Question Details

CHAPTER 24 PLANNING FOR CAPITAL INVESTMENTS MULTIPLE CHOICE QUESTION PART  7


106.	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

What is the approximate net present value of this investment?
a.	$27,600
b.	$3,583
c.	$1,772
d.	$5,496




























107.	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

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



	108.	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

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


	109.	
                     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

A company has a minimum required rate of return of 9%. It is considering investing in a project that costs $210,000 and is expected to generate cash inflows of $84,000 at the end of each year for three years. The net present value of this project is
a.	$212,604.
b.	$42,000.
c.	$21,261.
d.	$2,604.


	
110.	
                      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

		A company has a minimum required rate of return of 10%. It is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $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.


	111.	
                      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

		A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $91,116 and is expected to generate cash inflows of $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%.





	112.	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-

		The company requires a 10% rate of return on all new investments.
			Present Value of an Annuity of 1	
Periods	  9%		 10%		 11%		 12%	
	5	3.890	3.791	3.696	3.605
	6	4.486	4.355	4.231	4.111

		The cash payback period for Project Nuts is
a.	13.3 years.
b.	6.7 years.
c.	5.0 years.
d.	4.1 years.


	113.	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-

		The company requires a 10% rate of return on all new investments.
			Present Value of an Annuity of 1	
Periods	  9%		 10%		 11%		 12%	
	5	3.890	3.791	3.696	3.605
	6	4.486	4.355	4.231	4.111


		The net present value for Project Nuts is
a.	$635,830.
b.	$200,330.
c.	$100,000.
d.	$35,830.









	114.	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-

		The company requires a 10% rate of return on all new investments.
			Present Value of an Annuity of 1	
Periods	  9%		 10%		 11%		 12%	
	5	3.890	3.791	3.696	3.605
	6	4.486	4.355	4.231	4.111

The internal rate of return for Project Nuts is approximately
a.	11%.
b.	12%.
c.	10%.
d.	9%.


115.	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-

The company requires a 10% rate of return on all new investments.
			Present Value of an Annuity of 1	
Periods	  9%		 10%		 11%		 12%	
	5	3.890	3.791	3.696	3.605
	6	4.486	4.355	4.231	4.111


The annual rate of return for Project Soup is
a.	7.5%.
b.	15.0%.
c.	27.5%.
d.	55%.






	116.	A post-audit should be performed using
a.	a different evaluation technique than that used in making the original decision.
b.	the same evaluation technique used in making the original decision.
c.	estimated amounts instead of actual figures.
d.	an independent CPA.


	117.	A thorough evaluation of how well a project's actual performance matches the projections made when the project was proposed is called a
a.	pre-audit.
b.	post-audit.
c.	risk analysis.
d.	sensitivity analysis.

	118.	Performing a post-audit is important because
a.	managers will be more likely to submit reasonable data when they make investment proposals if they know their estimates will be compared to actual results.
b.	it provides a formal mechanism by which the company can determine whether existing projects should be terminated.
c.	it improves the development of future investment proposals because managers improve their estimation techniques by evaluating their past successes and failures.
d.	all of these.


	119.	A capital budgeting method that takes into consideration the time value of money is the
a.	annual rate of return method.
b.	return on stockholders' equity method.
c.	cash payback technique.
d.	internal rate of return method.


	120.	The internal rate of return is the interest rate that results in a 
a.	positive NPV.
b.	negative NPV.
c.	zero NPV.
d.	positive or negative NPV.


	121.	In using the internal rate of return method, the internal rate of return factor was 4.0 and the equal annual cash inflows were $18,000. The initial investment in the project must have been
a.	$18,000.
b.	$4,500.
c.	$72,000.
d.	$36,000.




	122.	The capital budgeting technique that finds the interest yield of the potential investment is the
a.	annual rate of return method.
b.	internal rate of return method.
c.	net present value method.
d.	profitability index method.


	123.	All of the following statements about the internal rate of return method are correct except that it
a.	recognizes the time value of money.
b.	is widely used in practice.
c.	is easy to interpret.
d.	can be used only when the cash inflows are equal.


124.	If the internal rate of return is used as the discount rate in the net present value calcula-tion, the net present value will be
a.	zero.
b.	positive.
c.	negative.
d.	undeterminable.


	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.