Question Details

CHAPTER 24 PLANNING FOR CAPITAL INVESTMENTS MULTIPLE CHOICE QUESTION PART 8



126.	If a project costing $40,000 has a profitability index of 1.00 and the discount rate was 8%, then the project- internal rate of return was
a.	less than 8%.
b.	equal to 8%.
c.	greater than 8%.
d.	undeterminable.


	127.	The internal rate of return factor is equal to the
a.	capital investment divided by the net cash flows.
b.	present value of net cash flows divided by the capital investment.
c.	present value of net cash flows divided by the profitability index.
d.	capital investment divided by the present value of the net cash flows.


128.	If a 2-year capital project has an internal rate of return factor equal to 1.690 and net annual cash flows of $60,000, the initial capital investment was
a.	$101,400.
b.	$35,503.
c.	$50,700.
d.	$71,007.


	129.	If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are
a.	$25,770.
b.	$30,000.
c.	$10,000.
d.	$38,655.


	130.	If the internal rate of return exceeds the discount rate, then the net present value of a project is
a.	positive.
b.	negative.
c.	zero.
d.	one.


	131.	If the internal rate of return is less than the discount rate, then the net present value of a project is
a.	positive.
b.	negative.
c.	zero.
d.	one.


	132.	If a project has a negative net present value, the internal rate of return will be
a.	less than the discount rate.
b.	greater than the discount rate.
c.	equal to the discount rate.
d.	a negative rate of return.


133.	If a project has a zero net present value, then the internal rate of return will be
a.	less than the discount rate.
b.	greater than the discount rate.
c.	equal to the discount rate.
d.	a negative rate of return.

134.	Which of the following will cause the internal rate of return to increase?
a.	An increase in the annual cash inflows
b.	A decrease in the annual cash inflows
c.	An increase in the discount rate
d.	A decrease in the discount rate


	135.	If project A has a lower internal rate of return than project B, then project A will have a
a.	lower NPV and a shorter payback period.
b.	higher NPV and a longer payback period.
c.	lower NPV and a longer payback period.
d.	higher NPV and a shorter payback period.


	136.	The internal rate of return factor is also the
a.	annual rate of return.
b.	profitability index.
c.	cash payback period.
d.	present value factor for a single amount.


137.	Use the following table:
	Present Value of an Annuity of 1
Period	  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 $379,650 and is expected to generate cash inflows of $150,000 each year for three years.  The approximate internal rate of return on this project is
a.	8%.
b.	9%.
c.	10%.
d.	The IRR on this project cannot be approximated.


138.	A company is considering purchasing a machine that costs $280,000 and is estimated to have no salvage value at the end of its 8-year useful life.  If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used.

If the machine is purchased, the annual rate of return expected on this machine is
a.	22.1%.
b.	44.3%.
c.	  9.6%.
d.	19.3%.

139.	A company projects an increase in net income of $135,000 each year for the next five years if it invests $900,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $300,000. What is the annual rate of return on this investment?
a.	15.0%
b.	22.5%
c.	30.0%
d.	34.5%


140.	Garza Company is considering buying equipment for $320,000 with a useful life of five years and an estimated salvage value of $16,000. If annual expected income is $28,000, the denominator in computing the annual rate of return is
a.	$320,000.
b.	$160,000.
c.	$168,000.
d.	$336,000. 


141.	Mussina Company had an investment which cost $250,000 and had a salvage value at the end of its useful life of zero. If Mussina's expected annual net income is $15,000, the annual rate of return is:
a.	  6.0%.
b.	10.2%.
c.	12.0%.
d.	15.0%.


142.	Discounted cash flow techniques include all of the following except
a.	profitability index.
b.	annual rate of return.
c.	internal rate of return.
d.	net present value.


	143.	Which of the following is based directly on accrual accounting data rather than cash flows?
a.	Profitability index
b.	Internal rate of return
c.	Net present value
d.	Annual rate of return


 
144.	When calculating the annual rate of return, the average investment is equal to
a.	(initial investment plus $0) divided by 2.
b.	initial investment divided by life of project.
c.	initial investment divided by 2.
d.	(initial investment plus salvage value) divided by 2.


	145.	A project has an annual rate of return of 15%. The project cost $120,000, has a 5-year useful life, and no salvage value. Straight-line depreciation is used. The annual net income, exclusive of depreciation, was
a.	$42,000.
b.	$33,000.
c.	$47,700.
d.	$18,000.


146.	A project that cost $75,000 has a useful life of 5 years and a salvage value of $3,000. The internal rate of return is 12% and the annual rate of return is 18%. The amount of the annual net income was
a.	$7,020.
b.	$6,480.
c.	$4,680.
d.	$4,320.


147.	A project has annual income exclusive of depreciation of $80,000. The annual rate of return is 15% and annual depreciation is $20,000. There is no salvage value. The internal rate of return is 12%. The initial cost of the project was
a.	$400,000.
b.	$500,000.
c.	$1,000,000.
d.	$800,000.

	148.	A project that cost $80,000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5,000. The project will generate annual cash flows of $21,375. The annual rate of return is
a.	15%.
b.	50.3%.
c.	16%.
d.	17%.

	149.	A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.
If the equipment is purchased, the annual rate of return expected on this equipment is
a.	40.0%.
b.	  7.5%.
c.	15.0%.
d.	20.0%.


	150.	A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.
The cash payback period on the equipment is
a.	13.3 years.
b.	8.0 years.
c.	5.0 years.
d.	2.5 years.


	151.	The capital budgeting technique that indicates the profitability of a capital expenditure is the
a.	profitability index method.
b.	net present value method.
c.	internal rate of return method.
d.	annual rate of return method.


	152.	The annual rate of return method is based on
a.	accounting data.
b.	the time value of money data.
c.	market values.
d.	cash flow data.


	153.	Disadvantages of the annual rate of return method include all of the following except that
a.	it relies on accrual accounting numbers instead of actual cash flows.
b.	it does not consider the time value of money.
c.	no consideration is given as to when the cash inflows occur.
d.	management is unfamiliar with the information used in the computation.


154.	A company projects an increase in net income of $30,000 each year for the next five years if it invests $300,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $100,000. What is the annual rate of return on this investment?
a.	10%
b.	15%
c.	20%
d.	25%


	155.	Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is
a.	$240,000.
b.	$120,000.
c.	$126,000.
d.	$252,000.

	156.	The annual rate of return is computed by dividing expected annual
a.	cash inflows by average investment.
b.	net income by average investment.
c.	cash inflows by original investment.
d.	net income by original investment.


	157.	All of the following statements about the annual rate of return method are correct except that it
a.	indicates the profitability of a capital expenditure.
b.	ignores the salvage value of an investment.
c.	does not consider the time value of money.
d.	compares the annual rate of return to management- minimum rate of return.