Capital Budgeting Complete Test Bank Whitecotton Ch.11

Managerial Accounting, 4e (Whitecotton)

Chapter 11 Capital Budgeting

1) Preference decisions compare an investment with some minimum criteria.

2) Independent projects are unrelated to one another, so that investing in one project does not affect the choice about investing in another project.

3) The accounting rate of return is the only method that focuses on net income rather than cash flow.

4) The payback period is defined as the average net income divided by the initial investment.

5) The payback period method ignores the time value of money.

6) The net present value method compares a project's future net income to the initial investment.

7) The internal rate of return is the rate of return that yields a zero net present value.

8) The internal rate of return method uses cash flows rather than net income.

9) The profitability index is calculated as the present value of future cash flows divided by the initial investment.

10) Sensitivity analysis helps determine whether changing the underlying assumptions would affect the decision.

11) When deciding between mutually exclusive investments, a manager should choose the option with the lowest depreciation.

12) When managers must choose among independent projects, they should prioritize projects according to their net present value.

13) An example of a future value of a single amount problem would be finding how much the right to receive a certain amount in the future would be worth today.

14) To find the present value of a single amount, you only need to know the amount to be received in the future, the interest rate, and the number of periods until the amount will be received.

15) An annuity is a series of consecutive payments that are equal in dollar amount, have interest periods of equal length, and earn an equal interest rate each period.

16) Which of the following statements is correct about capital assets?

A) For managerial accounting purposes, "capital assets" are defined more narrowly than for financial accounting purposes.

B) Human capital and research and development are both considered capital assets for financial accounting purposes, but not for managerial accounting purposes.

C) Capital assets are only those that can be depreciated, whether using managerial or financial accounting.

D) For managerial accounting purposes, "capital assets" are defined more broadly than for financial accounting purposes.

17) A decision that occurs when managers evaluate a proposed capital investment to determine whether it meets some minimum criteria is a(n):

A) preference decision.

B) capital decision.

C) screening decision.

D) incremental decision.

18) A decision that requires managers to choose from among a set of alternative capital investment opportunities is a(n):

A) preference decision.

B) capital decision.

C) screening decision.

D) incremental decision.

19) Projects that are unrelated to one another, so that investing in one project does not preclude or affect the choice about investing in the other alternatives, are:

A) mutually exclusive projects.

B) screening projects.

C) independent projects.

D) preference projects.

20) Projects that involve a choice among competing alternatives, where selection of one project implies rejection of all the other alternatives, are:

A) mutually exclusive projects.

B) screening projects.

C) independent projects.

D) preference projects.

21) Which of the following capital budgeting methods does not use discounted cash flows?

A) Net present value

B) Internal rate of return

C) Payback period

D) Profitability index

22) The accounting rate of return is calculated as:

A) initial investment divided by annual net income.

B) initial investment divided by required rate of return.

C) annual net income divided by initial investment.

D) annual net income divided by required rate of return.

23) The accounting rate of return is also called all of the following except:

A) annual rate of return.

B) required rate of return.

C) simple rate of return.

D) unadjusted rate of return.

24) Which of the following methods is calculated as annual net income as a percentage of the original investment in assets?

A) Accounting rate of return

B) Payback period

C) Net present value

D) Internal rate of return

25) Which of the following is the formula for accounting rate of return?

A) Initial investment/net income

B) Annual net cash flow/Initial investment

C) Initial investment/Annual net cash flow

D) Annual net income/Initial investment

26) Which of the following capital budgeting methods focuses on net income rather than cash flows?

A) Payback period

B) Accounting rate of return

C) Net present value

D) Internal rate of return

27) How does the accounting rate of return differ from the return on investment formula?

A) They are not different; both are calculated by dividing net operating income by initial investment.

B) The numerator in each formula differs; accounting rate of return divides net operating income by initial investment, and return on investment divides gross operating income by initial investment.

C) The numerator in each formula differs; accounting rate of return divides net operating income by average invested assets, while return on investment divides gross operating income by average invested assets.

D) The denominator in each formula differs; accounting rate of return divides net operating income by initial investment, while return on investment divides net operating income by average invested assets.

28) Palmer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $100,000. The equipment will have an initial cost of $400,000 and have a 7-year life. If the salvage value of the equipment is estimated to be $75,000, what is the accounting rate of return?

A) 14.28%

B) 25.00%

C) 42.11%

D) 147.37%

29) Belmont Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $200,000. The equipment will have an initial cost of $1,000,000 and have an 8-year life. If there is no salvage value of the equipment, what is the accounting rate of return?

A) 12.5%

B) 20%

C) 40%

D) 15%

30) Nelson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. If the salvage value of the equipment is estimated to be $75,000, what is the accounting rate of return? Ignore income taxes.

A) 6.25%

B) 8.75%

C) 25.00%

D) 26.67%

31) Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. What is the accounting rate of return? Ignore income taxes.

A) 5.56%

B) 16.67%

C) 22.22%

D) 44.44%

32) Fletcher Corp. is considering the purchase of a new piece of equipment. The equipment will have an initial cost of $400,000, a 5-year life, and a salvage value of $75,000. If the accounting rate of return for the project is 10%, what is the annual increase in net cash flow? Ignore income taxes.

A) $25,000

B) $40,000

C) $65,000

D) $105,000

33) Addison Corp. is considering the purchase of a new piece of equipment. The equipment will have an initial cost of $900,000, a 6-year life, and no salvage value. If the accounting rate of return for the project is 5%, what is the annual increase in net cash flow? Ignore income taxes.

A) $45,000

B) $105,000

C) $150,000

D) $195,000

34) Which of the following is not a limitation of using the accounting rate of return method for capital budgeting?

A) The accounting rate of return method does not incorporate time value of money.

B) The accounting rate of return method is based on accounting income, rather than cash flow.

C) Net income—on which the accounting rate of return method is based—is more objective than cash flow.

D) The accounting rate of return method is subject to potential manipulation based on accounting choices made by management (e.g., the method used to depreciate a capital asset).

35) Which of the following would be included in net income but not in annual cash flows?

A) Sales revenue

B) Depreciation

C) Initial investment

D) Direct labor

36) Homer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. If the salvage value of the equipment is estimated to be $75,000, what is the annual net cash flow?

A) $25,000

B) $35,000

C) $165,000

D) $175,000

37) Cortland Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net cash flows of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. If the salvage value of the equipment is estimated to be $75,000, what is the annual net income? Ignore income taxes.

A) $25,000

B) $35,000

C) $165,000

D) $175,000

38) The total time to recover an original investment is the:

A) net present value.

B) internal rate of return.

C) accounting rate of return.

D) payback period.

39) When cash flows are equal each year, the payback period is calculated as:

A) Initial investment × Annual net cash flow.

B) Initial investment/Annual net cash flow.

C) Annual net cash flow/Initial investment.

D) Annual net cash flow − Initial investment/Project life.

40) If cash flows are not equal each year, the payback period:

A) cannot be calculated.

B) is calculated by dividing the initial investment by the average cash flows.

C) is calculated by subtracting each year's cash flows from the initial investment until zero is reached.

D) is calculated by dividing the total years in the project by two.

41) Nelson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. If the salvage value of the equipment is estimated to be $75,000, what is the payback period? Ignore income taxes.

A) 3.25 years

B) 4.00 years

C) 4.75 years

D) 7.00 years

42) Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. What is the payback period?

A) 1.33 years

B) 2.57 years

C) 4.50 years

D) 6.00 years

43) Wright Corp. is considering the purchase of a new piece of equipment, which would have an initial cost of $1,000,000 and a 5-year life. There is no salvage value for the equipment. The increase in cash flow each year of the equipment's life would be as follows:

What is the payback period?

A) 2.39 years

B) 2.96 years

C) 3.00 years

D) 3.51 years

44) Patterson Corp. is considering the purchase of a new piece of equipment, which would have an initial cost of $500,000, a 7-year life, and $150,000 salvage value. The increase in cash flow each year of the equipment's life would be as follows:

What is the payback period?

A) 5.51 years

B) 5.97 years

C) 6.00 years

D) 6.18 years

45) Palmer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $100,000. The equipment will have an initial cost of $400,000 and have a 7-year life. If the salvage value of the equipment is estimated to be $75,000, what is the payback period?

A) 2.73 years

B) 4.00 years

C) 4.75 years

D) 7.00 years

46) Belmont Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $200,000. The equipment will have an initial cost of $1,000,000 and have an 8-year life. If there is no salvage value of the equipment, what is the payback period?

A) 1.6 years

B) 3.08 years

C) 5 years

D) 8 years

47) Wright Corp. is considering the purchase of a new piece of equipment, which would have an initial cost of $1,000,000 and a 5-year life. There is no salvage value for the equipment. The increase in net income each year of the equipment's life would be as follows:

What is the payback period?

A) 1.77 years

B) 2.06 years

C) 2.96 years

D) 3.51 years

48) Patterson Corp. is considering the purchase of a new piece of equipment, which would have an initial cost of $500,000, a 7-year life, and $150,000 salvage value. The increase in net income each year of the equipment's life would be as follows:

What is the payback period?

A) 3.55 years

B) 3.82 years

C) 5.97 years

D) 6.18 years

49) The payback method:

A) is a complex method of analysis.

B) is infrequently used.

C) incorporates the time value of money.

D) ignores benefits and costs that occur after the project has paid for itself.

50) Which of the following statement regarding the payback method is incorrect?

A) The payback period is the amount of time it takes for a capital investment to "pay for itself."

B) In general, projects with longer payback periods are safer investments than those with shorter payback periods.

C) When cash flows are equal each year, the payback period is calculated by dividing the initial investment in the project by its annual cash flow.

D) The payback method is often used as a screening tool for potential investments.

51) The method that compares the present value of a project's future cash flows to the initial investment is:

A) accounting rate of return.

B) payback period.

C) net present value.

D) internal rate of return.

52) Which of the following statements is correct about the net present value method?

A) It is a discounted cash flow method based on net income.

B) It is a non-discounted method based on net income.

C) It is a discounted cash flow method based on cash flow.

D) It is a non-discounted method based on cash flow.

53) If a project has a positive net present value, it means the project is expected to provide returns that are ________ the cost of capital.

A) greater than

B) less than

C) equal to

D) not connected to

54) The minimum required rate of return for a project is the:

A) annual rate of return.

B) accounting rate of return.

C) hurdle rate.

D) internal rate of return.

55) If the hurdle rate is greater than the internal rate of return, the net present value will be:

A) positive.

B) negative.

C) zero.

D) equal to the hurdle rate.

56) A positive net present value indicates that a project will:

A) generate a return in excess of the firm's cost of capital.

B) generate more cash than is initially invested.

C) generate more cash than alternative projects.

D) generate a return in excess of alternative projects.

57) When making screening decisions using the net present value method, a project is acceptable if:

A) the NPV is greater than the hurdle rate.

B) the NPV is greater than the IRR.

C) the NPV is positive.

D) the NPV is negative.

58) Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) Negative $28,940

B) Positive $28,940

C) Zero

D) Positive $300,000

59) Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. If the hurdle rate is 8%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) $924,580

B) $24,580

C) $900,000

D) $300,000

60) Byron Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. The salvage value of the equipment is estimated to be $75,000. If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) $25,648

B) $100,000

C) $175,000

D) ($20,291)

61) Byron Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. The salvage value of the equipment is estimated to be $75,000. If the hurdle rate is 15%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) Negative $27,490

B) Zero

C) Positive $400,000

D) Positive $75,000

62) Wilson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $50,000. The equipment will have an initial cost of $600,000 and have an 8-year life. The salvage value of the equipment is estimated to be $100,000. If the hurdle rate is 10%, what is the approximate net present value? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) Less than zero

B) $100,000

C) $500,000

D) $46,826

63) A profitability index greater than ________ means that a project has a positive NPV.

A) negative one

B) zero

C) one

D) the hurdle rate

64) The discount rate that would return a net present value equal to zero is the:

A) annual rate of return.

B) accounting rate of return.

C) hurdle rate.

D) internal rate of return.

65) The internal rate of return is a measure of:

A) the rate actually earned by the project, considering the time value of money.

B) the rate actually earned by the project, based on accounting income.

C) the rate used to discount the future cash flows to reflect the time value of money.

D) the firm's cost of capital.

66) Lawrence Corp. is considering the purchase of a new piece of equipment. When discounted at a hurdle rate of 8%, the project has a net present value of $24,580. When discounted at a hurdle rate of 10%, the project has a net present value of ($28,940). The internal rate of return of the project is:

A) zero.

B) between zero and 8%.

C) between 8% and 10%.

D) greater than 10%.

67) Grace Corp., whose required rate of return is 10%, is considering the purchase of a new piece of equipment. The internal rate of return of the project, which has a life of 8 years, is 12%. The project would have:

A) an accounting rate of return greater than 10%.

B) a payback period more than 8 years.

C) a net present value of zero.

D) a net present value greater than zero.

68) Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. If the hurdle rate is 10%, what is the internal rate of return? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) Between 6% and 8%

B) Between 8% and 10%

C) Between 10% and 12%

D) Less than zero

69) Olive Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $250,000. The equipment will have an initial cost of $1,300,000 and have an 8-year life. There is no salvage value for the equipment. If the hurdle rate is 10%, what is the internal rate of return? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) Between 6% and 8%

B) Between 8% and 10%

C) Greater than 10%

D) Less than zero

70) Byron Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. The salvage value of the equipment is estimated to be $75,000. If the hurdle rate is 10%, what is the internal rate of return? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) Between 6% and 8%

B) Between 8% and 10%

C) Between 10% and 12%

D) Between 12% and 14%

71) Wilson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $50,000. The equipment will have an initial cost of $600,000 and have an 8-year life. The salvage value of the equipment is estimated to be $100,000. If the hurdle rate is 10%, what is the internal rate of return? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) Less than zero

B) Between zero and 10%

C) Between 10% and 15%

D) More than 15%

72) When comparing mutually exclusive capital investments, managers should:

A) choose the option with the lowest cost on a net present value basis.

B) choose the option with the lowest undiscounted cost.

C) not use net present value because it cannot be used to compare investments.

D) not use sensitivity analysis.

73) An analysis that reveals whether changing the underlying assumptions would affect the decision is a:

A) net present value analysis.

B) internal rate of return analysis.

C) payback period analysis.

D) sensitivity analysis.

74) Heidi Inc. is considering whether to lease or purchase a piece of equipment. The total cost to lease the equipment will be $120,000 over its estimated life, while the total cost to buy the equipment will be $75,000 over its estimated life. At Heidi's required rate of return, the net present value of the cost of leasing the equipment is $73,700 and the net present value of the cost of buying the equipment is $68,000. Based on financial factors, Heidi should:

A) lease the equipment, saving $45,000 over buying.

B) buy the equipment, saving $45,000 over leasing.

C) lease the equipment, saving $5,700 over buying.

D) buy the equipment, saving $5,700 over leasing.

75) Devon Corp. is trying to decide whether to lease or purchase a piece of equipment. The total cost lease the equipment will be $150,000 over its estimated life, while the total cost to buy the equipment will be $120,000 over its estimated life. At Devon's required rate of return, the net present value of the cost of leasing the equipment is $108,000 and the net present value of the cost of buying the equipment is $119,000. Based on financial factors, Devon should:

A) lease the equipment, saving $30,000 over buying.

B) buy the equipment, saving $30,000 over leasing.

C) lease the equipment, saving $11,000 over buying.

D) buy the equipment, saving $11,000 over leasing.

76) Foster Inc. is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years. The equipment would cost $45,000 to purchase, and maintenance costs would be $5,000 per year. After ten years, Foster estimates it could sell the equipment for $20,000. If Foster leases the equipment, it would pay $12,000 each year, which would include all maintenance costs. If the hurdle rate for Foster is 10%, Foster should: (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Do not round intermediate calculations. Round your final answer to the nearest hundred.)

A) lease the equipment, as net present value of cost is about $5,700 less.

B) buy the equipment, as net present value of cost is about $5,700 less.

C) lease the equipment, as net present value of cost is about $2,000 less.

D) buy the equipment, as net present value of cost is about $45,000 less.

77) Randall Corp. is trying to decide whether to lease or purchase a piece of equipment needed for the next five years. The equipment would cost $100,000 to purchase, and maintenance costs would be $10,000 per year. After five years, Randall estimates it could sell the equipment for $30,000. If Randall leases the equipment, it would pay $30,000 each year, which would include all maintenance costs. If the hurdle rate for Randall is 12%, Randall should: (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Do not round intermediate calculations. Round your final answer to the nearest hundred.)

A) lease the equipment, as net present value of cost is about $11,000 less.

B) buy the equipment, as net present value of cost is about $11,000 less.

C) lease the equipment, as net present value of cost is about $30,000 less.

D) buy the equipment, as net present value of cost is about $30,000 less.

78) Frank Inc. is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years. The equipment would cost $45,000 to purchase, and maintenance costs would be $5,000 per year. After ten years, Frank estimates it could sell the equipment for $20,000. If Frank leased the equipment, it would pay a set annual fee that would include all maintenance costs. Frank has determined after a net present value analysis that at its hurdle rate of 10%, it would be better off by $5,700 if it buys the equipment. What would the approximate annual cost be if Frank were to lease the equipment? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Do not round intermediate calculations. Round your final answer to the nearest hundred.)

A) $9,000

B) $7,000

C) $12,000

D) $13,250

79) Dallas Corp. is trying to decide whether to lease or purchase a piece of equipment needed for the next five years. The equipment would cost $100,000 to purchase, and maintenance costs would be $10,000 per year. After five years, Dallas estimates it could sell the equipment for $30,000. If Dallas leased the equipment, it would pay a set annual fee that would include all maintenance costs. Dallas has determined after a net present value analysis that at its hurdle rate of 12% it would be better off by $11,000 if it leases the equipment. What would the approximate annual cost be if Dallas were to lease the equipment? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Do not round intermediate calculations. Round your final answer to the nearest hundred.)

A) $21,800

B) $27,800

C) $30,000

D) $34,700

80) Independent projects should be prioritized according to their:

A) profitability index.

B) net present value.

C) payback period.

D) total cash flows.

81) When a project has a positive net present value, it has a profitability index:

A) greater than zero.

B) less than zero.

C) greater than one.

D) less than one.

82) Carmen, Inc. is considering three different independent investment opportunities. The present value of future cash flows, initial investment, net present value, and profitability index for each of the projects are as follows:

In what order should Carmen prioritize investment in the projects? 

A) A, C, B

B) B, C, A

C) A, B, C

D) B, A, C

83) Norwood, Inc. is considering three different independent investment opportunities. The present value of future cash flows, initial investment, net present value, and profitability index for each of the projects are as follows:

In what order should Norwood prioritize investment in the projects?

A) A, B, C

B) C, B, A

C) A, C, B

D) C, A, B

84) Carol, Inc. is considering three different independent investment opportunities. The present value of future cash flows, initial investment, and net present value for each of the projects are as follows:

In what order should Carol prioritize investment in the projects? 

A) A, C, B

B) B, C, A

C) A, B, C

D) B, A, C

85) Boxwood, Inc. is considering three different independent investment opportunities. The present value of future cash flows, initial investment, and net present value for each of the projects are as follows:

In what order should Boxwood prioritize investment in the projects?

A) A, B, C

B) C, B, A

C) A, C, B

D) C, A, B

86) Iron, Inc., which has a hurdle rate of 10%, is considering three different independent investment opportunities. Each project has a five-year life. The annual cash flows and initial investment for each of the projects are as follows:  (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Do not round intermediate calculations. Round your final answer to the nearest hundred.)

In what order should Iron prioritize investment in the projects?

A) A, C, B

B) B, C, A

C) A, B, C

D) B, A, C

87) Ironwood, Inc., which has a hurdle rate of 12%, is considering three different independent investment opportunities. Each project has a seven-year life. The annual cash flows and initial investment for each of the projects are as follows: (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Do not round intermediate calculations. Round your final answer to the nearest hundred.)

In what order should Ironwood prioritize investment in the projects?

A) A, B, C

B) C, B, A

C) A, C, B

D) C, A, B

88) The value today of cash flow to be received in the future is called:

A) present value.

B) cash value.

C) future value.

D) accounting value.

89) A problem in which you must calculate how much money you will have in the future as a result of investing a certain amount in the present is a:

A) future value of a single amount problem.

B) present value of a single amount problem.

C) future value of an annuity problem.

D) present value of an annuity problem.

90) If you invest $10,000 today in a savings account that earns 5% interest, compounded annually, how much would be in the account at the end of ten years? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to nearest dollar amount.)

A) $6,139

B) $16,289

C) $77,217

D) $125,779

91) You purchase a home for $200,000 that you expect to appreciate 6% in value on an annual basis. How much will the home be worth in ten years?  (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to nearest dollar amount.)

A) $111,680

B) $358,120

C) $1,472,020

D) $2,636,160

92) You have $10,000 that you can invest in a savings account that earns 7% interest, compounded annually. If you want to withdraw at least $18,000 at some point in the future, how long will you need to keep the money invested? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to nearest dollar amount.)

A) 9 years

B) 10 years

C) 11 years

D) 12 years

93) A problem in which you must calculate the worth to you today of receiving a certain amount at some time in the future is a:

A) future value of a single amount problem.

B) present value of a single amount problem.

C) future value of an annuity problem.

D) present value of an annuity problem.

94) How much would you need to deposit in a savings account that earns 7%, compounded annually, to withdraw $20,000 eight years from now? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest whole dollar amount.)

A) $11,640

B) $18,600

C) $18,692

D) $34,364

95) You are saving for a car that costs $28,000 that you hope to purchase in five years. How much will you need to deposit today in a savings account that earns 8%, compounded annually, to withdraw enough for the purchase? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest whole dollar amount.)

A) $16,800

B) $19,057

C) $25,760

D) $41,140

96) Your grandmother has told you she can either give you $4,000 now or $5,000 when you graduate from college in three years. Your savings account earns 7% interest, compounded annually. Which option would be worth more to you now, and how much more? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to 2 decimal places.)

A) The $4,000 now is worth $81.50 more than the $5,000 in the future.

B) The $4,000 now is worth $100.00 more than the $5,000 in the future.

C) The $5,000 in the future is worth $81.50 more than the $4,000 now.

D) The $5,000 in the future is worth $100.00 more than the $4,000 now.

97) Which of the following is not a characteristic of an annuity?

A) It is a series of equal payments.

B) It earns an equal interest rate each interest period.

C) Interest is compounded annually.

D) Interest periods are of equal length.

98) A problem in which you must calculate how much money you will have in the future as a result of depositing a fixed amount of money each period is a:

A) future value of a single amount problem.

B) present value of a single amount problem.

C) future value of an annuity problem.

D) present value of an annuity problem.

99) How much will you have in a savings account in ten years, if you deposit $1000 in the account at the end of each year and the account earns 6% interest, compounded annually? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) $10,000

B) $10,600

C) $13,181

D) $17,906

100) You are saving for a car that you plan to purchase in five years. You plan to put $3,000 in savings (which earns 8%, compounded annually) at the end of each year until then. How much will you have saved for the car at the end of the five years? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) $15,000

B) $16,200

C) $17,600

D) $22,040

101) You will need at least $5,000 in four years and your friend says she can either loan you $5,000 all at once four years from now or she can deposit $1,200 in your savings account at the end of each year for the next four years. Your savings account earns 7% interest, compounded annually. Which option would be worth more to you four years from now, and how much more? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) The $5,000 in four years will be worth $328 more than the annual deposits.

B) The annual deposits will be worth $328 more than the $5,000 in four years.

C) The $5,000 in four years will be worth $136 more than the annual deposits.

D) The annual deposits will be worth $136 more than the $5,000 in four years.

102) A problem in which you must calculate the value now of a series of equal amounts to be received for some specified number of periods in the future is a:

A) future value of a single amount problem.

B) present value of a single amount problem.

C) future value of an annuity problem.

D) present value of an annuity problem.

103) How much would you need to deposit now in a savings account that earns 5% interest, compounded annually, in order to withdraw $5,000 at the end of every year for ten years? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) $38,609

B) $47,500

C) $47,619

D) $50,000

104) You have a savings account that earns 5% interest, compounded annually. A friend has offered you an investment opportunity; he says that if you invest in his new business, he will pay you $10,000 a year for the next five years. What is the maximum amount you would be willing to invest in your friend's business? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) $43,295

B) $47,500

C) $47,619

D) $50,000

105) You invest $13,420 in an annuity contract that earns 8% interest, compounded annually. You are to receive annual payments for the next ten years. How much will each of the payments be? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

A) $1,342

B) $1,449

C) $1,459

D) $2,000

106) Fargo Corp. is considering the purchase of a new piece of equipment. The equipment costs $50,000 and will have a salvage value of $5,000 after nine years. Using the new piece of equipment will increase Fargo's annual cash flows by $6,000. Fargo has a hurdle rate of 12%.

a. How much is Fargo's annual depreciation on the equipment?

b. What is Fargo's projected annual increase in net income?

c. What is the accounting rate of return for purchasing the new piece of equipment?

d. Based on financial factors, should Fargo purchase the new equipment? Why or why not?

107) Fire Corp. is considering the purchase of a new piece of equipment. The equipment costs $50,000 and will have a salvage value of $5,000 after nine years. Using the new piece of equipment will increase Fire's annual cash flows by $6,000.

a. What is the payback period for the new piece of equipment?

b. Suppose that the increase in cash flows was $10,000 in the first year, then decreased by $1,000 each year over the life of the equipment. What is the payback period for the equipment?

108) Dobson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income of $50,000. The equipment will have an initial cost of $500,000 and have an 8-year life. There is no salvage value of the equipment. The hurdle rate is 10%. Ignore income taxes. Calculate the following:

a. Accounting rate of return

b. Payback period

109) Lexington Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $500,000 and have an 8-year life. There is no salvage value of the equipment. The hurdle rate is 8%. Ignore income taxes. Calculate the following:

a. Accounting rate of return

b. Payback period

110) Grady Corp. is considering the purchase of a new piece of equipment. The equipment costs $50,000, and will have a salvage value of $5,000 after nine years. Using the new piece of equipment will increase Grady's annual cash flows by $6,000. Grady has a hurdle rate of 12%.

a. What is the present value of the increase in annual cash flows?

b. What is the present value of the salvage value?

c. What is the net present value of the equipment purchase?

d. Based on financial factors, should Grady purchase the equipment? Why?

111) Cloud Corp. is considering the purchase of a new piece of equipment. The equipment costs $30,000, and will have a salvage value of $4,000 after nine years. Using the new piece of equipment will increase Cloud's annual cash flows by $6,000. Cloud has a hurdle rate of 12%.

a. What is the net present value?

b. What would the net present value be with a 15% hurdle rate?

c. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

112) Major Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $500,000 and have an 8-year life. The equipment has no salvage value. The hurdle rate is 8%. Ignore income taxes. Answer the following:

a. What is the net present value?

b. What would the net present value be with a 12% hurdle rate?

c. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

113) Mindy Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $50,000. The equipment will have an initial cost of $500,000 and have an 8-year life. The equipment has no salvage value. The hurdle rate is 10%. Answer the following:

a. What is the net present value?

b. What would the net present value be with a 15% hurdle rate?

c. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

114) Grove Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income of $200,000. The equipment will have an initial cost of $1,200,000 and have an 8 year life. The salvage value of the equipment is estimated to be $200,000. The hurdle rate is 10%. Ignore income taxes. Answer the following:

a. What is the accounting rate of return?

b. What is the payback period?

c. What is the net present value?

d. What would the net present value be with a 15% hurdle rate?

e. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

115) Briar Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $1,200,000 and have an 8-year life. The salvage value of the equipment is estimated to be $200,000. The hurdle rate is 8%. Ignore income taxes. Answer the following:

a. What is the accounting rate of return?

b. What is the payback period?

c. What is the net present value?

d. What would the net present value be with a 12% hurdle rate?

e. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

116) Surf Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income of $50,000. The equipment will have an initial cost of $600,000 and have an 8-year life. The equipment has no salvage value. The hurdle rate is 10%. Ignore income taxes. Answer the following:

a. What is the accounting rate of return?

b. What is the payback period?

c. What is the net present value?

d. What would the net present value be with a 15% hurdle rate?

e. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

117) Clyde Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $600,000 and have an 8-year life. The equipment has no salvage value. The hurdle rate is 8%. Ignore income taxes. Answer the following:

a. What is the accounting rate of return?

b. What is the payback period?

c. What is the net present value?

d. What would the net present value be with a 12% hurdle rate?

e. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

118) Emerson Corp. is trying to decide whether to lease or purchase a piece of equipment needed for the next five years. The equipment would cost $500,000 to purchase, and maintenance costs would be $20,000 per year. After five years, Emerson estimates it could sell the equipment for $100,000. If Emerson leases the equipment, it would pay $150,000 each year, which would include all maintenance costs. Emerson's hurdle rate is 12%.

a. What is the net present value of the cost of purchasing the equipment?

b. What is the net present value of the cost of leasing the equipment?

c. Based on financial factors, should Emerson purchase or lease the equipment? Why?

119) York Inc. is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years. The equipment would cost $90,000 to purchase, and maintenance costs would be $10,000 per year. After ten years, York estimates it could sell the equipment for $40,000. If York leases the equipment, it would pay $24,000 each year, which would include all maintenance costs. The hurdle rate for York is 10%.

a. What is the net present value of the cost of purchasing the equipment?

b. What is the net present value of the cost of leasing the equipment?

c. Based on financial factors, should York purchase or lease the equipment? Why?

120) Norwood, Inc., which has a hurdle rate of 12%, is considering three different independent investment opportunities. Each project has a seven-year life. The annual cash flows and initial investment for each of the projects are as follows:

a. What is the present value of the annual cash flows for each of the three projects?

b. What is the net present value of each of the projects?

c. What is the profitability index of each of the projects? (Round to two decimal places.)

d. In what order should Norwood prioritize investment in the projects?

121) Carmen, Inc., which has a hurdle rate of 10%, is considering three different independent investment opportunities. Each project has a five-year life. The annual cash flows and initial investment for each of the projects are as follows:

a. What is the present value of the annual cash flows for each of the three projects?

b. What is the net present value of each of the projects?

c. What is the profitability index of each of the projects? (Round to two decimal places.)

d. In what order should Carmen prioritize investment in the projects?

122) Imagine you are a managerial accountant in charge of operations for an architectural firm whose work focuses on green building initiatives. To be consistent with the firm's principles, you propose three separate green initiatives to the board. The first proposal is to install low-water plumbing throughout the building. The second proposal is to install solar panels on the south-facing side of the building to reduce electric costs. The third proposal is to eliminate food and package waste from the break area by partnering with a sustainable food pantry. All three initiatives would include educational materials for clients, architects, and staff of the firm to underscore the firm's commitment to environmental matters. To convince the board of directors of the viability of these options, you prepare the following analysis.

a-f. Fill in the missing spaces within the table above.

Which project would the board of directors choose if it values:

g. a fast payback period?

h. internal rate of return?

i. net present value?

j. initial cost outlay?

k. If you make your recommendation based on the profitability index, in which order would you recommend the projects be prioritized?

123) You want to invest $10,000 in a business opportunity. If you keep the money invested in the business for two years, you will receive $11,000 back. If you keep the money invested in the business for five years, you will receive $13,000 back. Currently, the money is in your savings account, which earns 5% interest, compounded annually.

a. What is the future value of the money if it remains in your savings account for two years?

b. What is the future value of the money if it remains in your savings account for five years?

c. Is it better to invest in the business for two years, five years, or not at all? Why?

124) An acquaintance of yours owes you $1,000, but only has $800 to pay you now. He says he can either give you the $800 now in full settlement of the debt, or he can give you $1,000 one year from now. If you would let him keep the money for two years, though, he would give you $1,100 at that point. You have a savings account that earns 12% interest.

a. What is the present value of the payment now?

b. What is the present value of the payment a year from now?

c. What is the present value of the payment two years from now?

d. Which option would be best for you financially?

125) You are saving for a car and have decided you can afford to deposit $5,000 into a savings account at the end of each of the next five years, at which point you will withdraw the money to purchase the car. You can deposit the money in a savings account that earns 8% interest with no annual fee, or you can choose a savings account that earns 10% interest, but has an annual fee of $100.00 that would come out of your deposits.

a. If you choose the free savings account, how much money will you be able to withdraw five years from now?

b. If you choose the savings account with a fee, how much money will you be able to withdraw five years from now?

c. Which option would be best for you financially?

126) You won the lottery, and the jackpot was $12,000,000. You can either receive the $12,000,000 in equal installments over 20 years, or you can receive a lump sum today. The amount of the lump sum you'll receive today is based on the present value of the equal installment payments.

a. What is the present value of the lottery winnings taken in equal installments over 20 years at 8% interest?

b. What is the present value of the lottery winnings taken in equal installments over 20 years at 10% interest?

c. Which interest rate yields the greatest amount of cash today?