be sold now for scrap for
$50,000. The simple rate of return on the new machine is closest to:
a. 8.75%.
b. 20.00%.
c. 7.78%.
d. 22.22%.

68. (Ignore income taxes in this problem.) The Jason Company is considering the purchase of a machine that will increase
revenues by $32,000 each year. Cash outflows for operating this machine will be $6,000 each year. The cost of the machine is
$65,000. It is expected to have a useful life of five years with no salvage value. For this machine, the simple rate of return is:
a. 20%.
b. 40%.
c. 49.2%.
d. 9.2%.

69.Perkins Company is considering several investment proposals, as shown below:


Investment Proposal o
A B C D
Investment required ... $80,000 $100,000 $60,000 $75,000
Present value of future
net cash flows ...... 96,000 150,000 84,000 120,000

Rank the proposals in terms of preference using the


profitability index:
a. D, B, C, A.
b. B, D, C, A.
c. B, D, A, C.
d. A, C, B, D.

70. Information on four investment proposals is given below:

Proposal Investment Net Present Value


1 $50,000 $30,000
2 60,000 24,000
3 30,000 15,000
4 45,000 9,000

Rank the proposals in terms of preference according to the profitability index:


a. 3, 4, 1, 2.
b. 1, 2, 3, 4.
c. 1, 3, 2, 4.
d. 2, 1, 4, 3.

Reference: 14-1
(Ignore income taxes in this problem.) Shields Company has gathered the following data on a proposed investment project:

Investment required in equipment ..... $400,000


Annual cash inflows .................. $80,000
Salvage value ........................ $-0-
Life of the investment ............... 10 years
Discount rate ........................ 10%

71. Refer To: 14-1


The payback period for the investment is closest to:
a. 0.2 years.
b. 1.0 years.
c. 3.0 years.
d. 5.0 years.

72. Refer To: 14-1


The simple rate of return on the investment is closest to:
a. 5%.
b. 10%.
c. 15%.
d. 20%.

73. Refer To: 14-1


The net present value on this investment is closest to:
a. $400,000.
b. $80,000.
c. $91,600.
d. $76,750.

74. Refer To: 14-1


The internal rate of return on the investment is closest to:
a. 11%.
b. 13%.
c. 15%.
d. 17%.

Reference: 14-2
(Ignore income taxes in this problem.) Bugle's Bagel Bakery is investigating the purchase of a new bagel making machine. This
machine would provide an annual operating cost savings of $3,650 for each of the next 4 years. In addition, this new machine
would allow the production of one new type of bagel that would result in selling 1,500 dozen more bagels each year. The
company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450 and it
will have a 4-year useful life. Bugle's discount rate is 14%.

75. Refer To: 14-2


The total annual cash inflow from this machine for capital budgeting purposes is:
a. $3,650.
b. $5,150.
c. $4,750.
d. $5,000.

76. Refer To: 14-2


The internal rate of return for this investment is closest to:
a. 14%.
b. 16%.
c. 18%.
d. 20%.

77. Refer To: 14-2


The net present value of this investment is closest to:
a. $1,120.
b. $6,550.
c. $13,450.
d. $20,000.

Reference: 14-3

(Ignore income taxes in this problem.) Treads Corporation is considering the replacement of an old machine that is currently
being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to
replace the old machine, Picco Company has offered to purchase the old machine for $60,000. The old machine would have no
salvage value in five years.
The new machine would be acquired from Hillcrest Industries for $1,000,000 in cash. The new machine has an expected useful
life of five years with no salvage value. Due to the increased efficiency of the new machine, estimated annual cash savings of
$300,000 would be generated.
Treads Corporation uses a discount rate of 12%.

78. Refer To: 14-3


The net present value of the project is closest to:
a. $171,000.
b. $136,400.
c. $141,500.
d. $560,000.

79. Refer To: 14-3


The internal rate of return of the project is closest to:
a. 14%.
b. 16%.
c. 18%.
d. 20%.

Reference: 14-4
(Ignore income taxes in this problem.) Oriental Company has gathered the following data on a proposed investment project:

Investment in depreciable equipment ..... $200,000


Annual net cash flows ................... $ 50,000
Life of the equipment ................... 10 years
Salvage value ........................... -0-
Discount rate ........................... 10%

The company uses straight-line depreciation on all equipment.

80. Refer To: 14-4


The payback period for the investment would be:
a. 2.41 years.
b. 0.25 years.
c. 10 years.
d. 4 years.

81. Refer To: 14-4


The simple rate of return on the investment would be:
a. 10%.
b. 35%.
c. 15%.
d. 25%.

82. Refer To: 14-4


The net present value of this investment would be:
a. ($14,350).
b. $107,250.
c. $77,200.
d. $200,000.

Reference: 14-5
(Ignore income taxes in this problem.) Apex Corp. is planning to buy production machinery costing $100,000. This machinery's
expected useful life is five years, with no residual value. Apex uses a discount rate of 10% and has calculated the following data
pertaining to the purchase and operation of this machinery:

Estimated
annual net
Year cash inflow
1 $ 60,000
2 30,000
3 20,000
4 20,000
5 20,000

83. Refer To: 14-5


The payback period is:
a. 2.50 years.
b. 2.75 years.
c. 3.00 years.
d. 5.00 years.

84. Refer To: 14-5


The net present value is closest to:
a. $20,400.
b. $28,400.
c. $80,000.
d. $50,000.

Reference: 14-6
(Ignore income taxes in this problem.) The Finney Company is reviewing the possibility of remodeling one of its showrooms
and buying some new equipment to improve sales operations. The remodeling would cost $120,000 now and the useful life of
the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital
would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project
would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.

85. Refer To: 14-6


The immediate cash outflow required for this project would be:
a. $(120,000).
b. $(150,000).
c. $(90,000).
d. $(130,000).

86. Refer To: 14-6


What would the annual net cash inflows from this project have to be in order to justify investing in remodeling?
a. $14,495
b. $35,842
c. $16,147
d. $29,158

Reference: 14-7
(Ignore income taxes in this problem.) The Sawyer Company has $80,000 to invest and is considering two different projects, X
and Y. The following data are available on the projects:

Project X Project Y
Cost of equipment needed now ... $80,000 --
Working capital requirement .... -- $80,000
Annual cash operating inflows .. $23,000 $18,000
Salvage value in 5 years ....... $ 6,000 --

Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere.
Sawyer's discount rate is 12%.

87. Refer To: 14-7


The net present value of project X is:
a. $2,915.
b. $(11,708).
c. $5,283.
d. $6,317.

88. Refer To: 14-7


The net present value of project Y is closest to:
a. $15,110.
b. $30,250.
c. $11,708.
d. $(11,708).

Reference: 14-8
(Ignore income taxes in this problem.) The Becker Company is interested in buying a piece of equipment that it needs. The
following data have been assembled concerning this equipment:

Cost of required equipment .......... $250,000


Working capital required ............ $100,000
Annual operating cash inflows........ $ 80,000
Cash repair at end of 4 years ....... $ 40,000
Salvage value at end of 6 years ..... $ 90,000

This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released
for use elsewhere. The company's discount rate is 10%.

89. Refer To: 14-8


The present value of all future operating cash inflows is closest to:
a. $480,000.
b. $452,300.
c. $348,400.
d. $278,700.

90. Refer To: 14-8


The present value of the net cash flows (all cash inflows less all cash outflows) occurring during year 4 is:
a. $40,000.
b. $27,320.
c. $54,640.
d. $42,790.

91. Refer To: 14-8


The present value of the net cash flows (all cash inflows less all cash outflows) occurring during year 6 is closest to:
a. $270,000.
b. $195,900.
c. $107,200.
d. $152,300.

Reference: 14-9
(Ignore income taxes in this problem.) UR Company is considering rebuilding and selling used alternators for automobiles. The
company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of
the used alternators would be as follows (numbers in parentheses indicate an outflow):

Years 1 - 10 ... $ 90,000


Year 11 ........ (20,000)
Year 12 ........ 100,000

In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000 now to
use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's
discount rate is 10%.

92. Refer To: 14-9


The present value of the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and
sale of the alternators (rounded to the nearest dollar) is:
a. $582,735.
b. $596,735.
c. $577,950.
d. $591,950.
93. Refer To: 14-9
The net present value of all cash flows associated with this investment (rounded to the nearest dollar) is:
a. $377,950.
b. $382,735.
c. $392,950.
d. $362,950.

Reference: 14-10
(Ignore income taxes in this problem.) Westland College has a telephone system that is in poor condition. The system either can
be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:

Present Proposed New


System System
Purchase cost new ....................... $250,000 $300,000
Accumulated depreciation ................ $240,000 -
Overhaul costs needed now ............... $230,000 -
Annual cash operating costs ............. $180,000 $170,000
Salvage value now ....................... $160,000 -
Salvage value at the end of 8 years ..... $152,000 $165,000
Working capital required ................ - $200,000

Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are
expected to have a useful life of eight years.

94. Refer To: 14-10


The net present value of the alternative of overhauling the present system is:
a. $(1,279,316).
b. $(1,119,316).
c. $801,284.
d. $(1,194,036).

95. Refer To: 14-10


The net present value of the alternative of purchasing the new system is:
a. $(1,076,495).
b. $(1,236,495).
c. $(1,169,895).
d. $(969,895).

Reference: 14-11
(Ignore income taxes in this problem.) Lambert Manufacturing has $60,000 to invest in either Project A or Project B. The
following data are available on these projects:

Project A Project B
Cost of equipment needed now .............. $120,000 $70,000
Working capital investment needed now ..... - $50,000
Annual net operating cash inflows ......... $ 50,000 $45,000
Salvage value of equipment in 6 years ..... $ 15,000 -

Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use
elsewhere. Lambert's discount rate is 14%.

96. Refer To: 14-11


The net present value of Project A is closest to:
a. $82,241.
b. $67,610.
c. $74,450.
d. $81,290.

97. Refer To: 14-11


The net present value of Project B is closest to:
a. $77,805.
b. $127,805.
c. $55,005.
d. $105,005.

98. Refer To: 14-11


Which of the following statements is (are) correct?

I. Project A is acceptable according to the net present value


method.
II. Project A has an internal rate of return greater than 14%.

a. Only I.
b. Only II.
c. Both I and II.
d. Neither I nor II.

Reference: 14-12
(Ignore income taxes in this problem.) Fast Food, Inc., has purchased a new donut maker. It cost $16,000 and has an estimated
life of 10 years. The following annual donut sales and expenses are projected:

Sales ..................... $22,000


Expenses:
Flour, etc., required
in making donuts ... $10,000
Salaries ............... 6,000
Depreciation ........... 1,600 17,600
Net income ................ $ 4,400

99. Refer To: 14-12


The payback period on the new machine is closest to:
a. 5 years.
b. 2.7 years.
c. 3.6 years.
d. 1.4 years.

100. Refer To: 14-12


The simple rate of return for the new machine is closest to:
a. 20%.
b. 37.5%.
c. 27.5%.
d. 80.0%.

Reference: 14-13
(Ignore income taxes in this problem.) Purvell Company has just acquired a new machine. Data on the machine follow:

Purchase cost ............ $50,000


Annual cost savings ...... 15,000
Life of the machine ...... 8 years

The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making
depreciation deductions.) Assume cash flows occur uniformly throughout a year.
101. Refer To: 14-13
The payback period would be closest to:
a. 3.33 years.
b. 3.0 years.
c. 8.0 years.
d. 2.9 years.

102. Refer To: 14-13


The simple rate of return would be closest to:
a. 30.0%.
b. 17.5%.
c. 18.75%.
d. 12.5%.

Reference: 14-14
(Ignore income taxes in this problem.) Hanley Company purchased a machine for $125,000 that will be depreciated on the
straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be
$45,000 a year. These cash flows from operations occur uniformly throughout the year.

103. Refer To: 14-14


What is the payback period?
a. 2.1 years.
b. 2.3 years.
c. 2.8 years.
d. 4.2 years.

104. Refer To: 14-14


What is the simple rate of return on the initial investment?
a. 16%.
b. 24%.
c. 28%.
d. 36%.