Question Details

ACC 162 Planning for capital investments PART 6

MULTIPLE CHOICE QUESTIONS

86.	The profitability index
a.	does not take into account the discounted cash flows.
b.	is calculated by dividing total cash flows by the initial investment.
c.	allows comparison of the relative desirability of projects that require differing initial investments.
d.	will never be greater than 1.

	87.	The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments is the
a.	cash payback method.
b.	internal rate of return method.
c.	net present value method.
d.	profitability index.

	88.	The following information is available for a potential investment for Panda Company:
Initial investment	$80,000
Net annual cash inflow	20,000
Net present value	36,224
Salvage value	10,000
Useful life	10 yrs.
The potential investment- profitability index is
a.	4.00.
b.	2.85.
c.	2.50.
d.	1.45.

	89.	An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is
a.	the discounted cash flow technique.
b.	the net present value method.
c.	risk analysis.
d.	sensitivity analysis.

	90.	If a project- profitability index is greater than 1, then the
a.	project should always be accepted.
b.	project- net present value is negative.
c.	project- internal rate of return is less than the discount rate.
d.	project should be accepted if funds are available.

	91.	If a project- profitability index is less than 1, then
a.	its net present value is zero.
b.	its net present value is positive.
c.	it should be rejected.
d.	its internal rate of return is greater than the discount rate.

	92.	If a project- profitability index is equal to 1, then
a.	its net present value is zero.
b.	its net present value is positive.
c.	it should be rejected.
d.	its internal rate of return is greater than the discount rate.

	93.	A project with an initial investment of $50,000 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.	$56,000.
b.	$61,950.
c.	$40,355.
d.	$50,000.

	94.	A project with a profitability index of 1.156 also has net cash flows with a present value of $46,240. The project- internal rate of return was 10%. The initial investment was
a.	$44,000.
b.	$53,453.
c.	$40,000.
d.	$41,616.

Use the following information for questions 95 and 96.

Selma Inc. is comparing several alternative capital budgeting projects as shown below:
			Projects	
			A			B			C	
Initial investment	$40,000	$60,000	$  80,000
Present value of net cash flows	60,000	55,000	100,000

	95.	Using the profitability index, the projects rank as
a.	A, C, B.
b.	A, B, C.
c.	C, A, B.
d.	C, B, A.

	96.	Using the profitability index, how many of the projects are acceptable?
a.	3
b.	2
c.	1
d.	0

	97.	If a project has a negative net present value, its profitability index will be
a.	one.
b.	greater than one.
c.	less than one.
d.	undeterminable.

	98.	If a project has a positive net present value, its profitability index will be
a.	one.
b.	greater than one.
c.	less than one.
d.	undeterminable.

	99.	If a project has a zero net present value, its profitability index will be
a.	one.
b.	greater than one.
c.	less than one.
d.	undeterminable.

100.	If a project has a profitability index of 1.20, then the project- internal rate of return is
a.	equal to the discount rate.
b.	less than the discount rate.
c.	greater than the discount rate.
d.	equal to 20%.

Use the following information for questions 101-103.

Cleaners, Inc. is considering purchasing equipment costing $30,000 with a 6-year useful life. The equipment will provide cost savings of $7,300 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

101.	What is the approximate net present value of this investment?
a.	$13,800
b.	$1,792
c.	$886
d.	$2,748

102.	What is the approximate profitability index associated with this equipment?
a.	1.23
b.	1.03
c.	1.06
d.	.73

	103.	What is the approximate internal rate of return for this investment?
a.	9%
b.	10%
c.	11%
d.	12%

Use the following table for questions 104-106.

	Present Value of an Annuity of 1
Periods	  8%		  9%		 10%	
1		.926	.917	.909
2		1.783	1.759	1.736
3		2.577	2.531	2.487

	104.	A company has a minimum required rate of return of 9%. It is considering investing in a project that costs $175,000 and is expected to generate cash inflows of $70,000 at the end of each year for three years. The net present value of this project is
a.	$177,170.
b.	$35,000.
c.	$17,718.
d.	$2,170.

 
	105.	A company has a minimum required rate of return of 9%. It is considering investing in a project that costs $75,000 and is expected to generate cash inflows of $30,000 at the end of each year for three years. The profitability index for this project is
a.	.99.
b.	1.00.
c.	1.01.
d.	1.20.