Ch12 Capital Investment Decisions Test Questions & Answers

Managerial Accounting, 6e (Braun et al.)

Chapter 12 Capital Investment Decisions and the Time Value of Money

12.1 Describe the importance of capital investments and the capital budgeting process

1) Capital investments do not typically require large sums of money.

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

2) The process of making capital investment decisions is referred to as capital budgeting.

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

3) Self-check-in machines at airports are an example of capital assets.

Diff: 1

LO: 12-1

EOC: S12-16

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

4) Capital budgeting is done when common stock is issued.

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

5) Choosing among alternative capital investments is called a post-audit.

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

6) Post-audits of capital investments compare actual net cash inflows to projected net cash inflows.

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

7) The costs to develop a major website for a company would be considered a capital asset if those costs are significant and material (for example, the costs to develop the website exceed $100,000).

Diff: 1

LO: 12-1

EOC: S12-16

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

8) The cost associated with renovating a warehouse to be used as a restaurant would be considered a capital asset.

Diff: 1

LO: 12-1

EOC: S12-16

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

9) The health care insurance cost of a company for its assembly-line workers would not be considered a capital asset.

Diff: 1

LO: 12-1

EOC: S12-16

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

10) All four of the methods for analyzing capital investments use accrual basis accounting.

Diff: 1

LO: 12-1

AACSB: Reflective thinking

11) Accounting Rate of Return is the only method used for analyzing capital investments that uses accrual basis accounting.

Diff: 1

LO: 12-1

AACSB: Reflective thinking

12) Accounting Rate of Return and Payback Period are methods better used for capital investments that have a relatively short life span such as computer equipment and software.

Diff: 1

LO: 12-1

AACSB: Reflective thinking

13) Capital budgeting predictions must consider factors such as changing consumer preferences, competition, and government regulations.

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

14) The following are all methods of analyzing capital investments except

A) Payback Period.

B) Regression Analysis.

C) Net Present Value (NPV).

D) Accounting Rate of Return (ARR).

Diff: 1

LO: 12-1

EOC: S12-15

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

15) Which of the following items would be considered a capital asset?

A) Purchase of office supplies to be used internally over the next year

B) Payment for this year's advertising campaign

C) Construction of a new store building

D) Donation of money to United Way

Diff: 1

LO: 12-1

EOC: S12-16

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

16) Which of the following is a characteristic of a capital asset?

A) The item will be used for a long period of time.

B) The item involves a significant sum of money.

C) None of these characteristics are correct.

D) Both A and B are correct.

Diff: 1

LO: 12-1

EOC: S12-16

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

17) The process of choosing among different alternative investments due to limited resources is referred to as

A) capital investing.

B) capital rationing.

C) resource rationing.

D) resource allocation.

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

18) The ________ capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations.

A) ARR

B) Payback

C) NPV

D) IRR

Diff: 1

LO: 12-1

EOC: S12-15

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

19) Regarding capital rationing decisions for capital assets, which of the following is true?

A) Companies should always choose the investment with the shortest payback period.

B) Companies should always choose the investment with the highest NPV.

C) Companies should always choose the investment with the highest ARR.

D) None of the above are true.

Diff: 1

LO: 12-1

EOC: S12-15

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

20) After a company invests in capital assets, it will perform a ________ in order to compare the actual to the projected net cash inflows.

A) cash flow analysis

B) pre- and post-analysis

C) post-audit

D) post-cash flow

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

21) The term ________ is described as a "formal means of analyzing long-range investment alternatives."

A) annuity

B) time value of money

C) payback period

D) capital budgeting

Diff: 1

LO: 12-1

EOC: S12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

22) Which method of capital budgeting is best used for longer term capital investments?

A) Net Present Value

B) Internal Rate of Return

C) None of these methods

D) Both A & B

Diff: 1

LO: 12-1

AACSB: Reflective thinking

Learning Outcome: Discuss the basics of capital investments and illustrate the time value of money concepts.

12.2 Use the payback and accounting rate of return methods to make capital investment decisions

1) The accounting rate of return method of analyzing capital budgeting decisions measures the average annual rate of return from using the asset over its entire life.

Diff: 1

LO: 12-2

EOC: E12-21A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

2) The accounting rate of return is a measure of profitability computed by dividing the average annual operating income from an asset by the initial amount invested in the asset.

Diff: 1

LO: 12-2

EOC: E12-21A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

3) Accrual-based accounting is not used in determining the accounting rate of return.

Diff: 1

LO: 12-2

EOC: S12-15

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

4) The payback method primarily focuses on profitability and not time.

Diff: 1

LO: 12-2

EOC: S12-15

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

5) One disadvantage of the payback method is that it does not consider the time value of money.

Diff: 1

LO: 12-2

EOC: S12-15

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

6) The accounting rate of return uses non-cash flow factors including depreciation in calculating the operating income of the asset.

Diff: 1

LO: 12-2

EOC: S12-15

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

7) Investments with longer payback periods are more desirable, all else being equal.

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

8) The payback method can be used when the net cash inflows from a capital investment are unequal.

Diff: 1

LO: 12-2

EOC: E12-19A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

9) A major criticism of the payback method is that it focuses only on time, not on profitability.

Diff: 1

LO: 12-2

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

10) The term ________ is best described as "the length of time required to recover the cost of an investment."

A) time value of money

B) payback period

C) capital budgeting

D) annuity

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

11) If the accounting rate of return exceeds the required accounting rate of return,

A) invest in the capital asset.

B) do not invest in the capital asset.

C) only invest if the payback period is also greater than the required rate of return.

D) only invest if the payback period is also less than the required rate of return.

Diff: 1

LO: 12-2

EOC: E12-21A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

12) How does depreciation affect the calculation of a project's payback period?

A) Depreciation is deducted from the annual cash inflows.

B) Depreciation is added to the annual cash inflows.

C) Depreciation is only deducted if the payback period exceeds five years.

D) Depreciation does not affect the payback calculation.

Diff: 1

LO: 12-2

EOC: E12-18A; E12-19A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

13) How does depreciation affect the calculation of a project's accounting rate of return (ARR)?

A) Depreciation is added to the annual cash inflows.

B) Depreciation is deducted from the annual cash inflows.

C) Depreciation does not affect ARR.

D) Depreciation is only deducted if the ARR is less than the minimum required rate of return.

Diff: 1

LO: 12-2

EOC: E12-21A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

14) Which of the following is used as the equation's numerator when computing the payback period for a capital asset with equal annual net cash inflows?

A) Expected annual cash inflow

B) Total cash inflows

C) Amount invested

D) Net cash outflow

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

15) Which of the following is used as the equation's denominator when computing the payback period for a capital asset with equal annual net cash inflows?

A) Expected annual net cash inflow

B) Total cash inflows

C) Amount invested

D) Net cash outflow

Diff: 1

LO: 12-2

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

16) Which of the following is used as the equation's denominator when computing the accounting rate of return for a capital asset?

A) Initial investment amount

B) Average annual operating income from the asset

C) Total amount invested in the asset

D) Average net cash flows from the asset

Diff: 1

LO: 12-2

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

17) Which of the following is used as the equation's numerator when computing the accounting rate of return for a capital asset?

A) Average amount invested in the asset

B) Average annual operating income from the asset

C) Total amount invested in the asset

D) Average net cash flows from the asset

Diff: 1

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

18) All else being equal, a company would choose to invest in a capital asset if which of the following is true?

A) If the payback period equals the amount invested

B) If the expected accounting rate of return is less than the required rate of return

C) If the expected accounting rate of return is greater than the required rate of return

D) If the average amount invested is equal to the net cash inflows

Diff: 1

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

19) All else being equal, when using the payback period method to compare the capital investment between several options, a company would choose to invest in the capital asset if which of the following is true?

A) If the payback period equals the amount invested

B) If the expected accounting rate of return is less than the required rate of return

C) The payback period is the longest of all of the options.

D) The payback period is the shortest of all of the options.

Diff: 1

LO: 12-2

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

20) The formula for calculating the accounting rate of return for a capital asset is

A) average annual operating income from asset/amount invested in asset.

B) average annual net cash inflow from asset/amount invested in asset.

C) (average annual operating income + depreciation expense)/amount invested in asset.

D) (average annual cash inflows - depreciation expense)/(amount invested in asset + residual value of asset).

Diff: 1

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

21) Juniper Corporation is considering two alternative investment proposals with the following data:

How long is the payback period for Proposal X?

A) 11.76 years

B) 6.28 years

C) 6.21 years

D) 62.14 years

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

22) Juniper Corporation is considering two alternative investment proposals with the following data:

How long is the payback period for Proposal Y?

A) 20.00 years

B) 8.06 years

C) 7.33 years

D) 12.45 years

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

23) Juniper Corporation is considering two alternative investment proposals with the following data:

What is the accounting rate of return for Proposal X? (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A) 3.55%

B) 16.05%

C) 2.52%

D) 4.44%

Diff: 2

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

24) Juniper Corporation is considering two alternative investment proposals with the following data:

What is the accounting rate of return for Proposal Y? (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A) 12.50%

B) 7.13%

C) 6.31%

D) 19.63%

Diff: 2

LO: 12-2

EOC: E12-20A; E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

25) The Post Company is considering investing in two alternative projects:

What is the payback period for Project 1?

A) 5.45 years

B) 4.18 years

C) 25.00 years

D) 9.38 years

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

26) The Post Company is considering investing in two alternative projects:

What is the payback period for Project 2?

A) 8.57 years

B) 3.82 years

C) 8.75 years

D) 25.00 years

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

27) The Post Company is considering investing in two alternative projects:

What is the accounting rate of return for Project 1?

A) 41.33%

B) 12.00%

C) 14.67%

D) 26.67%

Diff: 2

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

28) The Post Company is considering investing in two alternative projects:

What is the accounting rate of return for Project 2? (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A) 60.95%

B) 8.57%

C) 33.33%

D) 21.90%

Diff: 2

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

29) Frameworthy Corporation is adding a new product line that will require an investment of $135,000. The product line is estimated to generate cash inflows of $25,000 the first year, $20,000 the second year, and $15,000 each year thereafter for ten more years. What is the payback period?

A) 8.75 years

B) 6.80 years

C) 8.00 years

D) 8.33 years

Diff: 2

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

30) Redtail Hawk Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:

How long is the payback period for Investment A?

A) 2.50 years

B) 6.50 years

C) 2.19 years

D) 0.88 years

Diff: 1

LO: 12-2

EOC: E12-19A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

31) Redtail Hawk Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:

How long is the payback period for Investment B?

A) 6.30 years

B) 6.50 years

C) 5.00 years

D) 32.50 years

Diff: 1

LO: 12-2

EOC: E12-19A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

32) Williams Corporation is considering investing in specialized equipment costing $220,000. The equipment has a useful life of 5 years and a residual value of $20,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:

Williams Corporation's required rate of return on investments is 14%.

What is the accounting rate of return on the investment?

A) 11.36%

B) 7.69%

C) 18.18%

D) 29.55%

Diff: 2

LO: 12-2

EOC: E12-20A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

33) Martin Corporation is considering an investment in new equipment costing $155,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $45,000 the first year, $65,000 the second year, and $90,000 every year thereafter until the fifth year. What is the payback period for this investment? The equipment has no residual value.

A) 2.29 years

B) 3.50 years

C) 1.58 years

D) 2.50 years

Diff: 2

LO: 12-2

EOC: E12-19A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

34) Suppose Whole Foods is considering investing in warehouse-management software that costs $800,000, has $80,000 residual value and should lead to cash cost savings of $180,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation's denominator?

A) $80,000

B) $800,000

C) $180,000

D) $260,000

Diff: 1

LO: 12-2

EOC: E12-19A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

35) The Digital Watch Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated:

Total net inflows during the useful life of the asset are

A) $540,000.

B) $420,000.

C) $470,000.

D) $170,000.

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

36) The Digital Watch Company uses straight-line depreciation and is considering a capital expenditure of which the following relevant cash flow data have been estimated:

Total operating income from the asset over the 3-year period is

A) $20,000.

B) $140,000.

C) $350,000.

D) $70,000.

Diff: 2

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

37) The Digital Watch Company uses straight-line depreciation and is considering a capital expenditure of which the following relevant cash flow data have been estimated:

The total depreciation expense over the life of the asset is

A) $170,000.

B) $560,000.

C) $440,000.

D) $280,000.

Diff: 1

LO: 12-2

EOC: E12-19A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

38) The Digital Watch Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated:

The accounting rate of return is closest to

A) 9.00%.

B) 23.33%.

C) 53.33%.

D) 2.44%.

Diff: 2

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

39) Beck Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,840,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,100,000 . The following information is available:

The payback period for the Kentucky proposal is closest to

A) 2.44 years.

B) 2.29 years.

C) 2.33 years.

D) 52.50 years.

Diff: 1

LO: 12-2

EOC: E12-19A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

40) Beck Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,800,000. The following information is available:

The payback period for the Indiana proposal is closest to

A) 96.00 years.

B) 4.00 years.

C) 19.20 years.

D) 24.00 years.

Diff: 1

LO: 12-2

EOC: E12-19A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

41) Beck Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,880,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,700,000. The following information is available:

The accounting rate of return for the Kentucky proposal is closest to ________. (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A) 15.66%.

B) 13.97%.

C) 8.00%.

D) 29.63%.

Diff: 2

LO: 12-2

EOC: E12-19A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

42) Beck Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,820,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,300,000. The following information is available:

The accounting rate of return for the Indiana proposal is closest to ________. (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A) 18.15%.

B) 20.60%.

C) 32.97%.

D) 31.87%.

Diff: 2

LO: 12-2

EOC: E12-19A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

43) Seaside Go-karts & More Fun Park bought new go-karts for its recreation facility. The useful life is 8 years. The go-karts had a total cost of $7,000 and will generate $1,400 total cash inflows each year for the life of the go-karts. The residual value of the go-karts is $610. The payback period in years is closest to

A) 5.44.

B) 5.00.

C) 4.56.

D) 3.48.

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

44) Say Cheese Inc. bought a new high-speed photo copier to offer customers the opportunity to make high-quality copies out of their digital pictures. Its useful life is 5 years. The copier cost $7,630 and will generate annual cash inflows of $2,190. The residual value of the copier is $1,310. The payback period in years is closest to

A) 5.82.

B) 3.48.

C) 2.89.

D) 2.48.

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

45) Solar Panel Corporation is evaluating a capital investment project which would require an initial investment of $230,000 to purchase new machinery. The annual revenues and expenses generated specifically by this project each year during the project's nine-year life would be:

The residual value of the machinery at the end of the nine years would be $10,000. The payback period of this potential project in years would be closest to

A) 1.3.

B) 1.6.

C) 1.9.

D) 1.00.

Diff: 2

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

46) Back on Your Seat, Computer Repair, is considering an investment in computer and network equipment costing $252,000. This equipment would allow them to offer new programming services to clients. The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $60,000. Using the accounting rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve an 11% accounting rate of return?

A) $6,600

B) $21,120

C) $34,320

D) $27,720

Diff: 3

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

47) Posie DJ Service is a company that is contracted to DJ private events. Due to a recent increase in bookings, Posie is considering the purchase of another mobile DJ unit. The company uses the payback method to evaluate its investments. The mobile DJ unit will cost $4,000, has a useful life of 6 years, and will generate $1,000 in net cash inflows per year. The residual value of the unit is $1,300. What is the payback period for the mobile DJ unit?

A) 5.30 years

B) 2.70 years

C) 4.00 years

D) 1.74 years

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

48) Sam Electric the Electrician specializes in rewiring historic houses. Sam recently purchased a new wire-pulling device that will decrease the time to complete each job and increase total revenues. The device will cost $3,021 and will increase net cash flows by $1,590 per year. The new device has a useful life of 6 years and a residual value of $260. What is the payback period for the new wire-pulling device?

A) 2.06 years

B) 1.90 years

C) 1.74 years

D) 1.63 years

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

49) Mountaintop Manufacturing is considering an investment that would require an initial net investment of $620,000. The following revenues/expenses relate exclusively to the investment:

The investment will have a residual value of $70,000 at the end of its 14 -year useful life. What is the payback period for this investment?

A) 1.59 years

B) 2.52 years

C) 2.33 years

D) 2.17 years

Diff: 2

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

50) Future Investment Corporation is analyzing a proposal to build condo units in southern Florida. The project will require an initial investment of $700,000. The building has a useful life of 20 years, a residual value of $200,000, and is depreciated on a straight-line basis. The company uses the accounting rate of return model to evaluate investment projects. What is the minimum annual operating income that must be generated by this project to achieve the 8% accounting return required by Future Investment Corporation?

A) $16,000

B) $56,000

C) $35,000

D) $40,000

Diff: 3

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

51) Long Enterprises purchased a new machine with a total cost of $32,450 and a useful life of 8 years. The machine will produce net cash inflows of $7,900 over its useful life and has a residual value of $1,780. What is the payback period for the new machine?

A) 5.30 years

B) 3.88 years

C) 4.11 years

D) 3.11 years

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

52) Pulsar Manufacturing has asked you to evaluate a capital investment project. The project will require an initial investment of $102,000. The life of the investment is 7 years with a residual value of $3,000. If the project produces net annual cash inflows of $17,000, what is the accounting rate of return? (Round any intermediary calculations to the nearest dollar and your final answer to two decimal places, X.XX%.)

A) 2.38%

B) 2.80%

C) 6.00%

D) 16.67%

Diff: 2

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

53) Goodwin Corporation bought a new machine, which cost $90,000, has a useful life of 10 years, and will generate annual cash inflows of $25,000. The residual value of the machine is $5,500. What is the payback period?

Diff: 1

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

54) The Haddock Company bought a new specialty machine that cost $100,000 with a 4-year life with no residual value. The company plans to generate annual cash inflows of $30,000 each year for 4 years. Calculate the accounting rate of return.

Diff: 2

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

55) The Hern Corporation bought a new machine that cost $150,000 with a 10-year life and a residual value of $20,000. The company plans to generate annual cash inflows of $40,000 over 10 years. Calculate the accounting rate of return.

Diff: 2

LO: 12-2

EOC: E12-18A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

56) Butler, Inc., is considering investing $160,000 in a machine that may last 4 years with no residual value. The new machine will generate annual operating income of $60,000 per year for 4 years. What is the accounting rate of return?

Diff: 2

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

57) Sharon Manufacturing is considering acquiring another facility for a cost of $610,000. The required payback period is 4.5 years. Assume annual net cash inflows are $150,000 for the first two years and $125,000 for years 3 and 4. What must the inflow be in the fifth year to meet the 4.5-year payback period?

Diff: 3

LO: 12-2

EOC: E12-21A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

58) The managerial accountant at Shiny Gems considers an investment in a gem cleaning piece of equipment that may increase the value of gems because it fills in the fractures of lower-value gems. The initial cost of the equipment is $1,480,000; whereas the annual net cash inflow is $425,000. The managerial accountant projects a useful life of 13 years. The resale value of the equipment is forecasted at $450,000. Calculate the annual depreciation expense. What is the expected payback period of this investment?

Diff: 2

LO: 12-2

EOC: S12-2; S12-4

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

12.3 Use the time value of money to compute the present and future values of single lump sums and annuities

1) One dollar to be received in the future is worth more than one dollar today.

Diff: 1

LO: 12-3

EOC: S12-10

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

2) One advantage of the internal rate of return is that it considers the time value of money.

Diff: 1

LO: 12-3

EOC: S12-15

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

3) The net present value method does not incorporate the time value of money.

Diff: 1

LO: 12-3

EOC: S12-10

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

4) The principal amount, the interest rate, and the number of periods are all factors needed to calculate the time value of money.

Diff: 1

LO: 12-3

EOC: S12-10; S12-9

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

5) Calculating interest on the principal and on all the interest earned to date is called compound interest.

Diff: 1

LO: 12-3

EOC: S12-10

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

6) The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.

Diff: 1

LO: 12-3

EOC: S12-7; S12-9

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

7) The three factors that affect the time value of money are principal, number of periods, and the interest rate.

Diff: 1

LO: 12-3

EOC: S12-10

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

8) The three factors that affect the time value of money are how old you are when you invest, number of periods, and the interest rate.

Diff: 1

LO: 12-3

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

9) The term ________ is best described as a relationship among principal, interest rate, and time.

A) capital budgeting

B) time value of money

C) payback period

D) annuity

Diff: 1

LO: 12-3

EOC: S12-7

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

10) The term ________ is best described as "a stream of equal installments made at equal time intervals."

A) time value of money

B) capital budgeting

C) annuity

D) payback period

Diff: 1

LO: 12-3

EOC: S12-7

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

11) Which of the following areas does not make significant use of time value of money concepts?

A) Capital investment analysis

B) Lending and borrowing

C) Personal finance planning

D) Marketing research

Diff: 2

LO: 12-3

EOC: S12-9; S12-10

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

12) The time value of money is explained by which of the following?

A) Invested money earns income over time.

B) Money is more valuable over time.

C) A stream of payments is received over time.

D) Interest is always compounded over time.

Diff: 1

LO: 12-3

EOC: S12-9; S12-10

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

13) An annuity is best described as which of the following statements?

A) A stream of equal installments made at equal time intervals

B) Another term used for present value

C) Another term used for future value

D) A stream of interest payments on a principal amount invested

Diff: 1

LO: 12-3

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

14) Compound interest means that interest is calculated on

A) the installment of an annuity.

B) only interest earned to date.

C) principal only.

D) principal AND all interest earned to date.

Diff: 1

LO: 12-3

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

15) Simple interest means that interest is calculated on

A) the installment of an annuity.

B) only interest earned to date.

C) principal only.

D) principal AND all interest earned to date.

Diff: 1

LO: 12-3

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

16) Your grandfather has promised to give you $600 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year. Using a discount rate of 6%, which of the following is correct for determining the present value of the gift?

A) PV = $600 × 6% × 4

B) PV = $600 × (PV factor, i = 4%, n = 6)

C) PV = $600 × (Annuity PV factor, i = 6%, n = 4)

D) PV = $600 × (Annuity FV factor, i = 6%, n = 4)

Diff: 2

LO: 12-3

EOC: S12-10

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

17) You have been awarded a scholarship that will pay you $300 per semester at the end of each of the next 8 semesters that you earn a GPA of 3.5 or better. You are a very serious student and you anticipate receiving the scholarship every semester. Using a discount rate of 2% per semester, which of the following is the correct calculation for determining the present value of the scholarship?

A) PV = $300 × 2% × 8

B) PV = $300 × (Annuity PV factor, i = 2%, n = 8)

C) PV = $300 × (Annuity FV factor, i = 4%, n = 4)

D) PV = $600 × (PV factor, i = 2%, n = 4)

Diff: 2

LO: 12-3

EOC: S12-10

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

18) You won the lottery and have a couple of choices as to how to take the money. Which choice yields a greater present value?

Present Value of $1

Present Value of Annuity of $1

A) $7,000 a year at the end of each of the next 8 years using a 8% discount rate

B) $41,000 (lump sum) now using a 8% discount rate

C) $84,000 (lump sum) 9 years from now using a 8% discount rate

D) $80,000 (lump sum) 9 years from now using an 10% discount rate

Diff: 2

LO: 12-3

EOC: S12-7

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

19) When you graduate from college, your mother plans to give you a gift of $30,000 to start you on your way. However, to determine what you learned in business school, your mother presents you with four options on how to receive the gift. Which of the four options presented by your mother will yield the greatest present value to you?

Present Value of $1

Present Value of Annuity of $1

A) A lump sum of $30,000 today

B) $15,000 per year for the next 2 years using a 2% discount rate

C) A lump sum of $30,000 after grad school (2 years) assuming a 5% discount rate

D) A lump sum of $30,000 after grad school (2 years) assuming a 2% discount rate

Diff: 2

LO: 12-3

EOC: S12-7

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

20) Your wealthy neighbor has promised to give you $2,000 a year at the end of each of the next four years to help with college. Using a discount rate of 8%, the present value of the gift can be stated as

A) PV = $2,000 (PV factor, i = 4%, n = 4).

B) PV = $2,000 × 8% × 5.

C) PV = $2,000 (Annuity FV factor, i = 8%, n = 4).

D) PV = $2,000 (Annuity PV factor, i = 8%, n = 4).

Diff: 2

LO: 12-3

EOC: S12-10

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

21) Your hard work in college paid off, quite literally, and you received a graduate assistantship for your MBA program. The assistantship pays a stipend of $15,000 at the end of each of the next 2 years. Using an average discount rate of 6%, the future value of your assistantship can be calculated by

A) FV= $15,000 × 6% × 2.

B) FV = $15,000 (PV factor, i = 6%, n = 2).

C) FV = $15,000 (Annuity PV factor, i = 6%, n = 2).

D) FV = $15,000 (Annuity FV factor, i = 6%, n = 2).

Diff: 2

LO: 12-3

EOC: S12-10; S12-11

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

22) The present value of an investment is affected by which of the following?

A) The interest rate

B) The number of time periods (length of the investment)

C) The type of investment (annuity versus lump sum)

D) All of the above

Diff: 1

LO: 12-3

EOC: S12-9; S12-10; S12-11

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

23) The present value of an investment is affected by all of the following except

A) the interest rate.

B) the number of time periods (length of the investment).

C) the type of investment (annuity versus lump sum).

D) the value of a past investment.

Diff: 1

LO: 12-3

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

24) You win the lottery and must decide how to take the payout. Use an 8% discount rate. What is the present value of $16,000 a year received at the end of each of the next six years?

Present Value of $1

Present Value of Annuity of $1

A) $10,080

B) $96,000

C) $99,360

D) $73,968

Diff: 2

LO: 12-3

EOC: S12-7; S12-8

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

25) Assuming an interest rate of 8%, the present value of $60,000 to be received 10 years from now would be closest to

Present Value of $1

Present Value of Annuity of $1

A) $27,780.

B) $48,000.

C) $60,000.

D) $402,600.

Diff: 2

LO: 12-3

EOC: S12-7; S12-8

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

26) Assuming an interest rate of 12%, the present value of $9,000 received at the end of each year for 6 years would be closest to

Present Value of $1

Present Value of Annuity of $1

A) $4,563.

B) $54,000.

C) $36,999.

D) $75,456.

Diff: 2

LO: 12-3

EOC: S12-7; S12-8

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

27) Assuming an interest rate of 12%, if you invest a lump sum of $5,000 now, the balance of your investment in 7 years will be closest to

Future Value of $1

Future Value of Annuity of $1

A) $22,820.

B) $11,055.

C) $2,260.

D) $35,000.

Diff: 2

LO: 12-3

EOC: S12-7; S12-8

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

28) If you invest $1,000 at the end of every year for three years at an interest rate of 8%, the balance of your investment in 3 years will be closest to

Future Value of $1

Future Value of Annuity of $1

A) $1,260.

B) $3,000.

C) $3,246.

D) $2,577.

Diff: 2

LO: 12-3

EOC: S12-7

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

29) Income from an apartment building you own totals $220,000 per year. You plan on selling the building and retiring to France in 11 years. Assuming you can invest the income from the building each year at 3%, how much money will you have on which to retire?

Future Value of $1

Future Value of Annuity of $1

A) $2,420,000

B) $660,000

C) $2,817,760

D) $2,035,660

Diff: 2

LO: 12-3

EOC: S12-7; S12-8

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

30) You recently won a contest sponsored by a local radio station. The radio station will pay you $2,000 at the end of each of the next 11 years. Assuming an interest rate of 6%, what is the present value of this prize?

Present Value of $1

Present Value of Annuity of $1

A) $29,944

B) $15,774

C) $14,720

D) $24,084

Diff: 2

LO: 12-3

EOC: S12-7; S12-8

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

31) The present value of $1,500,000 received in 13 years, given an interest rate of 5%, is

Present Value of $1

Present Value of Annuity of $1

A) $795,000.

B) $757,500.

C) $2,829,000.

D) $14,091,000.

Diff: 2

LO: 12-3

EOC: S12-7; S12-8

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

32) On a whim you purchased a scratch-off lottery ticket at the gas station. It must have been your lucky day because you won $2,000,000. Being logical and rational you decide to invest the money at 3% for 10 years until you are ready to start a family. At the end of 10 years, how much will your investment be worth?

Future Value of $1

Future Value of Annuity of $1

A) $22,928,000

B) $2,688,000

C) $1,488,000

D) $2,768,000

Diff: 2

LO: 12-3

EOC: S12-7; S12-8

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

33) Assuming an interest rate of 8%, the present value of $16,000 to be received 9 years from now would be closest to

Present Value of $1

Present Value of Annuity of $1

A) $10,896.

B) $8,000.

C) $31,984.

D) $29,616.

Diff: 2

LO: 12-3

EOC: S12-7; S12-8

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

34) Assuming an interest rate of 8%, the present value of $16,000 received at the end of each year for 9 years would be closest to

Present Value of $1

Present Value of Annuity of $1

A) $99,952.

B) $7,408.

C) $144,000.

D) $199,808.

Diff: 2

LO: 12-3

EOC: S12-7

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

35) Assuming an interest rate of 6%, if you invest a lump sum of $6,800 now, the balance of your investment in 6 years will be closest to

Future Value of $1

Future Value of Annuity of $1

A) $40,800.

B) $11,485.

C) $33,436.

D) $9,649.

Diff: 2

LO: 12-3

EOC: S12-7

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

36) If you invest $7,000 at the end of every year for nine years at an interest rate of 5%, the balance of your investment in 5 years will be closest to

Future Value of $1

Future Value of Annuity of $1

A) $8,932.

B) $38,682.

C) $30,303.

D) $35,000.

Diff: 2

LO: 12-3

EOC: S12-7

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

37) You win the lottery and must decide how to take the payout. Use an 8% discount rate for all parts of this question.

Present Value of $1

Present Value of Annuity of $1

Required:

a. What is the present value of $12,000 a year received at the end of each of the next six years?

b. What is the present value of taking a $60,000 lump sum now?

c. What is the present value of a $90,000 lump sum taken in 7 years?

Diff: 2

LO: 12-3

EOC: S12-7

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

38) Solve the following two cases (the cases are independent).

Future Value of $1

Future Value of Annuity of $1

a. If you invest $5,000 today at 10% interest, what is the value of the investment at the end of 5 years?

b. If you invest $1,200 at the end of each of the next 5 years and the investment earns 10% interest, what is the value of the investment at the end of 5 years?

Diff: 2

LO: 12-3

EOC: S12-7

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

39) An accounting student in her first year of college who is working on a 4-year degree receives from her parents $200 in her first year. As an incentive to encourage her to graduate, they promise that in the second year she will receive double the amount of the first year, and in the third year she will receive double the amount of the second year. In her fourth year, she will receive $1,000. If she invests her yearly gifts at a rate of 4% as she receives them, compare the value of the investment after five years with the value of the gift (present value). What is the investment loss if the gift is not invested?

Future Value of $1

Future Value of Annuity of $1

Diff: 3

LO: 12-3

EOC: S12-8; S12-9

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

40) Betsy recently earned a degree in accounting, and her first employment opportunity is an accountant at a major corporation. The 401K portion of her employment package has a personal investment cap at 20% of her salary and the employer contribution portion is 50% of her contribution. Her annual salary is $56,500 and she chose to invest 14% annually. Calculate the value of her 401K after 10 years at 4%, and then calculate the value of her 401K had she invested the maximum amount that her employer would match.

Future Value of $1

Future Value of Annuity of $1

Diff: 3

LO: 12-3

EOC: S12-8; S12-9; S12-10

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

12.4 Use discounted cash flow models to make capital investment decisions

1) The ARR allows managers to compare the present value of future cash generated by a project against the cost of investing in that project.

Diff: 1

LO: 12-4

EOC: S12-11

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

2) Net present value and the internal rate of return are examples of discounted cash flow models used in capital budgeting decisions.

Diff: 1

LO: 12-4

EOC: S12-11

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

3) In calculating the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.

Diff: 1

LO: 12-4

EOC: S12-11

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

4) The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

5) The residual value is considered in a net present value computation.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

6) A series of equal payments or deposits made at equal time intervals are called compound interest.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

7) The interest rate that makes the net present value of the investment equal to zero is the internal rate of return.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

8) The internal rate of return is used as the discount rate when calculating the net present value of a project.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

9) The net present value method assumes that all cash inflows are immediately reinvested at a rate of return equal to the internal rate of return.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

10) When evaluating capital investment projects, if the internal rate of return is less than the required rate of return, the project will be accepted.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

11) When selecting a capital investment project from three alternatives, the project with the highest net present value will always be preferable.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

12) The hurdle rate is the length of time it takes to recoup an investment's initial cost from the cash inflows that investment generates.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

13) When evaluating the cash flows from an investment, a reduction in cash outflows is treated as the same as an increase in cash inflows.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

14) When the profitability index is less than 1.00 for a project, that project has a positive net present value.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

15) The profitability index is also known as the present value index.

Diff: 1

LO: 12-4

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

16) What is an attribute of the internal rate of return?

A) It is the interest rate that makes the NPV of the investment equal to zero.

B) It is the interest rate that makes the cost of the investment equal to the present value of the investment's net cash inflows.

C) It is used in the capital rationing process.

D) All of the above are attributes of the internal rate of return.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

17) What would a project's profitability index be if the project has an internal rate of return which is equal to the company's discount rate?

A) It would be 0.5.

B) It would be 0.0.

C) It would be 1.0.

D) It cannot be determined from information provided

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

18) What will happen to the net present value (NPV) of a project if the discount rate is increased from 8% to 10%?

A) NPV will always decrease.

B) NPV will always increase.

C) The discount rate change will not affect NPV.

D) We cannot determine the direction of the effect on NPV from the information provided.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

19) What will happen to the internal rate of return (IRR) of a project if the discount rate is decreased from 9% to 7%?

A) IRR will always increase.

B) The discount rate change will not affect IRR.

C) IRR will always decrease.

D) We cannot determine the direction of the effect on IRR from the information provided.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

20) The net present value method assumes that the cash inflows from a project are immediately reinvested at the

A) internal rate of return.

B) accounting rate of return.

C) market rate of return.

D) required rate of return.

Diff: 1

LO: 12-4

EOC: E12-27A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

21) A company finds that the residual value of $8,000 for the equipment in a capital budgeting project has been inadvertently omitted from the calculation of the net present value (NPV) for that project. How does this omission affect the NPV of that project?

A) The project's NPV should be higher, but be less than $8,000 higher, with the residual value included.

B) The project's NPV should be $8,000 higher with the residual value included.

C) The project's NPV should be $8,000 lower with the residual value included.

D) The project's NPV should be lower, but be less than $8,000 lower, with the residual value included.

Diff: 2

LO: 12-4

EOC: E12-27A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

22) Which of the following is a weakness of the internal rate of return (IRR)?

A) IRR assumes that the cash inflows from the project are immediately reinvested at the minimum required rate of return.

B) IRR ignores the time value of money.

C) IRR assumes that the cash inflows from the project are immediately reinvested at the internal rate of return.

D) IRR is not a percentage rate, and is expressed in dollars.

Diff: 1

LO: 12-4

EOC: E12-30A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

23) Another name for the minimum desired rate of return is

A) discount rate.

B) required rate of return.

C) hurdle rate.

D) All of the above

Diff: 1

LO: 12-4

EOC: E12-30A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

24) A company would consider all of the following in computing the IRR of an investment, except

A) predicted cash inflows over the life of the project.

B) the cost of the project.

C) depreciation expense on the assets of the project.

D) present value factors.

Diff: 1

LO: 12-4

EOC: E12-30A

AACSB: Reflective thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

25) The net present value with equal annual net cash inflows is calculated by

A) multiplying the amount of each cash inflow by the annuity present value factor for a given discount rate and given number of payments.

B) multiplying the amount of all the cash inflows added together by the annuity present value factor for a given discount rate and given number of payments.

C) dividing the amount of each cash inflow by the annuity present value factor for a given discount rate and given number of payments.

D) dividing the annuity present value factor for a given discount rate and given number of payments by the total of the annual cash inflows.

Diff: 1

LO: 12-4

AACSB: Reflective thinking

26) The profitability index is calculated by dividing the present value of net cash inflows by

A) residual value.

B) initial investment minus residual value.

C) the net present value.

D) initial investment.

Diff: 1

LO: 12-4

AACSB: Reflective thinking

27) The profitability index is also known as

A) future value index.

B) residual value index.

C) investment index.

D) present value index.

Diff: 1

LO: 12-4

AACSB: Reflective thinking

28) The general rule when using the Internal Rate of Return to decide whether to invest in capital assets is to invest if the IRR ________ the required rate of return.

A) does not exceed

B) is half as much as

C) exceeds

D) Cannot determine from the information given.

Diff: 1

LO: 12-4

AACSB: Reflective thinking

29) Hadden Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $45,000 to purchase equipment. The equipment will have a residual value at the end of its life of $2,000. The useful life of the equipment is 6 years. The new project is expected to generate additional net cash inflows of $22,000 per year for each of the six years. The company's required rate of return is 12%. The net present value of this project is closest to

Present Value of $1

Present Value of Annuity of $1

A) $68,641.

B) $46,456.

C) $45,442.

D) $2,626.

Diff: 2

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

30) Rover Company is analyzing a special investment project. The project will require the purchase of two machines for $25,000 and $9,000 (both machines are required). The total residual value at the end of the project is $1,600. The project will generate cash inflows of $8,000 per year over its 12-year life. If the company requires a 8% return, what is the net present value (NPV) of this project?

Present Value of $1

Present Value of Annuity of $1

A) $26,288

B) $9,200

C) $7,936

D) $26,923

Diff: 3

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

31) Sly, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $48,000 and would have a residual value of $6,000 at the end of its 6-year life. The annual operating expenses of the new extruder would be $6,000. The other option that Sly has is to rebuild its existing extruder. The rebuilding would require an investment of $40,000 and would extend the life of the existing extruder by 6 years. The existing extruder has annual operating costs of $9,000 per year and does not have a residual value. Sly's discount rate is 16%. Using net present value analysis, which option is the better option and by how much?

Present Value of $1

Present Value of Annuity of $1

A) Better by $3,055 to rebuild existing extruder

B) Better by $3,055 to purchase new extruder

C) Better by $5,515 to rebuild existing extruder

D) Better by $5,515 to purchase new extruder

Diff: 3

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

32) The Fast Truck Company has two options for its delivery truck. The first option is to purchase a new truck for $18,000. The new truck will have a useful life of 6 years and a residual value of $1,000. Operating costs for the new truck will be $100. The second option is to overhaul its existing truck. The cost of the overhaul will be $7,000. The overhauled truck will have a useful life of 6 years and a residual value of $0. Operating costs for the overhauled truck will be $700. Using the company's discount rate of 5%, which option is better and by what amount?

Present Value of $1

Present Value of Annuity of $1

A) Better to overhaul by $7,208

B) Better to purchase new by $7,208

C) Better to overhaul by $21,954

D) Better to purchase new by $21,954

Diff: 3

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

33) Gnome Place Like Home, Inc. is evaluating the purchase of a new machine to use in its manufacturing process. The new machine would cost $42,000 and have a useful life of 6 years. At the end of the machine's life, it would have a residual value of $2,100. Annual cost savings from the new machine would be $12,100 per year for each of the 6 years of its life. The company has a minimum required rate of return of 14% on all new projects. The net present value of the new machine would be closest to

Present Value of $1

Present Value of Annuity of $1

(Round any intermediary calculations and your final answer to the nearest dollar.)

A) $958.

B) $6,015.

C) $5,057.

D) $47,057.

Diff: 3

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

34) Altrax Manufacturing is considering the purchase of a new machine to use in its packing department. The new machine will have an initial cost of $150,000, a useful life of 12 years and a $11,000 residual value. Altrax will realize $15,300 in annual savings for each of the machine's 12-year useful life. Given the company's 5% required rate of return, the new machine will have a net present value (NPV) of

Present Value of $1

Present Value of Annuity of $1

(Round any intermediary calculations and your final answer to the nearest dollar.)

A) ($20,523).

B) ($8,269).

C) ($141,731).

D) ($14,396).

Diff: 3

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

35) Choo Enterprises is evaluating the purchase of a new computer network system. The new system would cost $24,000 and have a useful life of 4 years. At the end of the system's life, it would have a residual value of $4,000. Annual operating cost savings from the new system would be $9,300 per year for each of the four years of its life. Choo Enterprises has a minimum required rate of return of 14% on all new projects. The net present value of the new network system would be closest to

Present Value of $1

Present Value of Annuity of $1

(Round any intermediary calculations and your final answer to the nearest dollar.)

A) $732.

B) $5,468.

C) $3,100.

D) $29,468.

Diff: 3

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

36) Fleece Industries is investing in a new high-speed loom for weaving its rugs and carpets. The new loom will have a useful life of 6 years and cost $40,000. The loom's residual value is $4,000. Assume that the company requires a return of 12% and that the loom will create annual cost savings of $17,050. What is the net present value (NPV) of the new loom?

Present Value of $1

Present Value of Annuity of $1

(Round any intermediary calculations and your final answer to the nearest dollar.)

A) $32,121

B) $28,065

C) $72,121

D) $30,093

Diff: 3

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

37) Sloan Corporation is considering the purchase of a machine that would cost $18,216 and would have a useful life of 4 years. The machine would generate $5,500 of net annual cash inflows per year for each of the 4 years of its life. The internal rate of return on the machine would be closest to

Present Value of $1

Present Value of Annuity of $1

A) 4%.

B) 6%.

C) 8%.

D) 10%.

Diff: 2

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

38) GAB Manufacturing is evaluating investing in a new metal stamping machine costing $27,464. Ryker estimates that it will realize $8,000 in annual cash inflows for each year of the machine's 5-year useful life. The internal rate of return (IRR) for the machine is approximately

Present Value of $1

Present Value of Annuity of $1

A) 14%.

B) 10%.

C) 6%.

D) 8%.

Diff: 2

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

39) Delicate Pieces Inc. is considering the purchase of a special blow-molding machine that would cost $59,752 and would have a useful life of 8 years. The machine would generate $11,200 of net annual cash inflows per year for each of the 8 years of its life. The internal rate of return on the machine would be closest to

Present Value of $1

Present Value of Annuity of $1

A) 8%.

B) 10%.

C) 6%.

D) 14%.

Diff: 2

LO: 12-4

EOC: P12-56A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

40) Ripe Vines Winery is considering the purchase of a state-of-the-art bottling machine. The new machine will cost $20,790 and will have a useful life of 4 years. The new machine will provide net cash savings of $6,000 per year. What is the internal rate of return (IRR) for the new bottling machine?

Present Value of $1

Present Value of Annuity of $1

A) 6%

B) 14%

C) 10%

D) 8%

Diff: 2

LO: 12-4

EOC: P12-56A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

41) Shugg Corporation is evaluating the purchase of a new machine that would have an initial cost of $120,000. This new machine would have a profitability index of 1.75. The company's discount rate is 13%. What is the present value of the net cash inflows of the new machine project?

A) $15,600

B) $210,000

C) $68,571

D) $923,077

Diff: 2

LO: 12-4

EOC: P12-56A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

42) ABC Company has three potential projects from which to choose. Selected information on each of the three projects follows:

Using the profitability index, rank the projects from most profitable to least profitable.

A) A, B, C

B) C, B, A

C) B, A, C

D) B, C, A

Diff: 3

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

43) Metalworks Company is evaluating a project that would require an initial investment of $40,000. The present value of the net cash inflows associated with this project would be $48,000. The profitability index for this project would be closest to

A) 0.83.

B) 1.20.

C) 0.20.

D) 2.40.

Diff: 3

LO: 12-4

EOC: P12-57

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

44) Puddle Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two—the B14 Model and the F54 Model. Financial data about the two choices follows.

What is the total present value of future cash inflows and residual value from the F54 Model?

Present Value of $1

Present Value of Annuity of $1

A) -$38,488

B) $212,000

C) $141,512

D) $148,000

Diff: 2

LO: 12-4

EOC: E12-22A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

45) Puddle Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two: the B14 Model and the F54 Model. Financial data about the two choices follows.

What is the total present value of future cash inflows and residual value from the B14 Model?

Present Value of $1

Present Value of Annuity of $1

A) $6,280

B) $316,280

C) $420,000

D) $145,715

Diff: 2

LO: 12-4

EOC: E12-22A

AACSB: Analytical thinking

Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment.

46) Puddle Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two: the B14 Model and the F54 Model. Financial data about the two choices follows.