Question Details

ACC 162 Planning for capital investments PART  5

MULTIPLE CHOICE QUESTIONS

66.	The discount rate that will result in the highest net present value for a project is
a.	any rate lower that the cost of capital.
b.	any rate higher than the cost of capital.
c.	the lowest rate used to evaluate the project.
d.	the highest rate used to evaluate the project.

	67.	Which of the following will increase the net present value of a project?
a.	An increase in the initial investment
b.	A decrease in annual cash inflows
c.	An increase in the discount rate
d.	A decrease in the discount rate

	68.	A project with a zero net present value indicates that it is
a.	unacceptable.
b.	profitable.
c.	acceptable.
d.	going to have an acceptable cash payback period.

	69.	Companies often assume that the risk element in the discount rate is
a.	zero.
b.	greater that zero. 
c.	less than zero. 
d.	known with certainty.

 
	70.	If a project has a salvage value greater than zero, the salvage value will
a.	have no effect on the net present value.
b.	increase the net present value.
c.	increase the payback period.
d.	decrease the net present value.

	71.	Sloan Inc. recently invested in a project with a 3-year life span. The net present value was $3,000 and annual cash inflows were $7,000 for year 1; $8,000 for year 2; and $9,000 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.	$15,264.
b.	$15,060.
c.	$9,744.
d.	$12,792.

	72.	Mini Inc. is contemplating a capital project costing $31,346. The project will provide annual cost savings of $12,000 for 3 years and have a salvage value of $2,000. The company- 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.

	73.	Johnson Corp. has an 8% required rate of return. It- considering a project that would provide annual cost savings of $20,000 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.	$50,364.
b.	$66,240.
c.	$79,860.
d.	$13,620.

	74.	Benaflek Co. purchased some equipment 3 years ago. The company- required rate of return is 12%, and the net present value of the project was $(450). Annual cost savings were: $5,000 for year 1; $4,000 for year 2; and $3,000 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.	$10,239.
b.	$9,158.
c.	$10,058.
d.	$9,339.

	75.	In capital budgeting, intangible benefits should be
a.	excluded entirely.
b.	included using optimistic estimated values.
c.	included using conservative estimated values.
d.	included only when benefits are known with certainty.

	76.	Miles, Inc. is considering the purchase of a new machine for $100,000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $17,500. 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.	$3,993 per year.
b.	$8,277 per year.
c.	$3,044 per year.
d.	$7,544 per year.

	77.	Intangible benefits in capital budgeting would include all of the following except increased
a.	product quality.
b.	employee loyalty.
c.	salvage value.
d.	product safety.

	78.	Intangible benefits in capital budgeting
a.	should be ignored because they are difficult to determine.
b.	include increased quality or employee loyalty.
c.	are not considered because they are usually not relevant to the decision.
d.	have a rate of return in excess of the company- cost of capital.

 
	79.	To avoid rejecting projects that actually should be accepted,
1.	intangible benefits should be ignored.
2.	conservative estimates of the intangible benefits' value should be incorporated into the NPV calculation.
3.	calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV.
a.	1
b.	2
c.	3
d.	both 2 and 3 are correct.

	80.	All of the following statements about intangible benefits in capital budgeting are correct except that they
a.	include increased quality and employee loyalty.
b.	are difficult to quantify.
c.	are often ignored in capital budgeting decisions.
d.	cannot be incorporated into the NPV calculation.

	81.	In evaluating high-tech projects,
a.	only tangible benefits should be considered.
b.	only intangible benefits should be considered.
c.	both tangible and intangible benefits should be considered.
d.	neither tangible nor intangible benefits should be considered.

	82.	Using a number of outcome estimates to get a sense of the variability among potential returns is
a.	financial analysis.
b.	post-audit analysis.
c.	sensitivity analysis.
d.	outcome analysis.

	83.	If a company's required rate of return is 9%, and in using the profitability index method, a project's index is greater than 1, this indicates that the project's rate of return is
a.	equal to 9%.
b.	greater than 9%.
c.	less than 9%.
d.	unacceptable for investment purposes.

	84.	The profitability index is computed by dividing the
a.	total cash flows by the initial investment.
b.	present value of cash flows by the initial investment.
c.	initial investment by the total cash flows.
d.	initial investment by the present value of cash flows.

	85.	The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the
a.	cash payback method.
b.	internal rate of return method.
c.	net present value method.
d.	profitability index.