Question Details

CHAPTER 24 PLANNING FOR CAPITAL INVESTMENTS MULTIPLE CHOICE QUESTION PART 5


66.	A company's cost of capital refers to the
a.	rate the company must pay to obtain funds from creditors and stockholders.
b.	total cost of a capital project.
c.	cost of printing and registering common stock shares.
d.	rate of return earned on common stock.


	67.	When a capital budgeting project generates a positive net present value, this means that the project earns a return higher than the
a.	internal rate of return.
b.	annual rate of return.
c.	required rate of return.
d.	profitability index.


	68.	A negative net present value indicates that the
a.	project is acceptable.
b.	wrong discount rate was used.
c.	project- annual rate of return exceeds the discount rate.
d.	present value of the cash inflows was less than the present value of the cash out flows.


	69.	A company- discount rate is based on the
a.	cost of capital and the internal rate of return.
b.	cost of capital and the risk element.
c.	cut-off rate and the risk element.
d.	cut-off rate and the internal rate of return.


	70.	The discount rate that will result in the lowest 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.


	71.	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.


	72.	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


	73.	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.


	74.	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.


	75.	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.

	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- 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- 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- 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.


	80.	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.


	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 also 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.


	82.	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.


	83.	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.


	84.	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.


	85.	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.