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Which one of the following risks is least likely to be mitigated by project diversification? A graph of the relationship between financial risk and expected financial reward would show a curve that has a: Which one of the following identifies the rate of return required by investors to compensate them for deferring current consumption when making an investment? As the perceived risk of an undertaking increases, what would be the expected effect on the risk-free rate of return and the risk premium rate of return? Which one of the following approaches to capital project evaluation is primarily concerned with the relative economic ranking of projects? Major Corp. is considering the purchase of a new machine for $5,000 that will have an estimated useful life of five years and no salvage value. The machine will increase Major’s after-tax cash flow by $2,000 annually for five years. Major uses the straight-line method of depreciation and has an incremental borrowing rate of 10%. The present value factors for 10% are as follows: Using the payback method, how many years will it take to pay back Major’s initial investment in the machine? Which one of the following is a strength of the payback method of evaluating an investment project? What is the investment’s payback period? Capital budgeting is concerned with capital investments that have which one of the following characteristics? A company invested in a new machine that will generate revenues of $35,000 annually for seven years. The company will have annual operating expenses of $7,000 on the new machine. Depreciation expense, included in the operating expenses, is $4,000 per year. The expected payback period for the new machine is 5.2 years. What amount did the company pay for the new machine? Which one of the following is not a technique or approach for evaluating capital budgeting opportunities? Using the information above, which one of the following is the payback period in years for this project? (Ignore income tax.) Which of the following statements is correct regarding the payback method as a capital budgeting technique? Which of the following statements concerning the discounted payback period approach to project evaluation is/are correct? Which of the following statements concerning the discounted payback period method of evaluating capital projects is/are correct? Which one of the following is the capital budgeting evaluation approach that determines the number of periods required for the discounted cash inflows of a project to equal the discounted cash outflows? The discounted payback period approach to project evaluation is better than the payback period approach because A company purchases an item for $43,000. The salvage value of the item is $3,000. The cost of capital is 8%. Pertinent information related to this purchase is as follows: What is the discounted payback period in years? Which one of the following methods of evaluating potential capital projects would take into account depreciation expense that was non-deductible for tax purposes? Which of the following statements concerning the accounting rate of return approach to evaluating capital projects is/are correct? Lin Co. is buying machinery it expects will increase average annual operating income by $40,000. The initial increase in the required investment is $60,000, and the average increase in required investment is $30,000. To compute the accrual accounting rate of return, what amount should be used as the numerator in the ratio? Phillips Company is considering the acquisition of a new machine that would cost $66,000, has an expected life of 6 years, and an expected salvage value of $16,000. The company expects the machine to provide annual incremental income before taxes of $7,200. Phillips has a tax rate of 30%. If Phillips uses average values in its calculations, which one of the following will be the average accounting rate of return on the machine? Salem Co. is considering a project that yields annual net cash inflows of $420,000 for years 1 through 5, and net cash inflow of $100,000 in year 6. The project will require an initial investment of $1,800,000. Salem’s cost of capital is 10%. Present value information is present below: What was Salem’s expected net present value for this project? Yarrow Co. is considering the purchase of a new machine that costs $450,000. The new machine will generate net cash flow of $150,000 per year and net income of $100,000 per year for five years. Yarrow’s desired rate of return is 6%. The present value factor for a five-year annuity of $1, discounted at 6%, is 4.212. The present value factor of $1, at compound interest of 6% due in five years, is 0.7473. What is the new machine’s net present value? A corporation is considering purchasing a machine that costs $100,000 and has a $20,000 salvage value. The machine will provide net annual cash inflows of $25,000 per year and has a six-year life. The corporation uses a discount rate of 10%. The discount factor for the present value of a single sum six years in the future is 0.564. The discount factor for the present value of an annuity for six years is 4.355. What is the net present value of the machine? Which of the following is an advantage of net present value modeling? A project should be accepted if the present value of cash flows from the project is: The following information pertains to Krel Co.’s computation of net present value relating to a contemplated project: Discounted expected cash inflows $1,000,000 Discounted expected cash outflows 700,000 Net present value is: Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment is acquired. The equipment’s estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for 10 periods is 5.65. Present value of 1 due in 10 periods at 12% is .322. Net present value is A project’s net present value, ignoring income tax considerations, is normally affected by the Smarti Co. has determined the following data in connection with its evaluation of a capital investment project: Smarti uses straight-line depreciation for capital investments of this type. Excerpts from present value tables showed the following: Using the above information, which one of the following is the present value of total estimated future cash inflows and savings? (Ignore income taxes.) An investment in a new product will require an initial outlay of $20,000. The cash inflow from the project will be $4,000 a year for the next six years. The payment will be received at the end of each year. What is the net present value of the investment at 8% using the correct factor from below? Oak Company bought a machine that they will depreciate on a straight-line basis over an estimated life of seven years. The machine has no salvage value. They expect the machine to generate after-tax net cash inflows from operations of $110,000 in each of the seven years. Oak’s minimum rate of return is 12%. Information on present value factors is as follows: Assuming a positive net present value of $12,000, what was the cost of the machine? Which project would provide the largest after-tax cash inflow? Net present value as used in investment decision-making is stated in terms of which of the following options? The calculation of depreciation is used in the determination of the net present value of an investment for which of the following reasons? The decline in the value of the investment should be reflected in the determination of net present value. Given a 10% discount rate with cash inflows of $3,000 at the end of each year for five years and an initial investment of $11,000, what is the net present value? The discount rate is determined in advance for which of the following capital budgeting techniques? Which of the following metrics equates the present value of a project’s expected cash inflows to the present value of the project’s expected costs? A client wants to know how many years it will take before the accumulated cash flows from an investment exceeds the initial investment, without taking the time value of money into account. Which of the following financial models should be used? Which of the following decision-making models equates the initial investment with the present value of the future cash inflows? Which of the following events would decrease the internal rate of return of a proposed asset purchase? Polo Co. requires higher rates of return for projects with a life span greater than five years. Projects extending beyond five years must earn a higher specified rate of return. Which of the following capital budgeting techniques can readily accommodate this requirement? Which of the following limitations is common to the calculations of payback period, discounted cash flow, internal rate of return, and net present value? Which of the following rates is most commonly compared to the internal rate of return to evaluate whether to make an investment? If income taxes are ignored, which of the following methods of evaluating capital investment projects includes the use of depreciation expense? Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment is acquired. The equipment’s estimated useful life is 10 years, with no residual value, and it would be depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for 10 periods is 5.65. Present value of 1 due in 10 periods at 12% is .322. In estimating the internal rate of return, the factors in the table of present values of an annuity should be taken from the columns closest to In evaluating the economic feasibility of a capital project, the discount rate (or hurdle rate of return) must be determined in advance when using the: Which of the following capital budgeting techniques, if any, implicitly assumes that all cash inflows are immediately reinvested to earn a return for the company? Which of the following phrases defines the internal rate of return on a project? Neu Co. is considering the purchase of capital equipment that has a positive net present value based on Neu’s 12% hurdle rate. The internal rate of return would be: Which of the following characteristics represent an advantage of the internal rate of return technique over the accounting rate of return technique in evaluating a project? I. Recognition of the project’s salvage value. II. Emphasis on cash flows. III. Recognition of the time value of money. How are the following used in the calculation of the internal rate of return of a proposed project? Ignore income tax considerations. Which of the following statements about investment decision models is true? When estimating cash flow for use in capital budgeting, depreciation is What is an internal rate of return? Which of the following is a limitation of the profitability index? What is the formula for calculating the profitability index of a project? If it is determined that a project investment is expected to generate $1.20 in present value for each $1.00 invested, which one of the following was most likely used to reach that conclusion? Disco is considering three capital projects that have the following costs and net present values (NPV): Which one of the projects, if any, is not economically feasible? Using the profitability index, which project, if any, would be ranked as the most desirable? Which one of the following represents the formula used to calculate the profitability index for ranking projects? Which one of the following methods of evaluating investment projects is most likely to be least acceptable for making project ranking decisions? Which of the following methods should be used if capital rationing needs to be considered when comparing capital projects? Which of the following statements is correct regarding financial decision making? Which one of the following methods of evaluating investment projects is most likely to be used to rank projects competing for limited capital investment funds? On August 31, Year 1, Ashe Corp. adopted a plan to accumulate $1,000,000 by September 1, Year 5. Ashe plans to make four equal annual deposits to a fund that will earn interest at 10% compounded annually. Ashe will make the first deposit on September 1, Year 1. Future value and future amount factors are as follows: Which one of the following would be the amount of annual deposits Ashe should make (rounded)? On November 1, Year 1, a company purchased a new machine that it does not have to pay for until November 1, Year 3. The total payment on November 1, Year 3 will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money concept? Which one of the following kinds of tables most likely would be used to determine the current worth of five equal amounts to be received at the end of each of the next five years. Pole Co. is investing in a machine with a 3-year life. The machine is expected to reduce annual cash operating costs by $30,000 in each of the first 2 years and by $20,000 in year 3. Present values of an annuity of $1 at 14% are: Using a 14% cost of capital, what is the present value of these future savings? Which of the following changes would result in the highest present value? Which one of the following sets of interest (or discount) rates will give the greater present value of $1.00 and greater future value of $1.00? On June 30, 2012, a company is preparing the cash budget for the third quarter. The collection pattern for credit sales has been 60% in the month of sale, 30% in the first month after sale, and the rest in the second month after sale. Uncollectible accounts are negligible. There are cash sales each month equal to 25% of total sales. The total sales for the quarter are estimated as follows: July, $30,000; August, $15,000; September, $35,000. Accounts receivable on June 30, 2012, were $10,000. What amount would be the projected cash collections for September? The regression analysis results for ABC Co. are shown as y = 90x + 45. The standard error (S ) is 30 and coefficient of determination (r ) is 0.81. The budget calls for production of 100 units. What is ABC’s estimate of total costs? The difference between standard hours at standard wage rates and actual hours at standard wage rates is referred to as which of the following types of variances? The production volume variance is due to Which of the following scenarios would encourage a company to use short-term loans to retire its ten-year bonds that have five years until maturity? Harvey Co. is evaluating a capital investment proposal for a new machine. The investment proposal shows the following information: If acquired, the machine will be depreciated using the straight-line method. The payback period for this investment is A company purchases an item for $43,000. The salvage value of the item is $3,000. The cost of capital is 8%. Pertinent information related to this purchase is as follows: What is the discounted payback period in years? The Bread Company is planning to purchase a new machine which it will depreciate on a straight-line basis over a 10-year period. A full year’s depreciation will be taken in the year of acquisition. The machine is expected to produce cash flow from operations, net of income taxes, of $3,000 in each of the 10 years.; The accounting (book value) rate of return is expected to be 10% on the initial increase in required investment. The cost of the new machine will be Assume that Trayco’s marginal tax rate is 30% and all cash flows come at the end of the year. In evaluating the decision how is the additional investment in working capital considered? Which of the following decision-making models equates the initial investment with the present value of the future cash inflows? The company has $2,000,000 of financing available for new investment projects. The investment project with the highest excess profitability index is Which one of the following methods of evaluating investment projects is most likely to be used to rank projects competing for limited capital investment funds? Axel Corp. is planning to buy a new machine with the expectation that this investment should earn a discounted rate of return of at least 15%. This machine, which costs $150,000, would yield an estimated net cash flow of $30,000 a year for 10 years, after income taxes. In order to determine the net present value of buying the new machine, Axel should first multiply the $30,000 by which of the following factors?
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