MULTIPLE CHOICE QUESTIONS 10. The true economic yield produced by an asset 17.

eld produced by an asset 17. A new machine that costs $172,100 is

1. Capital-budgeting decisions primarily involve: is summarized by the asset's: expected to save annual cash operating costs of
A. emergency situations. A. non-discounted cash flows. $40,000
B. long-term decisions. B. net present value. over each of the next nine years. The machine's
C. short-term planning situations. C. future value. internal rate of return is:
D. cash inflows and outflows in the current year. D. annuity discount factor. A. approximately 14%.
E. planning for the acquisition of capital. E. internal rate of return. B. approximately 16%.
Answer: B LO: 1 Type: RC Answer: E LO: 1 Type: RC C. approximately 18%.
D. approximately 20%.
2. Which of the following would not involve a 11. The internal rate of return on an asset can be E. some other figure not noted above.
capital-budgeting analysis? calculated: Answer: C LO: 1 Type: A
A. The acquisition of new equipment. A. if the return is greater than the hurdle rate.
B. The addition of a new product line. B. if the asset's cash flows are identical to the 18. Paulsen is considering the acquisition of a
C. The adoption of a new cost driver for overhead future value of a series of cash flows. $217,750 machine that is expected to produce
application. C. if the future value of a series of cash flows can annual savings in cash operating costs of $50,000
D. The construction of a new distribution facility. be arrived at by the annuity accumulation over the next six years. If Paulsen uses the
E. Whether a pro football team should trade for factor. internal rate of return (IRR) to evaluate new
and sign a star quarterback to a long-term D. by finding a discount rate that yields a zero net investments and the firm has a hurdle rate of
contract. present value. 12%, which of the following statements is correct?
Answer: C LO: 1 Type: N E. by finding a discount rate that yields a positive A. The machine's IRR is less than 4%, and the
net present value. machine should not be acquired.
3. The decision process that has managers select Answer: D LO: 1 Type: RC B. The machine's IRR is approximately 10%, and
from among several acceptable investment the machine should not be acquired.
proposals to make the best use of limited funds is 12. The internal rate of return: C. The machine's IRR is approximately 10%, and
known as: A. ignores the time value of money. the machine should be acquired.
A. capital rationing. B. equates a project's cash inflows with its cash D. The machine's IRR is approximately 12%, and
B. capital budgeting. outflows. the machine should be acquired.
C. acceptance or rejection analysis (ARA). C. equates a project's cash outflows with its E. All of the preceding statements are false.
D. cost analysis. expenses. Answer: B LO: 1 Type: A, N
E. project planning. D. equates the present value of a project's cash
Answer: A LO: 1 Type: RC inflows with the present value of the cash Use the following to answer questions 19-20:
outflows. A machine costs $25,000; it is expected to
4. Capital budgeting tends to focus primarily on: E. equates the present value of a project's cash generate annual cash revenues of $8,000 and
A. revenues. flows with the future value of the project's annual cash
B. costs. cash flows. expenses of $2,000 for five years. The required
C. cost centers. Answer: D LO: 1 Type: RC rate of return is 12%.
D. programs and projects. 19. The net present value of the machine is:
E. allocation tools. 13. Page Company is contemplating the A. $(3,840).
Answer: D LO: 1 Type: RC acquisition of a machine that costs $50,000 and B. $(3,370).
promises C. $0.
5. Discounted-cash-flow analysis focuses to reduce annual cash operating costs by $11,000 D. $21,630.
primarily on: over each of the next six years. Which of E. $28,840.
A. the stability of cash flows. the following is a proper way to evaluate this Answer: B LO: 1 Type: A
B. the timing of cash flows. investment if the company desires a 12% return 20. Which of the following statements about the
C. the probability of cash flows. on all investments? machine's internal rate of return is true?
D. the sensitivity of cash flows. A. $50,000 vs. $11,000 x 6. A. The internal rate of return is greater than 12%.
E. whether cash flows are increasing or B. $50,000 vs. $66,000 x 0.507. B. The internal rate of return is between 10% and
decreasing. C. $50,000 vs. $66,000 x 4.111. 12%.
Answer: B LO: 1 Type: RC D. $50,000 vs. $11,000 x 4.111. C. The internal rate of return is less than 10%.
E. $50,000 x 0.893 vs. $11,000 x 4.111. D. The internal rate of return must be greater than
6. In a net-present-value analysis, the discount Answer: D LO: 1 Type: A 15%.
rate is often called the: E. There is insufficient information to make any
A. payback rate. 14. Adams Company can acquire a $750,000 judgment about the internal rate of return.
B. hurdle rate. machine now that will benefit the firm over the Answer: C LO: 1 Type: A
C. minimal value. next
D. net unit rate. 8 years. Annual savings in cash operating costs Use the following to answer questions 21-23:
E. objective rate of return. are expected to total $140,000. If the hurdle The mayor of Smalltown is considering the
Answer: B LO: 1 Type: RC rate is 10%, the investment's net present value is: purchase of a new computer system for the city's
A. $(226,960). tax
7. The hurdle rate that is used in a B. $(3,100). department. The system costs $75,000 and has
net-present-value analysis is the same as the C. $65,150. an expected life of five years. The mayor
firm's: D. $370,000. estimates
A. discount rate. E. some other amount. the following savings will result if the system is
B. internal rate of return. Answer: B LO: 1 Type: A purchased:
C. minimum desired rate of return. Year Savings
D. objective rate of return. 15. Reeder Company, which uses net present 1 $20,000
E. discount rate and minimum desired rate of value to analyze investments, requires a 10% 2 25,000
return. minimum rate of return. A staff assistant recently 3 30,000
Answer: E LO: 1 Type: RC calculated a $500,000 machine's net present 4 15,000
value to be $86,400, excluding the impact of 5 12,000
8. Which of the following is taken into account by straight-line depreciation. If Reeder ignores
the net-present-value method? income taxes and the machine is expected to 21. If Smalltown uses a 10% discount rate for
have a five-year service life, the correct net capital-budgeting decisions, the net present value
A Project's Cash Flows Time Value
present value of the machine would be: of
Immediate During a of Money
A. $(13,600). the computer system would be:
Cash Flows Project's Life
B. $86,400. A. $489.
C. $186,400. B. $4,057.
A. Yes No No D. $292,700. C. $11,658.
B. Yes Yes No E. $465,500. D. $63,342.
C. Yes Yes Yes Answer: B LO: 1 Type: A E. $79,057.
D. No Yes Yes Answer: B LO: 1 Type: A
E. No Yes No 16. A new asset is expected to provide service 22. What can be said about the computer
Answer: C LO: 1 Type: N over the next four years. It will cost $500,000, system's internal rate of return if the net present
generates annual cash inflows of $150,000, and value at
9. Consider the following factors related to an requires cash operating expenses of $30,000 12% is positive?
investment: each year. In addition, a $10,000 overhaul will be A. The internal rate of return is greater than 12%.
I. The net income from the investment. needed in year 3. If the company requires a B. The internal rate of return is between 10% and
II. The cash flows from the investment. 10% rate of return, the net present value of this 12%.
III. The timing of the cash flows from the machine would be: C. The internal rate of return is less than 10%.
investment. A. $(127,110), and the machine meets the D. The internal rate of return must be less than
Which of the preceding factors would be important company's rate-of-return requirement. 5%.
considerations in a net-present-value B. $(127,110), and the machine does not meet the E. There is insufficient information to make any
analysis? company's rate-of-return requirement. judgment about the internal rate of return.
A. I only. C. $(129,600), and the machine does not meet Answer: A LO: 1 Type: N
B. II only. the company's rate-of-return requirement. 23. A salesperson from a different computer
C. I and II. D. $(151,700), and the machine meets the company claims that his machine, which costs
D. II and III. company's rate-of-return requirement. $85,000 and has an estimated service life of four
E. I, II, and III. E. some other amount. years, will generate annual savings for the
Answer: D LO: 1 Type: N Answer: B LO: 1 Type: A
city of $32,000. If the discount rate is 10%, the net I. Both approaches will yield the same D. Utilities expense.
present value of this system would be: conclusions. E. Office expense.
A. $16,440. II. Choosing between these approaches is a Answer: C LO: 4 Type: N
B. $23,175. matter of personal preference.
C. $63,512. III. The incremental approach focuses on cost 39. Assume that a capital project is being
D. $101,440. differences between alternatives. analyzed by a discounted-cash-flow approach,
E. some other amount. Which of the above statements is (are) true? and an employee first assumes no income taxes
Answer: A LO: 1 Type: A A. I only. and then later assumes a 30% income tax rate.
B. II only. How would depreciation expense be incorporated
24. A company that is using the internal rate of C. III only. in the analysis?
return (IRR) to evaluate projects should accept a D. II and III.
No Income Taxes 30% Income Tax
project if the IRR: E. I, II, and III.
Rate
A. is greater than the project's net present value. Answer: E LO: 3 Type: RC
B. equates the present value of the project's cash
inflows with the present value of the 32. The systematic follow-up on a capital project A. Considered Considered
project's cash outflows. to see how the project actually turns out is B. Considered Ignored
C. is greater than zero. commonly known as: C. Ignored Considered
D. is greater than the hurdle rate. A. capital budgeting assessment (CBA). D. Ignored Ignored
E. is less than the firm's cost of investment B. a postaudit. E. The correct answer depends on the
capital. C. control of capital expenditures (CCE). depreciation method that is used.
Answer: D LO: 2 Type: RC D. overall cost performance. Answer: C LO: 4 Type: N
E. the cost evaluation phase.
25. Which of the following choices correctly states Answer: B LO: 3 Type: RC 40. When a company is analyzing a capital project
the rules for project acceptance under the net- by a discounted-cash-flow approach and
present-value method and the 33. Consider the following statements about income taxes are being considered, depreciation:
internal-rate-of-return method? capital budgeting postaudits: A. should be ignored.
Net Present Value Internal Rate of Return I. Postaudits can be used to detect desirable B. should be considered because it results in a tax
A. Positive total Greater than hurdle rate projects that were rejected. savings.
B. Positive total Less than hurdle rate II. Postaudits can be used to detect undesirable C. should be considered because it is a fixed cost.
C. Negative total Greater than hurdle rate projects that were accepted. D. should be considered because it is a cash
D. Negative total Less than hurdle rate III. Postaudits may reveal shortcomings in inflow.
E. Greater than hurdle rate Positive number cash-flow projections, providing insights that E. should be considered because, like other
Answer: A LO: 2 Type: RC allow a firm to improve future predictions. expenses, it is a cash outlay related to operations.
Which of the above statements is (are) correct? Answer: B LO: 4 Type: RC
26. The net-present-value method assumes that A. I only.
project funds are reinvested at the: B. II only. 41. When income taxes are considered in capital
A. hurdle rate. C. III only. budgeting, the cash flows related to a company's
B. rate of return earned on the project. D. II and III. depreciation expense would be correctly figured
C. cost of debt capital. E. I, II, and III. by taking the cash paid for depreciation and:
D. cost of equity capital. Answer: D LO: 3 Type: RC A. adding the result of multiplying (depreciation
E. internal rate of return. expense x tax rate).
Answer: A LO: 2 Type: RC 34. Generally speaking, which of the following B. adding the result of multiplying [depreciation
would not directly affect a company's income tax expense x (1 - tax rate)].
27. The internal-rate-of-return method assumes payments? C. subtracting the result of multiplying
that project funds are reinvested at the: A. Advertising expense. (depreciation expense x tax rate).
A. hurdle rate. B. Gain on sale of machinery. D. subtracting the result of multiplying
B. rate of return earned on the project. C. Sales revenue. [depreciation expense x (1 - tax rate)].
C. cost of debt capital. D. Land owned by the firm. E. doing none of the above because there is no
D. cost of equity capital. E. Loss on sale of building. cash paid for depreciation.
E. rate of earnings growth (REG). Answer: D LO: 4 Type: RC Answer: E LO: 4 Type: N
Answer: B LO: 2 Type: RC
35. A company's cash flows from income taxes 42. Jester plans to generate $650,000 of sales
28. Which of the following choices correctly states are normally affected by: revenue if a capital project is implemented.
how funds are assumed to be reinvested under A. revenues. Assuming a 30% tax rate, the sales revenue
the net-present-value method and the B. operating expenses. should be reflected in the analysis by a:
internal-rate-of-return method? C. gains on the sale of assets. A. $195,000 inflow.
Net Present Value Internal Rate of Return D. losses on the sale of assets. B. $195,000 outflow.
A. At the hurdle rate At the hurdle rate E. all of the above. C. $455,000 inflow.
B. At the hurdle rate At the return earned on the Answer: E LO: 4 Type: RC D. $455,000 outflow.
project E. $650,000 inflow.
C. At the cost of debt capital At the cost of debt 36. Consider the following statements about taxes Answer: C LO: 4 Type: A
capital and after-tax cash flows:
D. At the cost of debt capital At the cost of equity I. Capital budgeting analyses should incorporate 43. Highlander Company plans to incur $350,000
capital after-tax cash flows rather than before- of salaries expense if a capital project is
E. At the cost of equity capital At the cost of equity tax cash flows. implemented. Assuming a 30% tax rate, the
capital II. Added company revenues will result in lower salaries should be reflected in the analysis by a:
Answer: B LO: 2 Type: RC taxes for a firm. A. $105,000 inflow.
III. Operating expenses may actually provide a tax B. $105,000 outflow.
29. A company's hurdle rate is generally benefit for an organization. C. $245,000 inflow.
influenced by: Which of the above statements is (are) correct? D. $245,000 outflow.
A. the cost of capital. A. I only. E. $350,000 outflow.
B. the firm's depreciable assets. B. II only. Answer: D LO: 4 Type: A
C. whether management uses the C. III only.
net-present-value method or the D. I and II. 44. Penn Company plans to incur $180,000 of
internal-rate-of-return E. I and III. salaries expense and produce $300,000 of
method. Answer: E LO: 4 Type: RC, N additional sales revenue if a capital project is
D. project risk. implemented. Assuming a 30% tax rate, these
E. items "A" and "D" above. 37. When income taxes are considered in capital two items collectively should appear in a capital
Answer: E LO: 2 Type: RC budgeting, the cash flows related to a company's budgeting analysis as:
advertising expense would be correctly figured by A. a $36,000 inflow.
30. If income taxes are ignored, which of the taking the cash paid for advertising and: B. a $36,000 outflow.
following choices correctly notes how a project's A. adding the result of multiplying (advertising C. an $84,000 inflow.
depreciation is treated under the expense x tax rate). D. an $84,000 outflow.
net-present-value method and the B. adding the tax rate. E. some other amount.
internal-rate-of-return C. adding the result of multiplying [advertising Answer: C LO: 4 Type: A
method? expense x (1 - tax rate)].
Net Present Value Internal Rate of Return D. subtracting the result of multiplying (advertising 45. Brookside Company has $70,000 of
A. Considered Considered expense x tax rate). depreciation expense and is subject to a 30%
B. Considered Ignored E. subtracting the result of multiplying [advertising income tax rate. On an after-tax basis,
C. Ignored Considered expense x (1 - tax rate)]. depreciation results in a:
D. Ignored Ignored Answer: D LO: 4 Type: N A. $21,000 inflow.
E. The correct answer depends on the B. $21,000 outflow.
depreciation method (straight line or accelerated) 38. Of the five expenses that follow, which one is C. $49,000 inflow.
that is used. most likely treated differently than the others D. $49,000 outflow.
Answer: D LO: 2 Type: RC when income taxes are considered in a E. neither an inflow nor an outflow because
discounted-cash-flow analysis? depreciation is a noncash expense.
31. Consider the following statements about the A. Salaries expense. Answer: A LO: 4 Type: A
total-cost and the incremental-cost approaches of B. Advertising expense.
investment evaluation: C. Depreciation expense.
46. Crossland Company is studying a capital E. $50,000. A. $350.
project that will produce $600,000 of added sales Answer: A LO: 4 Type: A B. $500.
revenue, $400,000 of additional cash operating C. $650.
expenses, and $50,000 of depreciation. 53. If a company desires to be in compliance with D. $2,500.
Assuming a 30% income tax rate, the company's current income tax law and write off the cost of E. none, because the transaction produced a
after-tax cash inflow (outflow) is: its assets rapidly, the firm would use: gain.
A. $105,000. A. straight-line depreciation. Answer: B LO: 6 Type: A
B. $125,000. B. sum-of-the-years'-digits depreciation. 61. The net after-tax cash flow of the disposal is:
C. $155,000. C. accelerated depreciation. A. $2,100.
D. $175,000. D. the Modified Accelerated Cost Recovery B. $2,350.
E. some other amount. System (MACRS). C. $2,500.
Answer: C LO: 4 Type: A E. annuity depreciation. D. $2,650.
Answer: D LO: 5 Type: RC E. some other amount.
47. Which of the following is the proper calculation Answer: D LO: 6 Type: A
of a company's depreciation tax shield? Chapter 16 499
A. Depreciation ÷ tax rate. 54. The Modified Accelerated Cost Recovery 62. Wright Company is considering a five-year
B. Depreciation ÷ (1 - tax rate). System (MACRS) assumes that, on average, project that requires a typical investment in
C. Depreciation x tax rate. assets working capital, in this case, $100,000. Consider
D. Depreciation x (1 - tax rate). will be placed in service: the following statements about this
E. Depreciation deduction + income taxes. A. at the beginning of the tax year. situation:
Answer: C LO: 4 Type: RC B. three months into the tax year. I. Wright should include a $100,000 outflow that
C. halfway through the tax year. occurs at time 0 in a discounted-cash-
48. A depreciation tax shield is a(n): D. at the end of the tax year. flow analysis.
A. after-tax cash outflow. E. in the next tax year. II. Wright should include separate $100,000
B. increase in income tax. Answer: C LO: 5 Type: RC outflows in each year of the project's five-year
C. noncash factor. life.
D. reduction in income tax. 55. A company used the net-present-value III. Wright should include a $100,000 recovery of
E. sporadic fluctuation in income tax. method to analyze an investment and found the its working-capital investment in year 5
Answer: D LO: 4 Type: RC investment to be very attractive. If the firm used of a discounted-cash-flow analysis.
straight-line depreciation and changes to the Which of the above statements is (are) correct?
49. Consider the following statements about Modified Accelerated Cost Recovery System A. I only.
depreciation tax shields: (MACRS), the investment's net present value B. II only.
I. A depreciation tax shield provides distinct will: C. III only.
benefits to a business. A. increase. D. I and II.
II. A depreciation tax shield should be ignored B. remain the same. E. I and III.
when doing a net-present-value analysis. C. decrease. Answer: E LO: 6 Type: RC
III. A depreciation tax shield can occur in more D. change, but the direction cannot be determined
than one year. based on the data presented. 63. A machine is expected to produce annual
Which of the above statements is (are) correct? E. fluctuate in an erratic manner. savings in cash operating costs of $400,000 for
A. I only. Answer: A LO: 5 Type: N the
B. II only. next six years. If the firm has a 10% after-tax
C. III only. 56. Pick Company received $18,000 cash from hurdle rate and is subject to a 30% income tax
D. I and II. the sale of a machine that had a $13,000 book rate, the correct discounted net cash flow would
E. I and III. value. If the company is subject to a 30% income be:
Answer: E LO: 4 Type: RC tax rate, the net cash flow to use in a A. $522,600.
discounted-cash-flow analysis would be: B. $947,520.
50. A company that uses accelerated A. $3,500. C. $1,219,400.
depreciation: B. $6,500. D. $1,742,000.
A. would write off a larger portion of an asset's C. $12,600. E. some other amount.
cost sooner than under the straight-line D. $16,500. Answer: C LO: 6 Type: A
method. E. $19,500.
B. would find that depreciation speeds up, with a Answer: D LO: 6 Type: A 64. A machine is expected to produce increases
small portion taken in early years and 57. Ralston Company received $7,000 cash from in cash operating costs of $200,000 for the next
larger amounts taken in later years. the sale of a machine that had an $11,000 book six years. If the firm has a 14% after-tax hurdle
C. would find that more tax benefits occur earlier value. If the company is subject to a 30% income rate and is subject to a 30% income tax rate,
than under the straight-line method. tax rate, the net cash flow to use in a the correct discounted net cash flow would be:
D. would find itself out of compliance with discounted-cash-flow analysis would be: A. $(233,340).
generally accepted accounting principles A. $2,100. B. $(544,460).
(GAAP). B. $4,900. C. $(777,800).
E. would find that choices "A" and "C" are true. C. $5,800. D. $(1,011,140).
Answer: E LO: 4 Type: RC D. $7,000. E. some other amount.
E. $8,200. Answer: B LO: 6 Type: A
51. David Company is considering the use of Answer: E LO: 6 Type: A
accelerated depreciation rather than straight-line 65. A new machine is expected to produce a
depreciation for a new asset acquisition. Which of 58. A machine was sold in December 20x3 for MACRS deduction in three years of $50,000. If
the following choices correctly shows $9,000. It was purchased in January 20x1 for the
when the majority of depreciation would be taken $15,000, and depreciation of $12,000 was firm has a 12% after-tax hurdle rate and is subject
(early or late in the asset's life), when most recorded from the date of purchase through the to a 30% income tax rate, the correct
of the tax savings occur (early or late in the date of disposal. Assuming a 40% income tax discounted net cash flow to include in an
asset's life), and which depreciation method would rate, the after-tax cash inflow at the time of sale is: acquisition analysis would be:
have the higher present value? A. $3,600. A. $0.
B. $6,600. B. $10,680.
C. $8,400. C. $24,920.
D. $9,000. D. $46,280.
When When Depreciation
E. $11,400. E. some other amount.
Majority Majority Method
Answer: B LO: 6 Type: A Answer: B LO: 6 Type: A
of of Tax With Higher
Depreciation Savings Present
59. Rogers Company purchased equipment for 66. In 10 years, Hopkins Company plans to
is Taken Occur Value
$30,000 in December 20x1. The equipment is receive $9,000 cash from the sale of a machine
expected to generate $10,000 per year of that
A. Early in life Early in life Accelerated additional revenue and incur $2,000 per year of has a $5,000 book value. If the company is
B. Early in life Early in life Straight-line additional cash expenses, beginning in 20x2. subject to a 30% income tax rate and has an 8%
C. Early in life Late in life Straight-line Under MACRS, depreciation in 20x2 will be after-tax hurdle rate, the correct discounted net
D. Late in life Late in life Straight-line $3,000. If the firm's income tax rate is 40%, the cash flow would be:
E. Late in life Early in life Accelerated after-tax cash flow in 20x2 would be: A. $2,916.90.
Answer: A LO: 4 Type: RC, N A. $3,200. B. $3,611.40.
B. $3,600. C. $4,167.00.
52. Julie Company purchased a $200,000 C. $4,800. D. $4,722.60.
machine that has a four-year life and no salvage D. $6,000. E. some other amount.
value. The company uses straight-line E. some other amount. Answer: B LO: 6 Type: A
depreciation on all asset acquisitions and is Answer: D LO: 6 Type: A
subject to a 30% 67. In eight years, Larson Company plans to
tax rate. The proper cash flow to show in a Use the following to answer questions 60-61: receive $11,000 cash from the sale of a machine
discounted-cash-flow analysis as occurring at time James Company has an asset that cost $5,000 that
0 would be: and currently has accumulated depreciation of has a $16,000 book value. If the company is
A. $(200,000). $2,000. subject to a 30% income tax rate and has a 12%
B. $(140,000). Suppose the firm sold the asset for $2,500 and is after-tax hurdle rate, the correct discounted net
C. $(35,000). subject to a 30% income tax rate. cash flow would be:
D. $15,000. 60. The loss on disposal would be: A. $606.
B. $1,414. 10-year life is $3,000. Ignoring income taxes, the Total revenue: $1,190,000
C. $3,838. payback period is: Total operating expenses (excluding
D. $5,050. A. 3.53 years. depreciation): $770,000
E. some other amount. B. 3.86 years. Total depreciation: $150,000
Answer: D LO: 6 Type: A C. 4.29 years. The accounting rate of return on the initial
D. 6.98 years. investment is:
68. Which of the following tools is sometimes E. some other period of time not noted above. A. 16%.
used to rank investment proposals? Answer: C LO: 8 Type: A B. 18%.
A. Profitability index. C. 26%.
B. Annuity index. 75. Portland is considering the acquisition of new D. 28%.
C. Project assessment guide (PAG). machinery that will produce uniform benefits E. some other figure.
D. Investment opportunity index. over the next eight years. The following Answer: B LO: 8 Type: A
E. Capital ranking index. information is available:
Answer: A LO: 7 Type: RC Annual savings in cash operating costs: $350,000 82. San Remo has a $4,000,000 asset investment
Annual depreciation expense: $250,000 and is subject to a 30% income tax rate. Cash
69. If a proposal's profitability index is greater than If the company is subject to a 30% tax rate, what inflows are expected to average $600,000 before
one: denominator should be used to compute the tax over the next few years; in contrast,
A. the net present value is negative. machinery's payback period? average income before tax is anticipated to be
B. the net present value is positive. A. $70,000. $500,000. The company's accounting rate of
C. the net present value is zero. B. $170,000. return is:
D. none of the above, because the net present C. $245,000. A. 8.75%.
value cannot be gauged by the profitability D. $320,000. B. 10.50%.
index. E. Some other amount. C. 12.50%.
E. the proposal should be rejected. Answer: D LO: 8 Type: A, N D. 15.00%
Answer: B LO: 7 Type: N E. some other figure.
76. Pinecrest is considering a $600,000 Answer: A LO: 8 Type: A
70. St. Andrews ranks investments by using the investment in new equipment that is anticipated to
profitability index (PI). The following data relate produce the following net cash inflows: 83. When making investment decisions that
to Project X and Project Y: Year Net Cash Inflows involve advanced manufacturing systems, the use
Project X Project Y 1 $120,000 ofnet present value:
Initial investment $400,000 $1,300,000 2 250,000 A. presents no special problems for the analyst.
Present value of inflows 600,000 1,800,000 3 110,000 B. often gives rise to net-present-value figures
Which project would be more attractive as judged 4 80,000 that are negative despite a manager's belief
by its ranking, and why? 5 160,000 that the investment is beneficial for the firm.
A. Project X because the PI is 1.50. If cash flows occur evenly throughout a year, the C. is not recommended.
B. Project Y because the PI is 1.38. equipment's payback period is: D. often omits a number of factors that are difficult
C. Project X because the PI is 0.67. A. 4 years, 2 months. to quantify (e.g., greater manufacturing
D. Project Y because the PI is 0.72. B. 4 years, 3 months. flexibility, improved product quality, and so forth).
E. Both projects would be equally attractive in C. 4 years, 4 months. E. is characterized by choices "B" and "D" above.
terms of ranking, as indicated by a positive D. 5 years. Answer: E LO: 9 Type: RC
PI. E. some other period of time not noted above.
Answer: A LO: 7 Type: A Answer: B LO: 8 Type: A, N 84. Hunter Corporation will evaluate a potential
investment in an advanced manufacturing system
71. Wakefield evaluates future projects by using 77. Which of the following project evaluation by use of the net-present-value (NPV) method.
the profitability index. The company is currently methods focuses on accounting income rather Which of the following system benefits is
reviewing five similar projects and must choose than cash flows? least likely to be omitted from the NPV analysis?
one of the following: A. Net present value. A. Savings in operating costs.
B. Accounting rate of return. B. Greater flexibility in the production process.
C. Internal rate of return. C. Improved product quality.
Project Initial Present
D. Payback period. D. Shorter manufacturing cycle time.
Investment Value
E. None of the above. E. Ability to fill customer orders more quickly.
of Cash
Answer: B LO: 8 Type: RC Answer: A LO: 9 Type: RC, N
Inflows

1 $100,000 $ 97,000 78. The accounting rate of return focuses on the: 85. A cash flow measured in nominal dollars is:
2 50,000 80,000 A. total accounting income over a project's life. A. the actual cash flow that we experience.
3 75,000 110,000 B. average accounting income over a project's B. the adjustment for a change in the dollar's
4 60,000 100,000 life. purchasing power.
5 150,000 200,000 C. average cash flows over a project's life. C. the discounted cash flow.
Which project should Wakefield select if the D. cash inflows from a project. D. the realistic cash flow after taxes.
decision is based entirely on the profitability E. tax savings from a project. E. none of the above.
index? Answer: B LO: 8 Type: RC Answer: A LO: 10 Type: RC
A. Project 1.
B. Project 2. 79. Which of the following choices correctly 86. A cash flow measured in real dollars:
C. Project 3. depicts whether discounted cash flows are used A. is the actual cash flow that we experience.
D. Project 4. by the method noted when evaluating long-term B. is the actual cash flow adjusted for a change in
E. Project 5. investments? the dollar's purchasing power.
Answer: D LO: 7 Type: A C. is discounted to reflect the time value of
money.
Net Internal Rate Accounting
72. The payback period is best defined as: D. equals the cash flow measured in nominal
Present of Return Rate of
A. initial investment ÷ annual after-tax cash inflow. dollars.
Value Return
B. annual after-tax cash inflow ÷ initial investment. E. coincides with the amount of contemplated new
C. initial investment ÷ useful life of investment. A. No No Yes investment.
D. present value of the cash flows, exclusive of B. Yes No Yes Answer: B LO: 10 Type: RC
the initial investment, ÷ initial investment. C. Yes No No
E. initial investment ÷ present value of the cash D. Yes Yes No 87. Consider the following statements about the
flows, exclusive of the initial investment. E. Yes Yes Yes accounting for inflation in a capital budgeting
Answer: A LO: 8 Type: RC Answer: D LO: 8 Type: RC analysis:
I. An analyst can use nominal dollars in
73. Consider the following statements about the 80. Consider the following statements about the conjunction with a nominal interest rate.
payback period: accounting rate of return: II. An analyst can use real dollars in conjunction
I. As shown in your text, the payback period I. The accounting rate of return focuses on a with a real interest rate.
considers the time value of money. project's income rather than its cash flows. III. An analyst can use nominal dollars in
II. The payback period can only be used if net II. Companies can figure the accounting rate of conjunction with a real interest rate.
cash inflows are uniform throughout a return on either the initial investment figure Which of the above statements is (are) correct?
project's life. or an average investment figure. A. I only.
III. The payback period ignores cash inflows that III. The accounting rate of return considers the B. II only.
occur after the payback period is reached. time value of money. C. III only.
Which of the above statements is (are) correct? Which of the above statements is (are) correct? D. I and II.
A. I only. A. I only. E. II and III.
B. II only. B. II only. Answer: D LO: 10 Type: RC
C. III only. C. III only.
D. I and II. D. I and II.
E. I, II, and III. E. II and III.
Answer: C LO: 8 Type: RC Answer: D LO: 8 Type: RC

74. A piece of equipment costs $30,000, and is 81. Mulligan Corporation, which is subject to a
expected to generate $8,500 of annual cash 30% income tax rate, is considering a $150,000
revenues and $1,500 of annual cash expenses. asset that will result in the following over its
The disposal value at the end of the estimated seven-year life: