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The payback period is the length of time it takes to recoup an investments initial cost from the cash inflows that investment generates. True or False When evaluating the cash flows from an investment, a reduction in cash outflows is treated as the same as an increase in cash inflows. True or False When the profitability index is greater than 1.00 for a project, that project has a positive net present value. True or False A project has an internal rate of return which is equal to the companys discount rate. The projects profitability index: A. would be 0.0. B. would be 0.5. C. would be 1.0. D. cannot be determined from information provided. If the discount rate is increased from 8% to 10%, what will happen to the net present value (NPV) of a project? A. NPV will always increase. B. NPV will always decrease. C. The discount rate change will not affect NPV. D. We cannot determine the direction of the effect on NPV from the information provided. If the discount rate is decreased from 9% to 7%, what will happen to the internal rate of return (IRR) of a project? A. IRR will always increase. B. IRR will always decrease. C. The discount rate change will not affect IRR. D. We cannot determine the direction of the effect on IRR from the information provided. The net present value method assumes that the cash inflows from a project are immediately reinvested at the: A. internal rate of return. B. required rate of return. C. market rate of return. D. accounting rate of return. A company finds that the residual value of $10,000 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 projects NPV should be $10,000 higher with the residual value included. B. The projects NPV should be higher, but be less than $10,000 higher, with the residual value included. C. The projects NPV should be $10,000 lower with the residual value included. D. The projects NPV should be lower, but be less than $10,000 lower, with the residual value included. A weakness of the internal rate of return (IRR) method is that it: A. assumes that the cash inflows from the project are immediately reinvested at the minimum required rate of return. B. assumes that the cash inflows from the project are immediately reinvested at the internal rate of return. C. ignores the time value of money. D. does not consider depreciation. Which of the following is another name for the minimum desired rate of return? A. Discount rate B. Required rate of return C. Hurdle rate D. All of the above In computing the IRR of an investment, a company would consider all of the following EXCEPT: A. predicted cash inflows over the life of the project. B. the cost of the project. C. present value factors. D. depreciation on the assets of the project. (Present value tables are required.) Mansfield Motors is evaluating a capital investment opportunity. This project would require an initial investment of $30,000 to purchase one machine and $10,000 to purchase the other machine (both machines are required). The project equipment will have a residual value at the end of its life of $3,000. The useful life of the equipment is 5 years. The new project is expected to generate additional net cash inflows of $12,000 per year for each of the five years. Mansfield Motors required rate of return is 14%. The net present value of this project is closest to: A. ($3,994). B. $ 1,196. C. $ 2,753. D. $26,386. (Present value tables are required.) Stensels, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $50,000 and would have a residual value of $5,000 at the end of its 8 year life. The annual operating expenses of the new extruder would be $8,000. The other option that Stensels has is to rebuild its existing extruder. The rebuilding would require an investment of $30,000 and would extend the life of the existing extruder by 8 years. The existing extruder has annual operating costs of $11,000 per year and does not have a residual value. Stensels discount rate is 14%. Using net present value analysis, which option is the better option and by how much? A. Better by $4,328 to rebuild existing extruder B. Better by $4,328 to purchase new extruder C. Better by $6,083 to rebuild existing extruder D. Better by $6,083 to purchase new extruder (Present value tables are required.) Home Products, Inc. is evaluating the purchase of a new machine to use in its manufacturing process. The new machine would cost $40,000 and have a useful life of 6 years. At the end of the machines life, it would have a residual value of $2,500. Annual cost savings from the new machine would be $12,400 per year for each of the six years of its life. Home Products, Inc. has a minimum required rate of return of 16% on all new projects. The net present value of the new machine would be closest to: A. $ 4,669. B. $ 5,694. C. $ 6,719. D. $46,719. (Present value tables are required.) Baker Enterprises is evaluating the purchase of a new computer network system. The new system would cost $24,000 and have a useful life of 6 years. At the end of the systems life, it would have a residual value of $3,000. Annual operating cost savings from the new system would be $8,800 per year for each of the six years of its life. Baker Enterprises has a minimum required rate of return of 12% on all new projects. The net present value of the new network system would be closest to: A. $ 10,656. B. $ 12,177. C. $ 13,698. D. $ 37,698. (Present value tables are required.) Camtash Corporation is considering the purchase of a machine that would cost $21,628 and would have a useful life of 5 years. The machine would generate $6,300 of net annual cash inflows per year for each of the 5 years of its life. The internal rate of return on the machine would be closest to: A. 8%. B. 10%. C. 12%. D. 14%. (Present value tables are required.) Salvador Corporation is considering the purchase of a special blow-molding machine that would cost $64,366 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: A. 8%. B. 10%. C. 12%. D. 14%. (Present value tables are required.) Lombard 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 1.25. The companys discount rate is 12%. What is the present value of the net cash inflows of the new machine project? A. $ 14,400 B. $ 96,000 C. $ 150,000 D. $1,000,000 Speedy Company has three potential projects from which to choose. Selected information on each of the three projects follows: Investment required Net present value of project Project A $ 42,500 $ 45,700 Project B $ 65,800 $ 75,400 Project C $ 53,700 $ 70,200 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 Copper Creations is evaluating a project that would require an initial investment of $36,000. The present value of the net cash inflows associated with this project would be $43,920. The profitability index for this project would be closest to: A. 0.22. B. 0.82. C. 1.22. D. 4.55. (Present value tables are needed.) Miami Marine 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 twothe B14 Model and the F54 Model. Financial data about the two choices follows. Investment Useful life (years) Estimated annual net cash inflows for useful life Residual value Depreciation method Required rate of return B14 Model $ 320,000 8 $ 75,000 $ 30,000 Straight-line 14% What is the total present value of future cash inflows from the F54 Model? A. $(21,930) B. $190,230 C. $213,400 D. $218,070 (Present value tables are needed.) Miami Marine 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. B14 Model F54 Model Investment $ 320,000 $ 240,000 Useful life (years) 8 8 Estimated annual net cash inflows for useful life $ 75,000 $ 40,000 Residual value $ 30,000 $ 10,000 Depreciation method Straight-line Straight-line Required rate of return 14% 10% What is the total present value of future cash inflows from the B14 Model? A. $38,455 B. $218,070 C. $358,455 D. $410,655 (Present value tables are needed.) Miami Marine 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. Investment Useful life (years) Estimated annual net cash inflows for useful life Residual value Depreciation method Required rate of return B14 Model $ 320,000 8 $ 75,000 $ 30,000 Straight-line 14% What is the net present value of the F54 Model? A. $21,930 negative B. $38,455 positive C. $178,070 positive D. $218,070 positive

The payback period is the length of time it takes to recoup an investments initial cost from the cash inflows that investment generates. True or False

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

When the profitability index is greater than 1.00 for a project, that project has a positive net present value. True or False

A project has an internal rate of return which is equal to the companys discount rate. The projects profitability index: A. would be 0.0. B. would be 0.5. C. would be 1.0. D. cannot be determined from information provided.

If the discount rate is increased from 8% to 10%, what will happen to the net present value (NPV) of a project? A. NPV will always increase. B. NPV will always decrease. C. The discount rate change will not affect NPV. D. We cannot determine the direction of the effect on NPV from the information provided.

If the discount rate is decreased from 9% to 7%, what will happen to the internal rate of return (IRR) of a project? A. IRR will always increase. B. IRR will always decrease. C. The discount rate change will not affect IRR. D. We cannot determine the direction of the effect on IRR from the information provided.

The net present value method assumes that the cash inflows from a project are immediately reinvested at the: A. internal rate of return. B. required rate of return. C. market rate of return. D. accounting rate of return.

A company finds that the residual value of $10,000 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 projects NPV should be $10,000 higher with the residual value included. B. The projects NPV should be higher, but be less than $10,000 higher, with the residual value included. C. The projects NPV should be $10,000 lower with the residual value included. D. The projects NPV should be lower, but be less than $10,000 lower, with the residual value included.

A weakness of the internal rate of return (IRR) method is that it: A. assumes that the cash inflows from the project are immediately reinvested at the minimum required rate of return. B. assumes that the cash inflows from the project are immediately reinvested at the internal rate of return. C. ignores the time value of money. D. does not consider depreciation.

Which of the following is another name for the minimum desired rate of return? A. Discount rate B. Required rate of return C. Hurdle rate D. All of the above

In computing the IRR of an investment, a company would consider all of the following EXCEPT: A. predicted cash inflows over the life of the project. B. the cost of the project. C. present value factors. D. depreciation on the assets of the project.

(Present value tables are required.) Mansfield Motors is evaluating a capital investment opportunity. This project would require an initial investment of $30,000 to purchase one machine and $10,000 to purchase the other machine (both machines are required). The project equipment will have a residual value at the end of its life of $3,000. The useful life of the equipment is 5 years. The new project is expected to generate additional net cash inflows of $12,000 per year for each of the five years. Mansfield Motors required rate of return is 14%. The net present value of this project is closest to: A. ($3,994). B. $ 1,196. C. $ 2,753. D. $26,386.

(Present value tables are required.) Stensels, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $50,000 and would have a residual value of $5,000 at the end of its 8 year life. The annual operating expenses of the new extruder would be $8,000. The other option that Stensels has is to rebuild its existing extruder. The rebuilding would require an investment of $30,000 and would extend the life of the existing extruder by 8 years. The existing extruder has annual operating costs of $11,000 per year and does not have a residual value. Stensels discount rate is 14%. Using net present value analysis, which option is the better option and by how much? A. Better by $4,328 to rebuild existing extruder B. Better by $4,328 to purchase new extruder C. Better by $6,083 to rebuild existing extruder D. Better by $6,083 to purchase new extruder

(Present value tables are required.) Home Products, Inc. is evaluating the purchase of a new machine to use in its manufacturing process. The new machine would cost $40,000 and have a useful life of 6 years. At the end of the machines life, it would have a residual value of $2,500. Annual cost savings from the new machine would be $12,400 per year for each of the six years of its life. Home Products, Inc. has a minimum required rate of return of 16% on all new projects. The net present value of the new machine would be closest to: A. $ 4,669. B. $ 5,694. C. $ 6,719. D. $46,719.

(Present value tables are required.) Baker Enterprises is evaluating the purchase of a new computer network system. The new system would cost $24,000 and have a useful life of 6 years. At the end of the systems life, it would have a residual value of $3,000. Annual operating cost savings from the new system would be $8,800 per year for each of the six years of its life. Baker Enterprises has a minimum required rate of return of 12% on all new projects. The net present value of the new network system would be closest to: A. $ 10,656. B. $ 12,177. C. $ 13,698. D. $ 37,698.

(Present value tables are required.) Camtash Corporation is considering the purchase of a machine that would cost $21,628 and would have a useful life of 5 years. The machine would generate $6,300 of net annual cash inflows per year for each of the 5 years of its life. The internal rate of return on the machine would be closest to: A. 8%. B. 10%. C. 12%. D. 14%.

(Present value tables are required.) Salvador Corporation is considering the purchase of a special blow-molding machine that would cost $64,366 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: A. 8%. B. 10%. C. 12%. D. 14%.

(Present value tables are required.) Lombard 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 1.25. The companys discount rate is 12%. What is the present value of the net cash inflows of the new machine project? A. $ 14,400 B. $ 96,000 C. $ 150,000 D. $1,000,000

Speedy Company has three potential projects from which to choose. Selected information on each of the three projects follows: Investment required Net present value of project Project A $ 42,500 $ 45,700 Project B $ 65,800 $ 75,400 Project C $ 53,700 $ 70,200 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

Copper Creations is evaluating a project that would require an initial investment of $36,000. The present value of the net cash inflows associated with this project would be $43,920. The profitability index for this project would be closest to: A. 0.22. B. 0.82. C. 1.22. D. 4.55.

(Present value tables are needed.) Miami Marine 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 twothe B14 Model and the F54 Model. Financial data about the two choices follows. Investment Useful life (years) Estimated annual net cash inflows for useful life Residual value Depreciation method Required rate of return B14 Model $ 320,000 8 $ 75,000 $ 30,000 Straight-line 14% What is the total present value of future cash inflows from the F54 Model? A. $(21,930) B. $190,230 C. $213,400 D. $218,070

(Present value tables are needed.) Miami Marine 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. B14 Model F54 Model Investment $ 320,000 $ 240,000 Useful life (years) 8 8 Estimated annual net cash inflows for useful life $ 75,000 $ 40,000 Residual value $ 30,000 $ 10,000 Depreciation method Straight-line Straight-line Required rate of return 14% 10% What is the total present value of future cash inflows from the B14 Model? A. $38,455 B. $218,070 C. $358,455 D. $410,655

(Present value tables are needed.) Miami Marine 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. Investment Useful life (years) Estimated annual net cash inflows for useful life Residual value Depreciation method Required rate of return B14 Model $ 320,000 8 $ 75,000 $ 30,000 Straight-line 14% What is the net present value of the F54 Model? A. $21,930 negative B. $38,455 positive C. $178,070 positive D. $218,070 positive

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