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A company is planning to purchase a machine that will cost $28,200 with a six-year
life and no salvage value. The company expects to sell the machine's output of 3,000
units evenly throughout each year. A projected income statement for each year of the
asset's life appears below. What is the accounting rate of return for this machine?
 
                                                                                                                 
Sales                                                                               $            95,000                  
Costs:                                                                                                     
Manufacturing                                                                 $             50,200                                                                  
Depreciation on machine                                                             4,700                                                                      
Selling and administrative expenses                                           35,000                 (89,900)                
Income before taxes                                                       $             5,100                      
Income tax (30%)                                                                           (1,530 )                  
Net income                                                                         $           3,570                      
 
Multiple Choice
 
25.32%
50.00%.
4.70%.
12.66%.
33.33%.
   
The following data concerns a proposed equipment purchase:
 
Cost                                       $             148,000                                 
Salvage value                     $             6,000                      
Estimated useful life                       4 years  
Annual net cash flows    $             48,100                  
Depreciation method                     Straight-line
 
Ignoring income taxes, the annual net income amount used to calculate the accounting rate of return is:
 
$83,600
$14,100
$46,600
$48,100
$12,600
   
Alfarsi Industries uses the net present value method to make investment decisions and requires
a 15% annual return on all investments. The company is considering two different investments.
Each require an initial investment of $14,200 and will produce cash flows as follows:
 
End of Year         Investment
A                                             B
1             $             9,800                     $             0              
2                             9,800                                     0              
3                             9,800                                     29,400  
 
The present value factors of $1 each year at 15% are:
                 
1             0.8696
2             0.7561
3             0.6575
 
The present value of an annuity of $1 for 3 years at 15% is 2.2832
The net present value of Investment B is:
 
$9,994.
$5,131
$15,200.
$48,731.
$(19,331).
   
The following present value factors are provided for use in this problem.
 
Periods                 Present Value of $1 at 12%          Present Value of an Annuity of $1 at 12%
1                                             0.8929                                                                 0.8929  
2                                             0.7972                                                                 1.6901  
3                                             0.7118                                                                 2.4018  
4                                             0.6355                                                                 3.0373  
 
 
Cliff Co. wants to purchase a machine for $60,000, but needs to earn an 12% return.
The expected year-end net cash flows are $23,000 in each of the first three years, and $27,000 in the
fourth year. What is the machine's net present value?
 
$12,400
$72,400.
$96,000.
$(4,759).
$(42,841).
   
The following data concerns a proposed equipment purchase:
 
                                                 
Cost                                       $             155,400                 
Salvage value                     $             4,600      
Estimated useful life                       4 years
Annual net cash flows    $             46,700  
Depreciation method                     Straight-line
 
 
The annual average investment amount used to calculate the accounting rate of return is:
 
$77,700
$80,000
$38,850
$54,350
$75,400
   
The following present value factors are provided for use in this problem.
 
Periods                 Present Value of $1 at 8%             Present Value of an Annuity of $1 at 8%
1                                             0.9259                                                 0.9259  
2                                             0.8573                                                 1.7833  
3                                             0.7938                                                 2.5771  
4                                             0.7350                                                 3.3121  
 
 
Xavier Co. wants to purchase a machine for $36,100 with a four year life and a $1,100 salvage value.
Xavier requires an 8% return on investment. The expected year-end net cash flows are $11,100 in
each of the four years. What is the machine's net present value?
 
$(1,473).
$1,473
$37,573.
$(664).
$664.
   
Vextra Corporation is considering the purchase of new equipment costing $36,000.
The projected annual cash inflow is $11,200, to be received at the end of each year. The machine has
a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments.
The present value of an annuity of $1 for different periods follows:
 
Periods                 12%
1             0.8929
2             1.6901
3             2.4018
4             3.0373
 
 
What is the net present value of the machine?
 
$36,000.
$(34,018).
$(3,300).
$(1,982)
$4,018.
   
A company is planning to purchase a machine that will cost $36,000 with a six-year life and no salvage value.
The company expects to sell the machine's output of 3,000 units evenly throughout each year.
A projected income statement for each year of the asset's life appears below.
What is the payback period for this machine?
                                                                                 
Sales                                                                  $             102,000                                 
Costs:                                                                                                     
Manufacturing                                                    $             56,000                                                                  
Depreciation on machine                                                6,000                                                                      
Selling and administrative expenses                              34,000                                 (96,000)                
Income before taxes                                          $             6,000                      
Income tax (35%)                                                              (2,100 )                  
Net income                                                         $             3,900                      
 
18.46 years.
3.64 years
9.23 years.
1.36 year.
6.00 years.
   
Carmel Corporation is considering the purchase of a machine costing $48,000 with a 8-year
useful life and no salvage value. Carmel uses straight-line depreciation and assumes that the
annual cash inflow from the machine will be received uniformly throughout each year.
In calculating the accounting rate of return, what is Carmel's average investment?
 
$27,000.
$48,000.
$24,000
$6,750.
$6,000.
   
A company is considering the purchase of a new machine for $66,000.
Management predicts that the machine can produce sales of $22,000 each year for the next
10 years. Expenses are expected to include direct materials, direct labor, and factory overhead
totaling $10,400 per year including depreciation of $5,800 per year. Income tax expense is $4,640
per year based on a tax rate of 40%. What is the payback period for the new machine?
 
5.17 years
6.73 years.
3.00 years.
11.38 years.
17.19 years
   
Alfarsi Industries uses the net present value method to make investment decisions and requires a
15% annual return on all investments. The company is considering two different investments.
Each require an initial investment of $15,100 and will produce cash flows as follows:
 
End of Year Investment
                                                                A                                         B
1                             $                             8,100                     $             0              
2                                                             8,100                                   0              
3                                                             8,100                                   24,300  
 
 
The present value factors of $1 each year at 15% are:
1             0.8696
2             0.7561
3             0.6575
 
The present value of an annuity of $1 for 3 years at 15% is 2.2832
The net present value of Investment A is:
 
$3,394.
$9,200.
$15,977
$(18,495).
$(15,100).
   
A company buys a machine for $64,000 that has an expected life of 5 years and no salvage value.
The company anticipates a yearly net income of $3,050 after taxes of 38%, with the cash flows to
be received evenly throughout each year. What is the accounting rate of return?
 
3.62%.
23.83%.
9.53%.
5.91%.
4.77%
   
Poe Company is considering the purchase of new equipment costing $89,500.
The projected annual cash inflows are $39,700, to be received at the end of each year.
The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on
its investments. The present value of $1 and present value of an annuity of $1 for different
periods is presented below. Compute the net present value of the machine.
 
Periods                 Present Value of $1 at 10%          Present Value of an Annuity of $1 at 10%
1                                             0.9091                                                                 0.9091  
2                                             0.8264                                                                 1.7355  
3                                             0.7513                                                                 2.4869  
4                                             0.6830                                                                 3.1699  
 
$(36,345).
$54,919.
$(22,101).
$22,101.
$36,345
   
Butler Corporation is considering the purchase of new equipment costing $36,000.
The projected annual after-tax net income from the equipment is $1,400, after deducting
$12,000 for depreciation. The revenue is to be received at the end of each year.
The machine has a useful life of 3 years and no salvage value. Butler requires a 10% return
on its investments. The present value of an annuity of $1 for different periods follows:
 
Periods                 10%
1                             0.9091
2                             1.7355
3                             2.4869
4                             3.1699
 
What is the net present value of the machine?
 
$(2,676)
$36,000.
$4,200.
$33,324.
$29,843
   
Poe Company is considering the purchase of new equipment costing $87,500.
The projected net cash flows are $42,500 for the first two years and $37,500 for years three and four.
The revenue is to be received at the end of each year. The machine has a useful life of 4 years and no
salvage value. Poe requires a 10% return on its investments. The present value of $1 and present value
of an annuity of $1 for different periods is presented below. Compute the net present value of the machine.
 
Periods                 Present Value of $1 at 10%          Present Value of an Annuity of $1 at 10%
1                                             0.9091                                                                  0.9091  
2                                             0.8264                                                                  1.7355  
3                                             0.7513                                                                  2.4869  
4                                             0.6830                                                                  3.1699  
 
$18,479.
$40,049
$(18,479).
$32,005.
$(32,005).
   
A company is considering the purchase of new equipment for $48,000.
The projected annual net cash flows are $20,100. The machine has a useful life of 3 years and
no salvage value. Management of the company requires a 11% return on investment.
The present value of an annuity of $1 for various periods follows:
 
Period                   Present value of an annuity of $1 at 11%
1                                                             0.9009
2                                                             1.7125
3                                                             2.4437
 
What is the net present value of this machine assuming all cash flows occur at year-end?
 
$3,100
$16,000
$46,675
$19,100
$1,118
   
A company can buy a machine that is expected to have a three-year life and a $34,000 salvage value.
The machine will cost $1,816,000 and is expected to produce a $204,000 after-tax net income to be
received at the end of each year. If a table of present values of $1 at 12% shows values of 0.8929 for
one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash
flows from the investment, discounted at 12%?
 
$124,918
$712,534
$636,166
$1,940,918
$592,218
   
Characteristics of capital budgeting include: (Check all that apply.)
 
large amount of money is involved
outcome is uncertain
long-term investment
   
Capital budgeting is used to evaluate the purchase of:
 
Machine
   
A company is considering two capital investments. Each requires an initial investment of $15,000
and has a 4 year useful life. Investment A has expected cash inflows of $5,000 each year for the 4
years for total cash inflows of $20,000. Investment B has the following expected cash flows:
 
Year 1: $8,000
Year 2: $6,000
Year 3: $4,000
Year 4: $2,000
Total cash flows: $20,000
 
Calculate the payback period for Investment A.
 
3 years
   
A company is considering a capital investment of $16,000 in new equipment which will improve production
and increase cash flows for the next five years at the following amounts:
 
Year 1: $8,000
Year 2: $6,000
Year 3: $5,000
Year 4: $6,000
Year 5: $5,000
 
The payback period is ______ years.
 
2.4
   
A company is considering a capital investment of $45,000 in new equipment which will improve production
and increase cash flows by $15,000 per year for 6 years. The payback period is ______ years.
 
3
   
The decision rule for NPV includes: (Check all that apply).
 
when comparing projects with similar initial investments and risk, select the one with the highest net present value.
if an asset's future net cash flows yield a positive net present value, invest.
   
A company is considering an investment opportunity with a cost of $5,000 that will provide future
cash flows of $8,000. The cash flows for the investment for the next 4 years are: $1,000, $2,000, $3,000 and $2,000.
Assume a required rate of return of 10%. The NPV is $______ (rounded to nearest dollar).
 
1,182
   
Capital budgeting decisions emphasize __ flows.
 
Cash.
   
If the NPV for an investment is greater than zero, the firm will:
 
Accept the project
   
Which of the following are correct statements about the internal rate of return (IRR)? (Check all that apply.)
 
The higher the IRR, the better.
IRR uses the time value of money.
   
A company is evaluating an investment which has an initial investment of $15,000.
Expected annual net cash flows over four years is $5,000. The company would like to earn
a 10% return on the investment. The present value of an annuity factor for 10% and 4 periods
is 3.1699. The present value of $1 factor for 10% and 4 periods is 0.6830.
The net present value is $______ (round your answer to the nearest whole dollar).
 
850
   
A company is considering an investment opportunity with a cost of $5,000 that will provide future cash
flows of $8,000. The cash flows for the investment for the next 4 years are: $1,000, $1,000, $2,000 and $4,000.
Assume a required rate of return of 10%. The NPV is $______ (rounded to nearest dollar).
 
970
   
The discount rate that results in a net present value of $0 is the:
 
internal rate of return
   
A predetermined, minimum acceptable rate of return is known as a(n):
 
hurdle rate
   
What are the methods used to evaluate capital expenditures?
 
Internal rate of return.
Payback method.
Net present value.
   
Match the capital budgeting method to its specific characteristic.
 
Payback period                                 >             Ignores the time value of money
Accounting rate of return            >             Uses income rather than cash flows
Net present value                            >             Can reflect changes in risk over a project's life
Internal rate of return                   >             Allows comparisons of projects of different sizes
   
Which of the following is the approximate internal rate of return for an investment that costs $12,680
and has net cash flows of $4,000 for 4 years?
 
10%
   
Net present value is the preferred investment selection method because it:
 
Is a theoretically valid method.
Is understood and used by real-world finance professionals.
   
MACRS classifies assets into ___ categories to determine the allowable rate of depreciation.
 
Nine
   
All of the following are cash flows over the life of an asset except:
 
Depreciation
   
The firm is considering the replacement of an old machine that has a current market value of $20,000 and a
book value of $15,000 with a new machine that has a purchase price of $100,000.
The firm's tax rate if 35%. The next cost of the new machine is $___.
 
81,750

20,000 - 15,000 = 5,000
5,000 x 0.35 = 1,750
100,000 - 20,000 + 1,750 = 81,750
 
   
A company is considering two capital investments. Each requires an initial investment of $15,000 and has
a 4 year useful life. Investment A has expected cash inflows of $5,000 each year for the 4 years for total
cash inflows of $20,000. Investment B has the following expected cash flows:
 
Year 1: $8,000
Year 2: $6,000
Year 3: $4,000
Year 4: $2,000
 
Total cash flows: $20,000.
Using the payback period as the evaluation method, which investment should be chosen by management?
 
Investment B
   
The capital budgeting evaluation method that measures the expected amount of time to recover
the initial investment amount is the:
 
payback period.
   
Based on the information provided in the table below, what is the net present value of the investment with a discount rate of 10%?
 
$1,3000 positive

Year (n); CF
0; -$50,000
1; $30,000
2; $20,000
3; $10,000
 
   
An investment that costs $30,000 will produce annual cash flows of $10,000 for 4 years.
Using a required return of 8%, the investment will generate (rounded to the nearest dollar) a:
 
Positive NPV of $3,121.

10,000 x 3.3121 = 33,121
33,121 - 30,000 = 3,121.
   
A company is evaluating an investment which has an initial investment of $4,000.
Annual net cash flows is expected to be $2,000 over the next three years. The company requires a 10%
annual return. The present value of an annuity factor for 10% and 3 periods is 2.4869. The present value
of $1 factor for 10% and 3 periods is 0.7513. The net present value is $______
(round your answer to the nearest whole dollar).
 
974
   
A company is considering two investment projects. Both have an initial cost of $50,000. One project has even
cash flows and the other uneven cash flows. Which evaluation method would be most appropriate?
 
Net present value
   
Net present value is the sum of the ___ values of all cash outflows and inflows related to a project.
 
Present
   
Of the four capital budgeting methods, which ones reflect the time value of money? (Check all that apply).
 
internal rate of return
net present value
   
A company is considering two similar investment projects. One has an initial cost of $50,000 and the
other an initial cost of $450,000. Which evaluation method would be most appropriate?
 
Internal rate of return
   
The firm has 2 investment opportunities to choose from, A and B. The cash inflows for each investment of $75,000 is provided in the table below. Using the payback method what is the payback period for each investment.


Year                       Investment A                     Investment B
1                              30,000                                   50,000
2;                            20,000;                                 20,000
3;                            20,000;                                 10,000
4;                            10,000;                                 5,000
5;                            10,000;                                 5,000
 
A = 3 ½ years and
B= 2 ½ years

Add up the investments to see how long it will take to satisfy the $75,000 amount.
   
Based on the table below, which investment alternative(s) will the firm choose if their cost of capital is 12%


Non-Mutually Exclusive Alternatives;                      IRR;                        NPV
Investment A;                                                                    10%;                      $0
Investment B;                                                                    15%;                      $500
Investment C;                                                                    12%;                      $250
Investment D;                                                                  7%;                         -$100
 
Investment B.
Investment C.

Investments B and C because each have a IRR equal to or higher than the Cost of Capital
   
The formula to calculate the accounting rate of return is:
 
annual income/average investment
   
A company purchases new equipment costing $200,000 that provides an annual cost savings of $25,000.
The company's tax rate is 35%. The company's annual after-tax savings is $___.
 
16,250

25,000 x (1- 0.35) = 16,250
   
Weaknesses of the accounting rate of return as a capital budgeting evaluation method include that it: (Check all that apply.)
 
Does not directly consider cash flows and their timing.
Ignores time value of money.
   
Assume straight-line depreciation. A company plans to purchase machinery costing $1,000,000
with salvage value of $200,000 after 4 years. Annual income is expected to be $40,000 during the 4 years.
Calculate the accounting rate of return. Round your answer to the nearest tenth of a percent.
 
6.7%


1,000,000 + 200,000) / 2 = 600,000
40,000 / 600,000 = 0.067 or 6.7%
   
Assume straight-line depreciation and equal cash flows. A company plans to purchase equipment for $25,000.
The equipment will have $0 salvage value and increase income by $7,500 annually during its 5-year life.
The accounting rate of return is ______%.
 
60
   
PGH, Inc. is considering a new six-year expansion project that requires an initial fixed asset investment of
$3.102 million. The fixed asset will be depreciated straight-line to zero over its six-year tax life, after
which time it will be worthless. The project is estimated to generate $1,987,000 in annual sales,
with costs of $1,102,200. The tax rate is 35 percent and the required return on the project is 16 percent.
What is the net present value for this project??
 
-$316,081.72

OCF = (1,987,000 - 1,102,200)(1 - .35) + (3,102,000 / 6)(.35) = 756,070
-3,102,000 + 756,070({1 - [1 / (1.16)6]} / .16) = -316,081.72
   
The accounting rate of return:
 
does not directly consider cash flows and their timing.
   
A company's required rate of return computed as an average of the rate the company must pay to
its lenders and investors is called:
 
hurdle rate
   
Under capital rationing, acceptable projects must be ranked and only those with the highest ___ will be chosen.
 
Net Present Value (NPV)
   
Which of the following rates are requires when applying the Net Present Value Profile:
 
Internal Rate of Return (IRR).
Discount Rate.
   
In a non-mutually exclusive investment decision he firm will choose the investments that have the highest
 
IRR.
NPV.
   
The capital investment evaluation method that subtracts the initial investment from
the discounted future net cash flows from the investment at the required rate of return is the:
 
net present value
   
An investment that costs $5,000 will produce annual cash flows of $3,000 for 3 years.
Using a required return of 8%, the investment will generate a NPV of $______
(rounded to nearest dollar).
 
2,731
   
A company has evaluated several projects using net present value.
All projects are similar in amount invested and risk.
Rank the projects in the order they should be accepted.
 
NPV = $2,067     >             First choice
NPV = $340         >             Second choice
NPV = $62           >             Third choice
NNPV = ($615)                  Not an acceptable project
   
A company is considering two capital investments. Each requires an initial investment of
$15,000 and has a 4 year useful life. Investment A has expected cash inflows of $5,000 each
 year for the 4 years for total cash inflows of $20,000.
Investment B has the following expected cash flows:
 
Year 1: $8,000
Year 2: $6,000
Year 3: $4,000
Year 4: $2,000
Total cash flows: $20,000
 
Calculate the payback period for Investment B.
 
2.25 years
   
A decision concerning the purchase of new technology to replace old technology is called a ___ decision.
 
Replacement
   
The curves of Investment A and Investment B cross one another at 10%.
If Investment A's curve falls below Investment B's curve prior to the crossover point,
which investment is superior at discount rates less than 10%?
 
B

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