Lec 6, 7 With Answers
Lec 6, 7 With Answers
Projected net annual cash flows over the project’s life are:
Year Net Annual Cash Flow
1 € 3,000
2 8,000
3 15,000
4 9,000
The cash payback period is
a. 2.29 years.
b. 2.60 years.
c. 2.40 years.
d. 2.31 years.
42. Bradshaw Inc. is contemplating a capital investment of €88,000. The cash flows over the
project’s four years are:
Expected Annual Expected Annual
Year Cash Inflows Cash Outflows
1 €30,000 €12,000
2 45,000 20,000
3 60,000 25,000
4 50,000 30,000
The cash payback period is
a. 3.59 years.
b. 3.50 years.
c. 2.37 years.
d. 3.20 years.
43. Jordan Company is considering the purchase of a machine with the following data:
Initial cost £150,000
One-time training cost 12,000
Annual maintenance costs 15,000
Annual cost savings 75,000
Salvage value 20,000
The cash payback period is
a. 2.70 years.
b. 2.50 years.
c. 2.37 years.
d. 2.17 years.
57. Richman Co. purchased some equipment 3 years ago. The company's required rate of
return is 12%, and the net present value of the project was £(900). Annual cost savings
were: £10,000 for year 1; £8,000 for year 2; and £6,000 for year 3. The amount of the
initial investment was
Present Value PV of an Annuity
Year of 1 at 12% of 1 at 12%
1 .893 .893
2 .797 1.690
3 .712 2.402
a. £20,478.
b. £18,316.
c. £20,116.
d. £18,678.
76. Sloan Inc. recently invested in a project with a 3-year life span. The net present value was
€9,000 and annual cash inflows were €21,000 for year 1; €24,000 for year 2; and €27,000 for
year 3. The initial investment for the project, assuming a 15% required rate of return, was
Present Value PV of an Annuity
Year of 1 at 15% of 1 at 15%
1 .870 .870
2 .756 1.626
3 .658 2.283
a. €45,792.
b. €45,180.
c. €29,232.
d. €38,376.
77. Mini Inc. is contemplating a capital project costing €47,019. The project will provide annual
cost savings of €18,000 for 3 years and have a salvage value of €3,000. The company’s
required rate of return is 10%. The company uses straight-line depreciation.
Present Value PV of an Annuity
Year of 1 at 10% of 1 at 10%
1 .909 .909
2 .826 1.736
3 .751 2.487
This project is
a. unacceptable because it earns a rate less than 10%.
b. acceptable because it has a positive NPV.
c. unacceptable because it has a negative NPV.
d. acceptable because it has a zero NPV.
78. Johnson Corp. has an 8% required rate of return. It’s considering a project that would
provide annual cost savings of £50,000 for 5 years. The most that Johnson would be
willing to spend on this project is
Present Value PV of an Annuity
Year of 1 at 8% of 1 at 8%
1 .926 .926
2 .857 1.783
3 .794 2.577
4 .735 3.312
5 .681 3.993
a. £125,910.
b. £165,600.
c. £199,650.
d. £34,050.
79. Benaflek Co. purchased some equipment 3 years ago. The company’s required rate of
return is 12%, and the net present value of the project was €(1,800). Annual cost savings
were: €20,000 for year 1; €16,000 for year 2; and €12,000 for year 3. The amount of the
initial investment was
Present Value PV of an Annuity
Year of 1 at 12% of 1 at 12%
1 .893 .893
2 .797 1.690
3 .712 2.402
a. €40,956.
b. €36,632.
c. €40,232.
d. €37,356.
81. Miles, Inc. is considering the purchase of a new machine for €600,000 that has an
estimated useful life of 5 years and no salvage value. The machine will generate net
annual cash flows of €105,000. It is believed that the new machine will reduce downtime
because of its reliability. Assume the discount rate is 8%. In order to make the project
acceptable, the reduction in downtime must be worth
Present Value PV of an Annuity
Year of 1 at 8% of 1 at 8%
1 .926 .926
2 .857 1.783
3 .794 2.577
4 .735 3.312
5 .681 3.993
a. €23,958 per year.
b. €49,662 per year.
c. €18,264 per year.
d. €45,263 per year.
93. The following information is available for a potential investment for Panda Company:
Initial investment £95,000
Net annual cash inflow 20,000
Net present value 36,224
Salvage value 10,000
Useful life 10 yrs.
The potential investment’s profitability index is
a. 4.75.
b. 3.22.
c. 2.62.
d. 1.38.
98. A project with an initial investment of HK$70,000 and a profitability index of 1.239 also has
an internal rate of return of 12%. The present value of net cash flows is
a. HK$78,400.
b. HK$86,730.
c. HK$56,497.
d. HK$70,000.
99. A project with a profitability index of 1.156 also has net cash flows with a present value of
HK$69,360. The project’s internal rate of return was 10%. The initial investment was
a. HK$66,000.
b. HK$80,180.
c. HK$60,000.
d. HK$62,424.
Selma Inc. is comparing several alternative capital budgeting projects as shown below:
Projects
A B C
Initial investment £80,000 £120,000 £160,000
Present value of net cash flows 90,000 110,000 200,000
Cleaners, Inc. is considering purchasing equipment costing €60,000 with a 6-year useful life. The
equipment will provide cost savings of €14,600 and will be depreciated straight-line over its useful
life with no salvage value. Cleaners requires a 10% rate of return.
Present Value of an Annuity of 1
Period 8% 9% 10% 11% 12% 15%
6 4.623 4.486 4.355 4.231 4.111 3.784
109. A company has a minimum required rate of return of 9%. It is considering investing in a
project that costs HK$210,000 and is expected to generate cash inflows of HK$84,000 at
the end of each year for three years. The net present value of this project is
a. HK$212,604.
b. HK$42,000.
c. HK$21,261.
d. HK$2,604.
110. A company has a minimum required rate of return of 10%. It is considering investing in a
project that costs HK$50,000 and is expected to generate cash inflows of HK$25,000 at
the end of each year for three years. The profitability index for this project is
a. .80.
b. 1.00.
c. 1.24.
d. 1.27.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC:
Problem Solving/Decision Making, IMA: Quantitative Methods
111. A company has a minimum required rate of return of 8%. It is considering investing in a
project that costs HK$91,116 and is expected to generate cash inflows of HK$36,000
each year for three years. The approximate internal rate of return on this project is
a. 8%.
b. 9%.
c. 10%.
d. less than the required 8%.
Carr Company is considering two capital investment proposals. Estimates regarding each project
are provided below:
Project Soup Project Nuts
Initial investment €400,000 €600,000
Annual net income 30,000 46,000
Net annual cash inflow 110,000 146,000
Estimated useful life 5 years 6 years
Salvage value -0- -0-
125. If a project costing €80,000 has a profitability index of 1.00 and the discount rate was
12%, then the present value of the net cash flows was
a. €80,000.
b. less than €80,000.
c. greater than €80,000.
d. undeterminable.
126. If a project costing €40,000 has a profitability index of 1.00 and the discount rate was 8%,
then the project’s internal rate of return was
a. less than 8%.
b. equal to 8%.
c. greater than 8%.
d. undeterminable.
127. The internal rate of return factor is equal to the
a. capital investment divided by the net cash flows.
b. present value of net cash flows divided by the capital investment.
c. present value of net cash flows divided by the profitability index.
d. capital investment divided by the present value of the net cash flows.
128. If a 2-year capital project has an internal rate of return factor equal to 1.690 and net
annual cash flows of €60,000, the initial capital investment was
a. €101,400.
b. €35,503.
c. €50,700.
d. €71,007.
129. If a 3-year capital project costing HK$77,310 has an internal rate of return factor equal to
2.577, the net annual cash flows assuming straight-line depreciation are
a. HK$25,770.
b. HK$30,000.
c. HK$10,000.
d. HK$38,655.
138. A company is considering purchasing a machine that costs HK$280,000 and is estimated
to have no salvage value at the end of its 8-year useful life. If the machine is purchased,
annual revenues are expected to be HK$100,000 and annual operating expenses
exclusive of depreciation expense are expected to be HK$38,000. The straight-line
method of depreciation would be used. If the machine is purchased, the annual rate of
return expected on this machine is
a. 22.1%.
b. 44.3%.
c. 9.6%.
d. 19.3%.
139. A company projects an increase in net income of HK$135,000 each year for the next five
years if it invests HK$900,000 in new equipment. The equipment has a five-year life and
an estimated salvage value of HK$300,000. What is the annual rate of return on this
investment?
a. 15.0%
b. 22.5%
c. 30.0%
d. 34.5%
140. Garza Company is considering buying equipment for €320,000 with a useful life of five
years and an estimated salvage value of €16,000. If annual expected income is €28,000,
the denominator in computing the annual rate of return is
a. €320,000.
b. €160,000.
c. €168,000.
d. €336,000.
141. Mussina Company had an investment which cost €250,000 and had a salvage value at
the end of its useful life of zero. If Mussina's expected annual net income is €15,000, the
annual rate of return is:
a. 6.0%.
b. 10.2%.
c. 12.0%.
d. 15.0%.
143. Which of the following is based directly on accrual accounting data rather than cash
flows?
a. Profitability index
b. Internal rate of return
c. Net present value
d. Annual rate of return
144. When calculating the annual rate of return, the average investment is equal to
a. (initial investment plus $0) divided by 2.
b. initial investment divided by life of project.
c. initial investment divided by 2.
d. (initial investment plus salvage value) divided by 2.
145. A project has an annual rate of return of 15%. The project cost €120,000, has a 5-year
useful life, and no salvage value. Straight-line depreciation is used. The annual net
income, exclusive of depreciation, was
a. €42,000.
b. €33,000.
c. €47,700.
d. €18,000.
146. A project that cost €75,000 has a useful life of 5 years and a salvage value of €3,000. The
internal rate of return is 12% and the annual rate of return is 18%. The amount of the
annual net income was
a. €7,020.
b. €6,480.
c. €4,680.
d. €4,320.
147. A project has annual income exclusive of depreciation of HK$80,000. The annual rate of
return is 15% and annual depreciation is HK$20,000. There is no salvage value. The
internal rate of return is 12%. The initial cost of the project was
a. HK$400,000.
b. HK$500,000.
c. HK$1,000,000.
d. HK$800,000.
148. A project that cost £80,000 with a useful life of 5 years is being considered. Straight-line
depreciation is being used and salvage value is £5,000. The project will generate annual
cash flows of £21,375. The annual rate of return is
a. 15%.
b. 50.3%.
c. 16%.
d. 17%.
Use the following information for questions 149 and 150.
A company is considering purchasing factory equipment that costs €480,000 and is estimated to
have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual
revenues are expected to be €135,000 and annual operating expenses exclusive of depreciation
expense are expected to be €39,000. The straight-line method of depreciation would be used.
149. If the equipment is purchased, the annual rate of return expected on this equipment is
a. 40.0%.
b. 7.5%.
c. 15.0%.
d. 20.0%.
155. Colaw Company is considering buying equipment for €240,000 with a useful life of five
years and an estimated salvage value of €12,000. If annual expected income is €21,000,
the denominator in computing the annual rate of return is
a. €240,000.
b. €120,000.
c. €126,000.
d. €252,000.