Managerial accounting, 5th by jiambalvo test bank ch09

Both the payback period and the net present value methods take into account the timing of future cash flows.. The net present value method equates cash inflows to revenues, and cash outf

Capital Budgeting DecisionsSummary of Questions by Objectives and Bloom’s Taxonomy

1 One possible capital budgeting decision is the potential acquisition of a patent from a competitor

2 The time value of money concept recognizes that a dollar received today is worth more than a

dollar received in the future

3 Present value techniques are developed to equate future dollars to current dollars

4 In evaluating an investment opportunity, a company must know how much cash it receives from

or pays for an investment and the timing of the cash flows because receipts and payments that occur in the future are worth more than those that occur earlier

5 If your required rate of return is 6%, the present value of $1,000 to be received three years from

today is $839.60

6 The process of determining present value removes the cost of interest from future cash flows to

determine the value of the amount today

7 Both the payback period and the net present value methods take into account the timing of future

cash flows

8 The net present value method equates cash inflows to revenues, and cash outflows to expenses, as

if occurring in the same accounting period

9 If the net present value is equal to zero, the project should be accepted

10 In net present value analysis, the purchase of equipment today results in a cash outflow that is not

discounted

11 The future value of all cash inflows minus the cash outflows equals the net present value of the

investment

12 The only cash outflow that may exist in a net present value analysis is the initial investment

13 If the required rate of return is greater than the internal rate of return of a potential investment, the

company should deem the investment acceptable

14 If the internal rate of return is used to calculate the net present value of a project, the net present

value will be zero

15 The internal rate of return method ignores the time value of money

16 The internal rate of return is the rate of return that management desires to earn on its investments

17 If the internal rate of return is greater than the required rate of return, the project should be

accepted

18 The cost of capital is the weighted average of the costs of debt and equity financing used to

generate capital for investments

19 Riskier investments demand lower rates of return.

20 Soft benefits are those that often have a significant nonfinancial impact on an investment decision

and as such, should be included in the decision analysis

21 The more risky a potential investment is, the lower the company’s required rate of return will be

22 If an investment project generates tax-deductible expenses, cash inflows from the project will be

reduced by the taxes resulting from the increase in income taxes payable

23 Depreciation itself is not a cash outflow, though it reduces the amount of income taxes that a

company must pay

24 Cash flows used in calculating the net present value need not be adjusted for inflation because the

interest rate used to discount the cash flows has already considered inflation

25 The depreciation tax shield is the amount of income taxes that the company avoids as a result of

reporting depreciation expense

26 The net present value method can be used to determine the effect of discontinuing one of a

company’s products

27 Neither the accounting rate of return method nor the payback period method consider the timing

of all future cash flows related to a potential investment

28 The internal rate of return method and the payback period method will always give the same

decision as to whether to accept a project, if the same inputs are used

29 All else being equal, a company prefers projects with long payback periods, as these benefit the

company for longer time periods

30 The payback period method ignores cash flows that occur after the end of the payback period

31 A project with positive cash flows will always generate an acceptable accounting rate of return

32 Managers may be discouraged from using present value techniques for evaluating investments

because of the way in which their own performance is evaluated

*33 When using the NPV function in Microsoft© Excel, the initial cash flow at time zero is omitted

from the range selected for the function

*34 When using the internal rate of return function in Microsoft© Excel to calculate the internal rate of

return, the initial cash flow at time zero is omitted from the range selected for the function because it is not discounted

Material from the appendix to the chapter is marked with an asterisk (*).

MULTIPLE CHOICE

35 Which of the following is not considered a capital budgeting project?

A Purchase of a new packaging machine

B Purchase of land on which to build a new factory

C Purchase of a new delivery truck to replace an old truck

D Purchase of inventory to be sold in the future

36 Capital expenditure decisions

A are useful for estimating inventory acquisition costs

B always involve the acquisition of long-lived assets

C consist of a final list of approved projects

D All of these answer choices are correct

37 Which of the following is not a component of a time value of money calculation?

A The amount of cash to be received

B The time until the cash will be received

C The opportunity costs of the alternative actions

D The required rate of return

38 The basic concept involved in time value of money calculations is that

A it is better to receive a dollar today than to receive a dollar in the future

B incremental revenues must exceed incremental costs

C you get what you measure

D revenue must be earned in order for net income to be generated

39 Present value techniques

A determine the effects of time value of money on future net income that will be generated

B are a way of converting future dollars into their equivalent current dollars

C provide more conservative results than similar time value of money computations

D treat a dollar received today to be worth the value of a dollar to be received a year from

today

40 Which of the following pairs of techniques use the time value of money concept?

A Payback period method and the internal rate of return method

B Internal rate of return method and the accounting rate of return method

C Accounting rate of return method and the payback period method

D Internal rate of return method and the net present value method

41 Your required rate of return is greater than zero How much is a payment of $3,000 to be received

a year from today worth?

A Less than $3,000 today

D Not enough information is provided to determine the answer

42 Which of the following would most likely be the present value of a 4-year annuity of $2,000 per

year, assuming a positive discount rate?

43 Assuming a 6% rate of return, how does the present value of an amount to be received two years

from today compare to the present value of the same amount to be received three years from today?

A The present value of the amount to be received in two years is greater than the present

value of amount to be received three years from today

B The present value of the amount to be received in two years is lesser than the present

value of amount to be received three years from today

C The present values of the two amounts are equal

D It is impossible to tell unless the actual amount to be received is known

44 Suppose you face the prospect of receiving $800 per year for the next five years and a $200

payment at the end of six years How much is this prospect worth today if the required rate of return is 9%?

45 In which of the following situations will an annuity table be useful?

I Calculating the net present value of an investment with equal cash flows for the firstnine years, but a different flow in year 10

II Calculating the internal rate of return of an investment with unequal cash flows eachyear

III Calculating the net present value of an investment with an equal cash flow in years one through four, and a different equal cash flow in years 5 through 10

A I, II, and III

D It depends on the rate of return that is required

47 If the time value of money techniques are used correctly, the present value of cash flows far in the

future will be

A lesser than the present value of the same amount of cash flows in the present

B greater than the present value of the same amount of cash flows in the present

C same as the future value of the same amount of cash flows in the present

D greater than the future value of the same amount of cash flows in the present

48 An annuity is

A the time period in which the cash flows paid out for an investment will be recovered

B a series of equal payments

C necessary in order to calculate the net present value

D used to calculate depreciation in order to provide a tax shield

49 If a 14% rate of return can be achieved, how much will need to be invested today in order to

receive $12,000 at the end of 3 years plus $10,000 at the end of 5 years? Round to the nearest whole number

50 To achieve exactly a 13% rate of return, how much would need to be invested today in an

investment that returns $12,000 at the end of 3 years and $10,000 at the end of 5 years? Round to the nearest whole number

51 Which of the following is not one of the steps in the net present value method?

A Identify the amount and timing of the cash flows

B Discount the cash flows

C Calculate the number of years required to recover the initial investment

D Compare the discounted net cash flows to zero

52 What is the sum of the present values of all cash flows (inflows and outflows) called?

A Cost of capital

B Internal rate of return

D Required rate of return

53 Projects A and B both have an initial outflow of $100,000 Project A will return a cash flow of

$30,000 each year for the next 5 years Project B will return $40,000 in year 1, $30,000 in year 2,

$30,000 in year 3, $30,000 in year 4, and $20,000 in year 5 Which project will have the higher net present value?

C The answer cannot be determined without knowing the required rate of return

D The answer cannot be determined without knowing the initial investment

54 Projects with a negative net present value will always have a(n)

A payback period longer than the useful life of the investment

B internal rate of return that is less than the required rate of return

C accounting rate of return that is negative

D series of cash outflows that is greater than the initial cost of the project

55 Projects with a negative net present value will always have a(n)

A payback period shorter than the life of the project

B accounting rate of return that is greater than zero

C an internal rate of return greater than the cost of capital

D None of these answer choices are correct

56 The required rate of return used to calculate an investment’s net present value is related to the

57 Maude Company’s required rate of return on capital budgeting projects is 9% The company is

considering an investment that would yield a cash flow of $12,000 per year for five years

Ignoring taxes, what is the most that the company will be willing to invest in this project?

58 An investment that costs $50,000 will return $15,000 operating cash flows per year for five years

Determine the net present value of the investment if the required rate of return is 14 percent Should the investment be undertaken?

A Yes, the profit is $25,000

B No, the accounting return is less than 14%

C No, the net present value is negative at $11,045

D Yes, the net present value is positive at $1,496.50

59 Santo Automotive is considering producing a new automobile product, No Text, which

disengages the ability to text while driving Marketing data indicate that the company will be able

to sell 40,000 units per year at $16 each The product will be produced in a section of an existing factory that is currently not in use To produce No Text, Santo must buy a machine that costs

$820,000 The machine has an expected life of five years and will have an ending residual value

of $50,000 Santo will depreciate the machine over five years using the straight-line method In addition to the cost of the machine, the company will incur incremental annual manufacturing costs of $390,000 The income tax rate is 30% and the company’s required rate of return is 10% How much is net operating cash flow each year?

60 Santo Automotive is considering producing a new automobile product, No Text, which

disengages the ability to text while driving Marketing data indicate that the company will be able

to sell 39,000 units per year at $16 each The product will be produced in a section of an existing factory that is currently not in use To produce No Text, Santo must buy a machine that costs

$820,000 The machine has an expected life of five years and will have an ending residual value

of $50,000 Santo expects to generate net income of $56,000 per year The income tax rate is 30%and the company’s required rate of return is 10% How much is the net present value?

D None of these answer choices are correct

61 What does the cost of capital represent?

A The weighted average of fixed and variable costs

B The weighted average of the incremental cash inflows and outflows

C The weighted average of debt and equity financing

D The weighted average of the cost of borrowing on a long and short-term basis

62 The return demanded by shareholders for the risk that they bear in supplying capital to the firm is

A less for riskier firms

B only considered when a corporation has no debt

C measured by the internal rate of return

D called the cost of equity

63 Since present value analysis is concerned with cash flows, which of the following is not true?

A Depreciation is always an incremental cash inflow

B Revenues are inflows in the period when the cash is received

C Expenses are outflows in the period when they are paid

D The salvage value of equipment is considered in the analysis

64 Natchez, Inc is considering the purchase of a new machine costing $200,000 The company will

incur $5,000 per year in operating expenses but it will allow the company to earn an additional

$100,000 per year in revenues Natchez expects the machine to provide future benefits for 3 yearsand salvage value at the end of the 3-year period to be $10,000 The company uses straight-line depreciation method The income tax rate is 30% If the required rate of return is 10%, how much

is the net present value of this project?

D None of these answer choices are correct

65 Discount Dollar Store is considering the purchase of a new machine costing $220,000 This

machine is estimated to generate an additional $88,000 per year in revenues The machine will be depreciated using the straight-line method over its 4-year life There is no expected salvage value

at the end of its life Expected annual net cash flows are $67,240 and expected annual net income from the new machine total $12,240 The required rate of return is 8% and the income tax rate is 28% How much is the net present value of this project?

66 Live Nutrition is considering the purchase of a new computer system for diagnosing health

problems The company estimates that the system will result in increased operating cash flows of

$5,800 in year 1, $6,500 in year 2, and $11,400 in year 3 The company’s required rate of return is8% What is the maximum cost the company will be willing to pay for the computer system?

Ignoring income taxes, how much is the net present value of the proposed investment?

68 Objective Products’ required rate of return on capital budgeting projects is 9% The company is

considering an investment that would yield net annual operating cash flows of $30,000 for 3 years What is the maximum amount that the company will be willing to invest in this project?

69 Which of the following is the rate of return that equates the present value of future cash flows to

the investment outlay?

B Internal rate of return

D Accounting rate of return

70 Which statement(s) is/are true concerning the internal rate of return?

I It takes into account the time value of money

II It is the rate of return that equates the present value of future cash flows to the investment outlay

C Neither I nor II

71 Under which one of the following situations should a project be accepted?

A The internal rate of return is less than the cost of capital

B The hurdle rate is greater than the required rate of return

C The return on the project is equal to the required rate of return

D The internal rate of return is less than the cost of capital

72 The cash inflows expected during a project’s life are equal in amount In determining the internal

rate of return, how is the present value factor calculated?

A By dividing the initial outlay by the annuity amount

B By multiplying the annuity amount by the number of years it occurs

C By looking in the present value of an annuity table for the number of years and the

respective discount rate

D By dividing the present value of the annuity by the initial outlay

73 Mexicali Foods determined the net operating cash inflows during a project’s life would not be

equal in amount How can the internal rate of return be found?

A By averaging the cash flows and treating them as if they are equal

B By determining the accounting rate of return

C By determining the cost of equity

D By trial and error using present value tables, a spreadsheet program, or a financial

B The project should be rejected

C A lower discount rate should be used

D The project should be accepted

75 Which of the following two methods are most likely give the same decision of accepting or

rejecting a particular project?

A Net present value and internal rate of return

B Accounting rate of return and payback period

C Accounting rate of return and internal rate of return

D Net present value and accounting rate of return

76 Halloran, Inc is planning a capital investment The company has a 7.8% required rate of return

and a 6.3% cost of capital Results of its budgeting calculations for three possible investments, each with a 7-year expected useful life and no salvage value, follow:

Which of the reasons below is true concerning the acceptability of a particular project?

A Project 33 incurs a net loss

B Project 33 generates a return that is less than the required rate of return

C The cash invested in Project 77 requires an additional half year to recover when

compared to Project 22

D Project 77 will operate at breakeven

77 What are soft benefits?

A The reverse side of opportunity costs

B Benefits those are hard to quantify

C Projected cash flows that are expected to change

D Considerations needed when a project has a negative internal rate of return

78 Which one of the following is a soft benefit?

A Decreased time to receive and process customers’ payments

B Enhanced reputation of the company

C Depreciation tax shield

D Reduction in the number of items spoiled during processing

79 A project under consideration currently has a negative net present value of $11,600 using a 6%

rate of return and an estimated 4-year life What must be the minimum present value of the soft benefits of this project in order to make it acceptable? (Round the answer to nearest whole dollar.)

80 The following data pertain to an investment proposal:

The income tax rate is 28% To which amount is the internal rate of return on this investment closest?

81 The following data pertain to an investment proposal:

The income tax rate is 30% To which amount is the internal rate of return on this investment closest?

82 An investment that costs $82,000 is expected to reduce cash operating costs by $27,000 per year

for 4 years Based on the internal rate of return of the investment, should the investment be undertaken if the required rate of return is 9 percent?

A No, the actual return of 3.04% is less than the required rate of return

B Yes, because the return of 12% is more than the hurdle rate

C Yes, because the IRR is more than 30%

D Yes, because the NPV exceeds the cost by $26,000

83 An investment that costs $120,000 is estimated to reduce cash operating costs by $40,000 per

year for 4 years The required rate of return is 10 percent Determine the payback period

assuming an inflation rate of 8 percent on the operating costs saved

84 A company is contemplating an investment of $650,000 that is expected to yield a net present

value of zero Which of the following statements is true?

A The internal rate of return of the investment is zero

B The investment will yield an internal rate of return equal to the required rate of return

C The investment will yield an accounting rate of return equal to the required rate of return

D The investment will result in zero profit

85 Event Supplies is evaluating a renovation of its retail store The cost of the renovation is

estimated to be $290,000 and will be depreciated over 8 years using the straight-line method The renovation is expected to generate additional annual revenue of $86,500, annual operating cash flows are expected to increase by $50,775, and net income is expected to increase by $14,525 per year The company’s income tax rate is 30% and its minimum required rate of return is 9% To which of the following amounts is the internal rate of return of the renovation closest?

86 Why does depreciation have an indirect effect on cash flows?

A It reduces the amount of income taxes a company must pay

B It reduces the original cash outflow associated with the asset

C It reduces the annual operating cash flows

D It causes net income to be less than operating cash flows

87 Maxson, Inc.’s revenues are collected when they are earned and its operating expenses are paid

when they are incurred Which of the following summarizes the calculation of operating cash flows if the income tax rate is 30%?

A Revenues – operating expenses + income taxes = Operating cash flows

B Net income – income taxes + depreciation = Operating cash flows

C Net income – depreciation = Operating cash flows

D Revenues – operating expenses – income taxes + depreciation = Operating cash flows

88 Why may worthwhile investment opportunities be rejected if inflation is ignored?

A Inflation effects generally increase estimated future cash flows, which increases the NPV

and the likelihood of acceptance

B The payback period for projects will be shorter than it would be if the future cash flow

amounts were adjusted for inflation, which decreases the likelihood of acceptance

C Inflation effects generally reduce future profits and operating cash flows making the NPV

smaller than if inflation is ignored, which in turn decreases the likelihood of acceptance

D Estimated future cash flows adjusted for inflation have larger NPVs, which increases the

likelihood of rejection

89 Which one of the following is a long-run decision that is not a capital budgeting decision, for

which time value of money analyses are appropriate?

A Decision to drop a product line

B Decision to repave a parking lot

C Decision to acquire a patent from a competitor

D Decision to hire additional workers

90 Celebration Cruises wants to acquire a new tender at a cost $425,000 The tender will have an

estimated salvage value at the end of its 8-year life of $50,000 It is expected that annual

incremental income before taxes will be $36,000 Celebration Cruises plans to make the purchase

on January 1, 2014 The company’s cost of capital is 9% and the required rate of return is 10% The income tax rate is 32% How much is the depreciation tax shield for 2014?

91 A company is considering investing in a piece of machinery that will cost $550,000 It will

provide an additional $160,000 in sales each year and its annual cash operating expenses are expected to be $52,000 Management plans to depreciate the machine on a straight-line basis over

a 10-year life with no estimated salvage value The company has a 40% tax rate How much is netannual operating cash flow expected if the machinery is acquired?

92 Sunny Farms is considering investing in a chicken plucker machine that will cost $300,000 The

investment will provide an additional $90,000 in sales annually Sunny Farms’ annual cash operating expenses are expected to be $22,000 The machine will be depreciated on a straight-linebasis over a 10-year life with a $12,000 estimated salvage value The company has a 30% tax rateand its required rate of return is 10% How much is the annual depreciation tax shield?

93 A company is considering investing in a piece of machinery costing $400,000 The investment

will provide an additional $142,000 in additional sales each year and its annual cash operating expenses are expected to be $51,000 The machine will be depreciated on a straight-line basis over an 8-year life with no estimated salvage value The company has a 40% tax rate How much are annual operating cash flows?

94 Testor Labs determined it would recover its investment of a new laboratory at 12.5 years What

did Testor Labs calculate?

C The net present value

D The accounting return period

95 Why is the payback period often criticized?

A It requires trial and error to determine the quantitative amount on which to make a

decision

B It ignores the cash flows after the end of the payback period

C It requires the estimate of a hurdle rate that is subject to uncertain economic effects

D It is based on accounting income, which most likely differs from the actual cash flows

96 Which of the following statements about the payback period method is true?

A All other things being equal, a company would prefer a project with a longer payback

period

B The payback period method ignores the time value of money

C The payback period method is more sophisticated and yields better decisions than the

internal rate of return method

D The payback period method takes into account the total stream of cash flows, which are

difficult to predict

97 Hammer Saw Tools is considering a $7,000 investment Which of the following alternative cash

inflows has the shortest payback period?

B $0 in Year 1, $8,000 in Year 2

C $1,500 per year for Years 1 through 5

D $3,000 in year 1, $2,500 per year for Years 3 and 4

98 JT Corp has a cost of capital of 6.2% and a required rate of return of 7.9% The company

evaluated an investment and determined the IRR to be zero Should JT accept or reject the investment and why?

A Accept, because the investment will generate the minimum required return

B Reject, because the investment will not generate any cash flows

C Accept, because the required rate of return is greater than the cost of capital

D Reject, because investment will generate a return that is less than the minimum required

rate of return

99 An investment project has an accounting rate of return of 10.8% The initial outlay for the

investment is $91,000 The hurdle rate is 10.2% Which of the following indicates a proper interpretation?

A The investment earns a net income of 10.8 cents on each dollar invested

B The investment earns a cash return of 10.8 cents on each dollar invested

C The investment earns a net income of 10.8 cents on each dollar of sales generated

D The investment earns a cash return of 10.8 cents on each dollar of sales generated

100 Why might the accounting rate of return be low in the initial years of an investment?

A Because the depreciation tax shield is negative

B Because customers are not willing to spend money in the initial years

C Because the investment base will be higher in the initial years

D Because the company must pay for the investment at the beginning of the first year

101 A company with $800,000 in operating assets is considering purchasing a machine that costs

$300,000 with an estimated salvage value of $40,000 The acquisition is expected to reduce operating costs by $55,000 in year 1, with a $5,000 increase in cost savings per year for each of the remaining years of its 6-year life How long is the payback period?

*102 Oakridge Appliances is deciding whether to purchase a machine for $84,000 that is expected to

yield the following net cash flow savings:

103 Redrum Hotel is considering a project with a 5-year life and which would require a $325,000

investment in equipment with no salvage value The project would provide income each year as follows for the life of the project:

The income tax rate is 30% Depreciation is included in the fixed costs amount The company’s required rate of return is 8% Calculate the payback period for this project

104 Hurlizter Pianos has just purchased a piece of equipment at a cost of $345,000 This equipment

will reduce cash operating costs by $65,000 each year for the next 5 years This equipment has a salvage value of $20,000 Ignoring income taxes, how long will it take for the company to recover its entire cash investment?

*105 When using Microsoft© Excel to calculate the internal rate of return, which item can you safely

omit from the function wizard and still calculate the internal rate of return?

A The initial cash flow

C A guess at the internal rate of return

D None of these answer choices are correct

*106 When using Microsoft© Excel to calculate the net present value, what should you do with the

initial cash outflow?

A Include it in the range of cells in the function

B Add it to the results from the net present value function

C Subtract it from the results from the net present value function

D Discount it at the required rate of return

107 A proposed acquisition of a forklift on January 1, 2014 will cost $86,000 The company has

estimated the forklift’s salvage value at the end of its estimated 5-year life to be $21,000 Thefollowing amounts have been provided by the management:

The company’s required rate of return is 7.6% and its cost of capital is 5.4% The income tax rate

is 32% Calculate the payback period

110 Donaldson, Inc analyzed an investment and determined that the proposed investment will earn a

return of 9.9% Donaldson’s cost of capital is 6.5% and required rate of return is 9% Currently, Donaldson’s other investments are earning 11% Will Donaldson be motivated to accept the investment?

A Yes, because the expected return is greater than the cost of capital

B No, because it will cause its current return to decline

C Yes, because the expected return is less than the required rate of return

D No, because the expected return is less than the required rate of return

111 An investment was analyzed and its NPV was determined to be $2,000 The company’s expected

rate of return was 12% The manager of the division is currently earning 12% on its other

investments This investment will generate losses for the first two years Which of the following statements best describes what the manager will likely be motivated to do if he is evaluated based

D Do not accept the proposal since losses are expected for the first two years

112 Which of the following is a partial solution to motivate managers to accept proposed investments

that are projected to generate net losses for the initial years, in spite of the internal rate of return expected to be greater than the required rate of return?

A Evaluate managers based on long-term profitability

B Evaluate managers on the short-run expectations of investments

C Do not evaluate managers based on investments

D Do not allow managers to make decisions on which investments to accept

113 How much would you have to deposit in the bank today so that you could withdraw $2,000 per

year for 4 years earning 8%?

114 An investment promises a return of $8,000 per year at the end of each of the next six years How

much will you be willing to invest today to receive the $8,000 payments and earn a return of 7%?

115 You will need $12,000 at the end of each of the next four years If an interest rate of 6% is

appropriate, how much must you deposit today to receive these payments?

116 Calculate the present value of an annuity of $42,000 per year for each of the next 15 years Use a

required rate of return of 6%

117 Sanders Company has a 15% minimum required rate of return What is the present value of the

expected operating cash flows of $300,000 per year for each of the next ten years?

118 On January 1, 2014, Sanford, Inc plans to purchase a machine for $68,000 that has an estimated

salvage value of $12,000, and an estimated life of 4 years The machine is expected to generatethe following cash flows and income over the next 4 years:

2013 2014 2015 2016

Sanford’s required rate of return is 9.5%, and the cost of capital is 7.5% How much is the accounting rate of return?

119 A project with an initial cost of $314,000 will generate no returns in the first two years of

operations, and operating cash flows of $150,000 per year in Years 3, 4, and 5 The required rate

of return is 7% To which amount is the net present value of the project closest?

120 Which amount is never used as part of the calculation of the annual operating cash flows in a

capital budgeting decision?

A Cost savings due to reduced labor with the new asset

B The salvage value of the new asset

C Additional variable overhead costs expected for the new machine

D Additional revenue due to an increased selling price

121 What is IRR?

A The rate of return that causes the investment to exactly breakeven

B The rate of return that is the minimum acceptable by the company

C The rate of return that is equal to the company’s hurdle rate

D The rate of return that would result in zero net present value of the investment

122 Landy Company is using the internal rate of return method to decide whether to make an

investment that will cost $120,000 and which is expected to generate economic resources for 5years Landry determines the IRR is 3.12 What information does the IRR provide?

A Landy expects to earn 3.12% of its investment as cash flows each year the asset is used

B Landy expects to earn a 3.12% return over the life of its investment

C Landy expects the asset will produce profits equal to 3.12% of the asset’s cost each year

D Landy expects to recover its cash over 3.12 years

123 A project that costs $100,000 yields a cash flow of $18,000 per year for 9 years How much is the

net present value of the project using a 16% cost of capital?

124 Why is the depreciation tax shield a component of analyzing investment decisions?

A Depreciation causes a cash outflow that is added to determine net income

B Though no cash was paid out, depreciation was included on the tax return, which caused

the company to have to pay taxes on the amount of depreciation

C Depreciation lowers income tax expense to be paid, though no cash flow occurs for the

depreciation amount

D Depreciation creates cash flows that do not appear on the income statement

125 An investment of $100,000 promises net operating cash inflows of $40,000 per year for each of

the next three years If the required rate of return is 14%, what is the net present value of the project?

126 When the NPV is calculated, what occurs?

A The company adds the rate of return to the future incoming cash flows

B The company factors in inflation to future cash flows

C Interest is removed from the future cash flows to reflect the cost of money over time

D The company factors in its cost of capital to reflect the proper rate on earnings

127 Double, Inc analyzed an investment with a required rate of return of 8.2% Because the Federal

Reserve increased interest rates in the market, Double decided to change the analysis to a 8.8%discount rate The annual net income and cash flows remained the same What happened to thenet present value?

128 A proposed project will require an initial investment of $1,000,000 and will generate net

operating cash inflows of $250,000 per year for five years What is the internal rate of return?

129 An investment is expected to generate net operating cash inflows of $25,000 per year for each of

the next 5 years If the initial amount invested is $101,000, which of the following is closest to the internal rate of return?

130 An investment of $143,000 is expected to generate net operating cash inflows of $62,000 in each

of three years What is the internal rate of return?

131 Pinkela Company reported revenues of $275,000 and expenses of $100,000 last year The income

tax rate was 40% Depreciation expense of $25,000 was included in the expenses How much wasthe net operating cash flows?

132 After deducting income taxes at 30%, the annual cash basis income is estimated at $30,000

Depreciation expense is $8,000 per year on a machine with a 6-year life How much are annual incremental operating cash flows?

133 A project with an initial cost of $81,000 is expected to produce cash flows of $20,000 per year

and net income of $9,000 for each of the next 7 years The asset has an estimated 7-year life and a

$4,000 salvage value What is the projected payback period?