Test Bank Chapter 10 The Fundamentals Of Capital Budgeting

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 10 The Fundamentals of Capital Budgeting

1) The goal of the capital budgeting decision is to select capital projects that will decrease the value of the firm.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

2) Capital budgeting decisions, once made, are not easy to reverse because of the huge investments involved.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

3) Capital budgeting plans are made according to the firm's three- to five-year strategic plan.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

4) Most of the information required to make capital budgeting decisions are internally generated, beginning with the sales force.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

5) All capital budgeting projects are independent projects.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

6) When two projects have cash flows that are tied to each other, the projects may be classified as independent.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

7) Projects are classified as independent when their cash flows are unrelated.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

8) When two projects are independent, accepting one project implicitly eliminates the other.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

9) When two projects are mutually exclusive, accepting one project implicitly eliminates the other.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

10) Projects that are classified as contingent could be mandatory or optional projects.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

11) All contingent projects are mandatory projects.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

12) The cost of capital is the maximum return a project can earn.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

13) Capital rationing refers to the limiting of capital resources to underperforming divisions.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

14) The net present value technique is an approach that is inconsistent with the goal of shareholder wealth maximization.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

15) The NPV method determines how much the present value of cash inflows exceeds the present value of costs.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

16) Accepting a positive-NPV project decreases shareholder wealth.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

17) Accepting a positive-NPV project increases shareholder wealth.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

18) Accepting a negative-NPV project increases shareholder wealth.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

19) The discount rate used to determine the present value of future cash flows is the cost of capital.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

20) The payback method is a discounted cash flow technique.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

21) If the payback period for a project exceeds the firm's threshold period, then the project is accepted.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

22) The payback method is consistent with the goal of shareholder wealth maximization.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

23) The discounted payback period calculation calls for the future cash flows to be discounted by a firm's cost of capital.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

24) Unlike the regular payback method, the discounted payback method does not ignore cash flows beyond a firm's threshold period.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

25) The accounting rate of return is not a true return because it simply averages numbers from a firm's balance sheet and income statement.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

26) The decision criterion for the accounting rate of return is consistent with the goal of shareholder wealth maximization.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

27) The IRR and NPV decisions are consistent with each other when a project's cash flows follow a conventional pattern.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

28) Unconventional cash flow patterns could lead to conflicting NPV and IRR decisions.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

29) When mutually exclusive projects are considered, both NPV and IRR will always produce the same acceptance decision.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

30) When evaluating two projects that require different investments, the IRR does not recognize the difference in the size of the investments.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

31) Which of the following is NOT true about capital budgeting?

A) It involves identifying projects that will add to a firm's value.

B) It involves investing large amounts of capital.

C) It allows a firm to reverse the decision of large capital investments at any time.

D) It allows a firm's management to analyze potential business opportunities and decide on which ones to undertake.

Learning Objective: LO 1

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

32) Which of the following is a characteristic of independent projects?

A) The cash flows are related.

B) The cash flows are unrelated.

C) Selecting one would automatically eliminate accepting the other.

D) Acceptance of one project is contingent on the acceptance of another.

Learning Objective: LO 17

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

33) Two projects are considered to be independent if:

A) selecting one does not affect whether the other is accepted or not.

B) their cash flows are unrelated.

C) selecting one does not affect whether the other is accepted or not, and their cash flows are unrelated.

D) acceptance of one project is contingent on the acceptance of the other.

Learning Objective: LO 1

Bloomcode: Analysis

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

34) Two projects are considered to be mutually exclusive if:

A) the projects perform the same function.

B) selecting one would automatically eliminate accepting the other.

C) the projects perform the same function, and selecting one would automatically eliminate accepting the other.

D) the acceptance of one project is contingent on the acceptance of the other.

Learning Objective: LO 1

Bloomcode: Analysis

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

35) Two projects are considered to be contingent projects if:

A) selecting one would automatically eliminate accepting the other.

B) the acceptance of one project is dependent on the acceptance of the other.

C) rejection of one project does not eliminate the selection of the other.

D) their cash flows are unrelated.

Learning Objective: LO 17

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

36) Contingent projects would imply that:

A) the acceptance of one project is dependent on the acceptance of the other.

B) the projects can be either mandatory or optional.

C) the acceptance of one project is dependent on the acceptance of the other, and the projects can be either mandatory or optional.

D) their cash flow are unrelated.

Learning Objective: LO 1, 7

Bloomcode: Analysis

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

Reference 10-1 Use the following to answer the questions below:

A construction firm is evaluating two value-adding projects. The first project deals with building access roads to a new terminal at the local airport. The second project is to build a parking garage on a piece of land that the hiring firm owns adjacent to the airport.

37) Refer to Reference 10-1. The firm's decision will be to:

A) accept both projects because they are independent projects.

B) accept both projects because they are contingent projects.

C) pick the one that adds the most value because they are mutually exclusive projects.

D) pick neither project.

Learning Objective: LO 18

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

38) Refer to Reference 10-1. If both projects are positive-NPV projects, then the firm should:

A) accept both projects because they are independent projects.

B) select the higher NPV project because they are mutually exclusive.

C) accept both projects because they are contingent projects.

D) Not enough information is given to make a decision.

Learning Objective: LO 1

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

39) The cost of capital is:

A) the minimum return that a capital project must earn to be accepted.

B) the maximum return a project can earn.

C) the return the firm had earned on a previous project.

D) not viewed as an opportunity cost.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

40) Capital rationing implies that:

A) a firm has constraints to funding all of the available projects.

B) funding needs are equal to funding resources.

C) the available capital will be allocated equally to all available projects.

D) the firm has more resources that it needs.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

41) Capital rationing implies that:

A) funding resources exceed funding needs.

B) funding needs exceed funding resources.

C) funding needs equal funding resources.

D) funding resources are not needed.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

42) Which one of the following statements is NOT true?

A) Accepting a positive-NPV project increases shareholder wealth.

B) Accepting a negative-NPV project has no impact on shareholder wealth.

C) Accepting a negative-NPV project decreases shareholder wealth.

D) Managers are indifferent about accepting or rejecting a zero NPV project.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

43) Which one of the following statements is NOT true?

A) Accepting a positive-NPV project increases shareholder wealth.

B) Accepting a negative-NPV project decreases shareholder wealth.

C) Accepting a zero NPV project has a negative impact on shareholder wealth.

D) Managers are indifferent about accepting or rejecting a zero NPV project.

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

44) When computing the NPV of a capital budgeting project, one should NOT:

A) estimate the cost of the project.

B) discount the future cash flows over the project's expected life.

C) ignore the salvage value.

D) make a decision based on the project's NPV.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

45) The net present value:

A) uses undiscounted cash flows.

B) has a preference for negative values for project acceptance.

C) is inconsistent with the shareholder wealth maximization goal.

D) will provide a direct measure of how much a firm's value will change because of the capital project.

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

46) To accept a capital project when using NPV:

A) the project NPV should be less than zero.

B) the project NPV should be greater than zero.

C) the project NPV should be greater than and less than zero.

D) the project NPV should be equal to zero.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

47) Choose the answer below that does NOT describe the circumstances where IRR conflicts with NPV in the decision to accept a project.

A) If the sign of the project's cash flows changes more than once during the life of a project.

B) When two or more projects are mutually exclusive.

C) When two or more projects are independent.

D) IRR assumes that all cash flows received during the life of a project are reinvested at the IRR while the NPV method assumes that they are reinvested at the cost of capital rate.

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

48) The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $7,581,072

B) $2,092,432

C) $4,836,752

D) $3,112,459

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

49) Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $1,802,554

B) $197,446

C) -$1,802,554

D) -$197,446

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

50) Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company's required rate of return of 15 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $1,169,806

B) $2,919,806

C) $4,669,806

D) $3,122,607

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

51) Jackson Inc. is considering two mutually exclusive, equally risky projects S and L. Their cash flows are shown below. What is the crossover rate?

WACC: 7.50%

Year 0 1 2 3 4

CFS -$1,100 $550 $600 $100 $100

CFL -$2,700 $650 $725 $800 $1,400

A) 7.50%

B) 9.67%

C) 10.16%

D) 10.38%

Learning Objective: LO 2, 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

52) Jackson Inc. is considering two mutually exclusive, equally risky projects S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates for the NPV method. What is the modified IRR (MIRR) for project S?

WACC: 7.50%

Year 0 1 2 3 4

CFS -$1,100 $550 $600 $100 $100

CFL -$2,700 $650 $725 $800 $1,400

A) 9.55%

B) 9.67%

C) 10.05%

D) 10.29%

Learning Objective: LO 2, 5

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

53) Gao Enterprises plans to build a new plant at a cost of $3,250,000. The plant is expected to generate annual cash flows of $1,225,000 for the next five years. If the firm's required rate of return is 18 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $2,875,000

B) $3,830,785

C) $580,785

D) $2,225,875

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

54) Jenkins Corporation is investing in a new piece of equipment at a cost of $6 million. The project is expected to generate annual cash flows of $1,850,000 over the next six years. The firm's cost of capital is 20 percent. What is the project's NPV? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $722,604

B) $351,097

C) $152,194

D) $261,008

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

55) Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest million dollars.)

A) $10 million

B) $12 million

C) $14 million

D) $16 million

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

56) Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $645,366

B) $1,213,909

C) $905,888

D) $777,713

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

57) Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The firm expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $890,197

B) $1,213,909

C) $905,888

D) $777,713

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

58) Which of the following is true about the net present value method?

A) The NPV does not utilize time value of money concepts.

B) The NPV assumes that all cash flows are reinvested at the firm's discount rate.

C) The NPV allows projects to be ranked by rate of return.

D) The NPV is a rate of return that is acceptable to the firm.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

59) Which of the following statements about the payback method is true?

A) The payback method is consistent with the goal of shareholder wealth maximization.

B) The payback method represents the number of years it takes a project to recover its initial investment plus a required rate of return.

C) There is no economic rational that links the payback method to shareholder wealth maximization.

D) The payback method considers the time value of money.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

60) Which one of the following statements about the discounted payback method is FALSE?

A) The discounted payback method represents the number of years it takes a project to recover its initial investment accounting for the time value of money.

B) The discounted payback method calls for a project to be accepted if the payback period is greater than a target period.

C) The discount payback method is a liquidity risk indicator.

D) The expected cash flows from a project are discounted at the cost of capital.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

61) Which of the following is an advantage of the payback method?

A) The technique is simple for managers to compute and interpret.

B) It is a good measure of liquidity risk.

C) The technique is simple for managers to compute and interpret, and it is a good measure of liquidity risk.

D) The payback method incorporates the time value of money in the calculation.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

62) Which of the following about the payback method is true?

A) It considers the time value of money.

B) It is consistent with the goal of maximizing shareholder wealth.

C) It does not consider the cost of a project.

D) It ignores cash flows beyond the payback period.

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

63) Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the next four years. What is the payback period for this project? (Round your answer to two decimal places.)

A) 2.12 years

B) 1.88 years

C) 4.00 years

D) 3.00 years

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

64) Elmer Sporting Goods is getting ready to produce a new line of golf clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $812,500, and 1,200,000 over the next three years. What is the payback period for this project? (Round your answer to two decimal places.)

A) 3.55 years

B) 2.43 years

C) 1.57 years

D) More than 3 years

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

65) Creighton, Inc. has invested $2,165,800 on equipment. The firm uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $424,386, $512,178, $561,755, $764,997, $816,500, and $825,375 over the next six years. What is the payback period, and does this investment meet the firm's payback criteria? (Round your answer to two decimal places.)

A) 4.13 years; no

B) 4.13 years; yes

C) 3.87 years; yes

D) 3.87 years; no

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

66) Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. What is the payback period for this project? If its acceptance period is three years, will this project be accepted? (Round your answer to two decimal places.)

A) 2.67 years; yes

B) 2.67 years; no

C) 3.33 years; yes

D) 3.33 years; no

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

67) Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. What is the payback period for this project? If its acceptance period is five years, will this project be accepted? (Round your answer to two decimal places.)

A) 4.17 years; yes

B) 4.17 years; no

C) 3.83 years; yes

D) 3.83 years; no

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

68) Roswell Energy Company is installing new equipment at a cost of $10 million. Expected cash flows from this project over the next five years will be $1,045,000, $2,550,000, $4,125,000, $6,326,750, and $7,000,000. The company's discount rate for such projects is 14 percent. What is the project's discounted payback period? (Do not round intermediate computations. Round your answer to one decimal place.)

A) 4.2 years

B) 4.4 years

C) 4.8 years

D) 5.0 years

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

69) Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. The firm's cost of capital is 12 percent. What is the discounted payback period for this project? If the firm's acceptance period is five years, will this project be accepted? (Do not round intermediate computations. Round your answer to one decimal place.)

A) 5.4 years; no

B) 6.1 years; no

C) 6.1 years; yes

D) 4.2 years; yes

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

70) Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The machinery will result in additional annual cash flows of $375,000 over the next five years. The firm's cost of capital is 10 percent. What is the discounted payback period for this project? If its acceptance period is three years, will this project be accepted? (Do not round intermediate computations. Round your answer to one decimal place.)

A) 2.7 years; yes

B) 4.7 years; no

C) 2.3 years; yes

D) 4.3 years; no

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

71) Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the payback period for this project? (Round your answer to one decimal place.)

A) 1.7 years

B) 2.2 years

C) 1.2 years

D) 2.7 years

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

72) Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the payback period for this project? (Round your answer to one decimal place.)

A) 2.7 years

B) 2.9 years

C) 3.1 years

D) 3.4 years

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

73) Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The firm expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent. What is the payback period for this project?

A) 2.8 years

B) 3.0 years

C) 3.2 years

D) 3.4 years

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

74) You have been asked to analyze a potential project. The project's cost is $180,000. Cash inflows are projected to be: year 1 = $55,000, year 2 = $65,000; year 3 = $75,000; year 4 = $85,500; year 5 = $95,000. What is the investment project's payback? (Round to the nearest 0.1 years.)

A) 4.1 years

B) 1.6 years

C) 3.5 years

D) 2.8 years

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

75) LaGrange Corp. has forecasted that over the next four years the average annual after-tax income will be $45,731. The average book value of the manufacturing equipment that is used is $167,095. What is the accounting rate of return? (Round your answer to one decimal place.)

A) 33.3%

B) 27.4%

C) 29.8%

D) 22.3%

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

76) Stump Storage Co. is expecting to generate after-tax income of $155,708, $159,312, and $161,112 for each of the next three years. The equipment used will have an average book value of $251,575 over that period. What is the ARR? (Do not round intermediate computations. Round final answer to one decimal place.)

A) 65.7%

B) 69.4%

C) 63.1%

D) 66.8%

Learning Objective: LO 46

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

77) Which of the following statements about IRR is FALSE?

A) The IRR is the discount rate that makes the NPV greater than zero.

B) The IRR is a discounted cash flow method.

C) The IRR is an expected rate of return.

D) The IRR considers the time value of money.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

78) The internal rate of return is:

A) the discount rate that makes the NPV greater than zero.

B) the discount rate that makes the NPV equal to zero.

C) the discount rate that makes the NPV less than zero.

D) Both A and C are correct.

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

79) When evaluating capital projects, the decisions using the NPV method and the IRR method will agree if:

A) the projects are independent.

B) the cash flow pattern is conventional.

C) the projects are mutually exclusive.

D) the projects are independent and the cash flow pattern is conventional.

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

80) In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if:

A) the projects are independent.

B) the cash flows pattern is conventional.

C) the projects are mutually exclusive.

D) the cash flows pattern is unconventional.

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

81) Which of the following cash flow patterns is NOT an unconventional cash flow pattern?

A) A positive initial cash flow is followed by negative future cash flows.

B) A cash flow pattern in which there are alternate inflows and outflows.

C) A negative initial cash flow is followed by positive future cash flows.

D) A cash flow stream looks similar to a conventional cash flow stream except for a final negative cash flow.

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

82) Quick Sale Real Estate Company is planning to invest in a new development. The cost of the project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000, and $6,350,000 over the next three years. The company's cost of capital is 20 percent. What is the internal rate of return on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 22%

B) 20%

C) 24%

D) 28%

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

83) Modern Federal Bank is setting up a brand-new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 20%

B) 23%

C) 25%

D) 27%

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

84) Signet Pipeline Co. is looking to install new equipment that will cost $2,750,000. The cash flows expected from the project are $612,335, $891,005, $1,132,000, and $1,412,500 for the next four years. What is Signet's internal rate of return? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 11%

B) 13%

C) 15%

D) 17%

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

85) Casa Del Sol Property Development Company is refurbishing a 200-unit condominium complex at a cost of $1,875,000. It expects that this will lead to expected annual cash flows of $415,350 for the next seven years. What internal rate of return can the firm earn from this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 10%

B) 12%

C) 14%

D) 16%

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

86) Lowell Communications, Inc., has been installing a fiber-optic network at a cost of $18 million. The firm expects annual cash flows of $3.7 million over the next 10 years. What is this project's internal rate of return? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 10%

B) 12%

C) 14%

D) 16%

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

87) Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the internal rate of return that Turnbull can earn on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 41%

B) 42%

C) 43%

D) 44%

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

88) Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the MIRR on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 36%

B) 37%

C) 38%

D) 39%

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

89) Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the internal rate of return that Jamaica can earn on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 18%

B) 19%

C) 20%

D) 21%

Learning Objective: LO 58

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

90) Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the MIRR on this project? (Round to the nearest percent.)

A) 18%

B) 19%

C) 20%

D) 21%

Learning Objective: LO 58

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

91) Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The firm expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent. What is the internal rate of return on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 17%

B) 18%

C) 19%

D) 20%

Learning Objective: LO 58

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

92) Crossover Point/Rate: Packard Electronics Corp. is evaluating the two mutually exclusive projects shown below.

Boundless Corp. Project A Project B

Period Cash Flows Cash Flows

0 $ (100,000) $ (150,000)

1 50,000 15,000

2 40,000 30,000

3 30,000 50,000

4 20,000 70,000

5 10,000 80,000

What is the "crossover rate" of the two projects? (Round to the nearest (0.01%.)

A) 10.82%

B) 8.24%

C) 13.76%

D) 16.38%

Learning Objective: LO 58

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

93) What difficulties are associated with valuing real assets compared to financial assets?

Learning Objective: LO 28

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

94) What are the advantages of the net present value technique?

Learning Objective: LO 27

Bloomcode: Analysis

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

95) Explain under what circumstances the NPV and IRR could provide different decisions.

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Industry/Sector Perspective

© 2022 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.