Ch.14 Practice Quiz with Answers

1. The net present value and internal rate of return methods of capital budgeting are superior to the payback method in that they: A) are easier to implement. B) consider the time value of money. C) require less input. D) reflect the effects of depreciation and income taxes. 2. (Ignore income taxes in this problem.) The following data pertain to an investment in equipment: Investment in the project Net annual cash inflows Working capital required Salvage value of the equipment Life of the project A) B) C) D) $10,000 2,400 5,000 1,000 8 years At the completion of the project, the working capital will be released for use elsewhere. Compute the net present value of the project, using a discount rate of 10%: $606. $8,271. ($1,729). $1,729. 3. (Ignore income taxes in this problem.) The following data pertain to an investment proposal: Present investment required Annual cost savings Projected life of the investment Projected salvage value A) B) C) D) $26,500 $ 5,000 10 years $ -0- The internal rate of return, interpolated to the nearest tenth of a percent, would be: 11.6%. 12.8%. 13.6%. 12.4%. 4. (Ignore income taxes in this problem.) The following data pertain to an investment proposal: Investment in the project (equipment) Net annual cash inflows promised Working capital required $14,000 2,800 5,000 Page 1 Salvage value of the equipment Life of the project A) B) C) D) 1,000 10 years The working capital would be released for use elsewhere when the project is completed. What is the net present value of the project, using a discount rate of 8%? $2,566. ($251). $251. $5,251. 5. (Ignore income taxes in this problem.) A piece of equipment has a cost of $20,000. The equipment will provide cost savings of $3,500 each year for ten years, after which time it will have a salvage value of $2,500. If the company's discount rate is 12%, the equipment's net present value is: A) $580. B) ($225). C) $17,500. D) $2,275. 6. (Ignore income taxes in this problem.) The following data are available on a proposed investment project: Initial investment Annual cash inflows Life of the investment. Required rate of return A) B) C) D) $142,500 $30,000 8 years 10% The internal rate of return, interpolated to the nearest tenth of a percent, would be: 13.3%. 12.1%. 15.3%. 12.7%. 7. (Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $5,000 per year. The cost of these prescriptions to the pharmacy will be about $2,000 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is: A) 3.0 years. B) 1.8 years. C) 2.0 years. D) 1.2 years. Page 2 8. (Ignore income taxes in this problem.) The following data pertain to an investment proposal: Present investment required Annual cost savings Projected life of the investment Projected salvage value Required rate of return A) B) C) D) $14,000 $ 2,500 8 years $ -06% The internal rate of return, interpolated to the nearest tenth of a percent, would be: 6.7%. 9.3%. 8.7%. 7.3%. 9. (Ignore income taxes in this problem.) Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment that has no salvage value. The project would provide net income each year as follows for the life of the project: Sales Less cash variable expenses Contribution margin Less fixed expenses: Fixed cash expenses Depreciation expenses Net income A) B) C) D) $500,000 200,000 300,000 $150,000 45,000 195,000 $105,000 aaaaaaa The company's required rate of return is 12%. What is the payback period for this project? 3 years 2 years 4.28 years 9 years 10. (Ignore income taxes in this problem.) Parks Company is considering an investment proposal in which a working capital investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The working capital would be released for use elsewhere when the project is completed. If the company's discount rate is 10%, the investment's net present value is: A) $1,290. Page 3 B) ($1,290). C) $2,000. D) $4,350. Page 4 Answer Key -- Quiz Chapter 14 1. B consider the time value of money. Format: Multiple Choice Difficulty: Medium Type: CPA adapted Origin: Chapter 14, Capital Budgeting Decisions....18 2. A $606. Format: Multiple Choice Difficulty: Medium Type: (None) Origin: Chapter 14, Capital Budgeting Decisions....44 3. C 13.6%. Format: Multiple Choice Difficulty: Medium Type: (None) Origin: Chapter 14, Capital Budgeting Decisions....57 4. A $2,566. Format: Multiple Choice Difficulty: Medium Type: (None) Origin: Chapter 14, Capital Budgeting Decisions....47 5. A $580. Format: Multiple Choice Difficulty: Medium Type: (None) Origin: Chapter 14, Capital Budgeting Decisions....45 6. A 13.3%. Format: Multiple Choice Difficulty: Medium Type: (None) Origin: Chapter 14, Capital Budgeting Decisions....58 7. A 3.0 years. Format: Multiple Choice Difficulty: Medium Type: (None) Origin: Chapter 14, Capital Budgeting Decisions....63 8. C 8.7%. Format: Multiple Choice Page 5 Difficulty: Medium Type: (None) Origin: Chapter 14, Capital Budgeting Decisions....59 9. A 3 years Format: Multiple Choice Difficulty: Medium Type: (None) Origin: Chapter 14, Capital Budgeting Decisions....62 10. D $4,350. Format: Multiple Choice Difficulty: Medium Type: (None) Origin: Chapter 14, Capital Budgeting Decisions....46 Page 6