MCQ-14355

What is the payback period for a capital budgeting project where the total initial capital investment
is $900,000 and the expected annual net after‐tax cash flow is $150,000?

A. 4 years

B. 7 years

C. 6 years

D. 3 years
MCQ-11477

Foster Manufacturing is analyzing a capital investment project that is forecasted to produce the
following cash flows and net income.

After-tax Net
Year cash flow income

0 $(20,000) $0

1 6,000 2,000

2 6,000 2,000

3 8,000 2,000

4 8,000 2,000

The payback period of this project will be:

A. 2.5 years.

B. 2.6 years.

C. 3.0 years.

D. 3.3 years.
MCQ-10125

McLean Inc. is considering the purchase of a new machine that will cost $150,000. The machine
has an estimated useful life of three years. Assume for simplicity that the equipment will be fully
depreciated 30, 40, and 30 percent in each of the three years, respectively. The new machine will
have a $10,000 resale value at the end of its estimated useful life. The machine is expected to
save the company $85,000 per year in operating expenses. McLean uses a 40 percent estimated
income tax rate and a 16 percent hurdle rate to evaluate capital projects.
Discount rates for a 16 percent rate are as follows:

Present Value of an
Present Value of $1 Ordinary Annuity of $1

Year 1 .862 .862

Year 2 .743 1.605

Year 3 .641 2.246

What is the net present value of this project?

A. $15,842

B. $13,278

C. $9,432

D. $(35,454)
MCQ-14501

Lunar Inc. is considering the purchase of a machine for $500,000, which will last five years. A
financial analysis is being developed using the following information:

The machine will be depreciated over five years on a straight‐line basis for tax purposes, and
Lunar is subject to a 40 percent effective income tax rate. Assuming Lunar will have significant
taxable income from other lines of business, and using a 20 percent discount rate, the net present
value of the project would be:

A. $280,000.

B. $161,550.

C. $480,000.

D. $16,530.
MCQ-11560

McLean Inc. is considering the purchase of a new machine that will cost $150,000. The machine
has an estimated useful life of three years. Assume for simplicity that the equipment will be fully
depreciated 30, 40, and 30 percent in each of the three years, respectively. The new machine will
have a $10,000 resale value at the end of its estimated useful life. The machine is expected to
save the company $85,000 per year in operating expenses. McLean uses a 40 percent estimated
income tax rate and a 16 percent hurdle rate to evaluate capital projects.
Discount rates for a 16 percent rate are as follows.

Present Present Value of an

Value of $1 Ordinary Annuity of $1

Year 1 0.862 0.862

Year 2 0.743 1.605

Year 3 0.641 2.246

The payback period for this investment would be:

A. 2.72 years.

B. 1.83 years.

C. 2.08 years.

D. 2.94 years.
MCQ-04986

Preston Corporation is evaluating its potential investment in a $225,660 piece of equipment with a
three-year life and no salvage value. The company anticipates that pre-tax cash flows in each of
the three years will equal to 22%, 44%, and 66%, respectively, of the investment's face value. The
tax rate is 28%. Pre-tax cash flows, discounted at 10 percent, are $427,697, undiscounted after-
tax cash flows are $279,185, and after-tax cash flows, discounted at 10 percent, are $225,660.
The internal rate of return is:

A. 10.0%

B. 22.0%

C. 23.7%

D. 44.0%
MCQ-14496

Smithco is considering the acquisition of scanning equipment to mechanize its procurement

process. The equipment will require extensive testing and debugging, as well as user training prior
to its operational use. Projected after‐tax cash flows are shown below.

Management anticipates the equipment will be sold at the end of Year 5 for $50,000 when its book
value is zero. Smithco's internal hurdle and effective tax rates are 12 percent and 40 percent,
respectively. The project's net present value would be:

A. $32,400.

B. $49,410.

C. $43,740.

D. $60,750.
MCQ-11364

Despite its shortcomings, the traditional payback period continues to be a popular method to
evaluate investments, because, in part, it:

A. Provides some insight into the risk associated with a project.

B. Ignores the time value of money.

C. Focuses on income rather than cash flow.

D. Furnishes information about an investment's lifetime performance.

MCQ-14497

Gibber Corp. has an opportunity to sell a newly developed product in the United States for a period
of five years. The product license would be purchased from NewGroup Co. Gibber would be
responsible for all distribution and product promotion costs. NewGroup has the option to renew the
agreement, with modifications, at the end of the initial five‐year term. Gibber has developed the
following estimated revenues and costs that would be associated with the new product.

The working capital required to support the new product would be released for investment
elsewhere if the product licensing agreement is not renewed.
Using the net present value method of analysis and ignoring income tax, the net present value of
this product agreement assuming Gibber has a 20 percent cost of capital would be:
(Use one or both of the following Present Value tables to calculate your answer.)
A. ($72,680)

B. ($80,720)

C. ($320)

D. $7,720
MCQ-12039

Verla Industries is trying to decide which one of the following two options to pursue. Either
option will take effect on January 1 of the next year.
Option One: Acquire a New Finishing Machine
The cost of the machine is $1,000,000, and it will have a useful life of five years. Net
pretax cash flows arising from savings in labor costs will amount to $100,000 per year for
five years.
Depreciation expense will be calculated using the straight-line method for both financial
and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in
allowance of $50,000 on its current fully depreciated finishing machine.
Option Two: Outsource the Finishing Work
Verla can outsource the work to LM Inc. at a cost of $200,000 per year for five years.
If they outsource, then Verla will scrap their current fully depreciated finishing
machine.
Verla's effective income tax rate is 40 percent. The weighted average cost of capital is
10 percent, the present value of $1 at 10 percent to be received in five years is 0.621,
and the present value of an annuity of $1 at 10 percent for five years is 3.791.
The net present value of outsourcing the finishing work is:

A. $303,280 net cash outflow.

B. $404,920 net cash outflow.

C. $454,920 net cash outflow.

D. $758,200 net cash outflow.

MCQ-14400

Wilkinson Inc., which has a cost of capital of 12 percent, invested in a project with an internal rate
of return (IRR) of 14 percent. The project is expected to have a useful life of four years, and it will
produce after‐tax net cash inflows as follows:

Year After‐tax Net Cash Inflows

1 $1,000

2 2,000

3 4,000

4 4,000

The initial cost (or initiation cash flow) of this project amounted to:
(Use one or both of the Present Value tables below to calculate your answer.)

A. $7,879.
B. $7,483.

C. $25,115.

D. $11,000.
MCQ-07763

Progress Industries has the following expected present values of cash flows for five potential
projects:

Project PV Cash Outflows PV Cash Inflows Profitability Index

1 $200,000 $300,000 1.50

2 $450,000 $725,000 1.61

3 $350,000 $425,000 1.21

4 $900,000 $1,300,000 1.44

5 $600,000 $1,000,000 1.67

Assuming the company has $1,000,000 to invest in capital projects, which combination of projects
should Progress Industries accept?

A. 1 and 5

B. 2 and 5

C. 3 and 5

D. 1, 2, and 3
MCQ-11423

For a given investment project, the interest rate at which the present value of the cash inflows
equals the present value of the cash outflows is called the:

A. Hurdle rate.

B. Payback rate.

C. Internal rate of return.

D. Cost of capital.
MCQ-11424

Two mutually exclusive capital expenditure projects have the following characteristics.

Project A Project B

Investment $100,000 $150,000

Net cash inflow Year 1 40,000 80,000

Year 2 50,000 70,000

Year 3 60,000 60,000

All cash flows are received at the end of the year. Based on this information, which one of the
following statements is not correct?

A. The net present value of Project A at a cost of capital of 10 percent is $22,720.

B. The net present value of Project B at a cost of capital of 12 percent is $19,950.

The internal rate of return of Project B is greater than the internal rate of return of
C.
Project A.

D. The payback years for Project A is greater than the payback years for Project B.
MCQ-11367

Fred Kratz just completed a capital investment analysis for the acquisition of new material handling
equipment. The equipment is expected to cost $1,000,000 and be used for eight years. Kratz
reviewed the net present value (NPV) analysis with Bill Dolan, Vice President of Finance. The
analysis shows that the tax shield for this investment has a positive NPV of $200,000 using the
firm's hurdle rate of 20 percent. Dolan noticed that eight-year straight-line depreciation was used
for tax purposes, but since this equipment qualifies for three-year MACRS treatment, the tax shield
analysis should be revised. The company has an effective tax rate of 40 percent. The MACRS
rates for three-year property are as follows.

Year Rate

1 33.33%

2 44.45%

3 14.81%

4 7.41%

Accordingly, the revised NPV for the tax shield (rounded to the nearest thousand) should be:

A. $109,000.

B. $192,000.

C. $283,000.

D. $425,000.
MCQ-11332

Parker Industries is analyzing a $200,000 equipment investment to produce a new product for the
next five years. A study of expected annual after-tax cash flows from the project produced the
following data.

Annual after-tax
cash flow Probability

$45,000 0.10

50,000 0.20

55,000 0.30

60,000 0.20

65,000 0.10

70,000 0.10

If Parker utilizes a 14 percent hurdle rate, then the probability of achieving a positive net present
value (NPV) is:

A. 20 percent.

B. 30 percent.

C. 40 percent.

D. 60 percent.
MCQ-11401

Winston Corporation is subject to a 30 percent effective income tax rate and uses the net present
value (NPV) method to evaluate capital budgeting proposals. Harry Ralston, the capital budget
manager, desires to improve the appeal of a marginally attractive proposal. To accomplish his goal,
which one of the following actions should be recommended to Ralston?

A. Postpone a fully deductible major overhaul from Year 4 to Year 5

B. Decrease the project's estimated terminal salvage value

Immediately pay the proposal's marketing program in its entirety rather than pay in five
C.
equal installments

Adjust the project's discount rate to reflect movement of the project from a "low risk"
D.
category to an "average risk" category
MCQ-11975

Wilcox Corporation won a settlement in a lawsuit and was offered four different payment
alternatives by the defendant's insurance company. A review of interest rates indicates that
8 percent is appropriate for analyzing this situation.
Relevant present value factors at a discount rate of 8 percent are provided below:

PV of $1 at 8% for 4 years 0.735

PV of $1 at 8% for 5 years 0.681
PV of $1 at 8% for 10 years 0.463
PV of an annuity of $1 at 8% for 4 years 3.312
PV of an annuity of $1 at 8% for 9 years 6.247
PV of an annuity of $1 at 8% for 10 years 6.710
Ignoring any tax considerations, which one of the following four alternatives should the
controller recommend to Wilcox management?

A. $135,000 now

B. $40,000 per year at the end of each of the next four years

C. $5,000 now and $20,000 per year at the end of each of the next 10 years

$5,000 now and $5,000 per year at the end of each of the next nine years, plus a lump-
D.
sum payment of $200,000 at the end of the 10th year
MCQ-10336

Garter Company anticipates buying a $250,000 piece of equipment that will cost $20,000 to install,
have a nine-year useful life, and generate $90,000 per year in pre tax cash flows. Assuming a 30
percent tax rate, what is the payback period for this investment in years?

A. 3.00

B. 3.47

C. 3.75

D. 4.50
MCQ-10362

Heartland Farms is using the internal rate of return method as part of its consideration of the
purchase of a new piece of equipment. Heartland has a 7% hurdle rate and a net capital
investment of $250,000. After-tax cash flows are uneven and will materialize in the first year
immediately upon making the investment and then only at the end of year two and year three. The
after tax cash flows at the end of year two and three are $108,900 and $98,900 respectively.
Present value factors at 7% are as follows:

Present Value of $1 Present Value of an Annuity

Year 1 .9346 0.9346

Year 2 .8734 1.8080

Year 3 .8163 2.6243

What is the necessary after-tax cash flow in Year 1 to achieve a 7% IRR?

A. $74,155

B. $79,345

C. $80,732

D. $95,113
MCQ-12012

Olson Industries needs to add a small plant to accommodate a special contract to supply building
materials over a five-year period. The required initial cash outlays at inception are as follows.

Land $500,000
New building 2,000,000
Equipment 3,000,000
Olson uses straight-line depreciation for tax purposes and will depreciate the building over
10 years and the equipment over five years. Olson's effective tax rate is 40 percent.
Revenues from the special contract are estimated at $1.2 million annually, and cash expenses are
estimated at $300,000 annually. At the end of the fifth year, the assumed sales values of the land
and building are $800,000 and $500,000, respectively. It is further assumed that the equipment will
be removed at a cost of $50,000 and sold for $300,000.
As Olson utilizes the net present value (NPV) method to analyze investments, the net cash flow for
Year 5 would be:

A. $1,590,000.

B. $1,710,000.

C. $2,240,000.

D. $2,390,000.
MCQ-14377

Verla Industries is trying to decide which one of the following two options to pursue. Either option
will take effect on January 1 of the next year.
Option One ‐ Acquire a new finishing machine
The cost of the machine is $1,000,000 and will have a useful life of five years. Net pretax cash
flows arising from savings in labor costs will amount to $100,000 per year for five years.
Depreciation expense will be calculated using the straight‐line method for both financial and tax
reporting purposes. As an incentive to purchase, Verla will receive a trade‐in allowance of $50,000
on their current fully depreciated finishing machine.
Option Two ‐ Outsource the finishing work
Verla can outsource the work to LM Inc. at a cost of $200,000 per year for five years. If they
outsource, Verla will scrap their current fully depreciated finishing machine. Assume that removal
costs equal the machine's scrap value.
Verla's effective income tax rate is 40 percent. The weighted‐average cost of capital is 10 percent.
The net present value (NPV) of outsourcing the finishing work is:

A. Negative $303,280.

B. Negative $454,920.

C. Negative $600,000.

D. Negative $758,200.
MCQ-04983

Preston Corporation is evaluating its potential investment in a $240,000 piece of equipment with a
three-year life and no salvage value. The company's hurdle rate is 10 percent and it anticipates
that pre-tax cash flows in each of the three years will equal 20%, 40%, and 60%, respectively, of
the investment's face value. The tax rate is 30%. Discounted pre-tax cash flows are $429,953,
undiscounted after-tax cash flows are $273,600, and discounted after-tax cash flows are
$221,414. The net present value of the investment is:

A. $189,952

B. $33,600

C. $18,586

D. ($18,586)
MCQ-09135

Inexacta Enterprises wants to compute the payback on a $100,000 capital investment that is
projected to produce $23,850 in after-tax cash inflows each year for the next five years and has a
7% salvage value at the end of the fifth year. What is the payback period in years?

A. 3.90

B. 4.19

C. 4.49

D. 5.93
MCQ-14359

Fitzgerald Co. is planning to acquire a $250,000 machine that will provide increased efficiencies,
thereby reducing annual operating costs by $80,000. The machine will be depreciated by the
straight‐line method over a five‐year life with no salvage value at the end of five years. Assuming a
40 percent income tax rate, the machine's payback period is:

A. 3.13 years.

B. 1.84 years.

C. 3.68 years.

D. 4.00 years.
MCQ-11972

Cora Lewis is performing an analysis to determine if her firm should invest in new equipment to
produce a product recently developed by her firm. The other option would be to abandon the
product. She uses the net present value (NPV) method and discounts at the firm's cost of capital.
Lewis is contemplating how to handle the following items.
I. The book value of warehouse space currently used by another division
II. Interest payments on debt to finance the equipment
III. Increased levels of accounts payable and inventory
IV. R&D spent in prior years and treated as a deferred asset for book and tax purposes
Which of these items are relevant to her decision?”

A. I, II, III, and IV

B. II and III only

C. III only

D. IV only
MCQ-17321

Which of the following statements about the profitability index is false?

A. The index provides a way to rank various projects from the best to the worst.

B. The index assists in assigning limited capital resources.

C. The time value of money considerations is ignored by the profitability index.

D. The index measures the cash flow return per dollar invested.
MCQ-07794

Blane Inc. purchases a new machine for $340,000, which includes installation and shipping
charges totaling $20,000. The machine is expected to increase annual cash flows by $110,000 per
year for the next 4 years. At a discount rate of 4 percent, the appropriate discount factors are as
follows:

Year 1 .962

Year 2 .925

Year 3 .889

Year 4 .855

Using the discounted payback period method, approximately how many years will it take for Blane
to recover its investment?

A. 3.09 years.

B. 3.16 years.

C. 3.37 years.

D. 3.58 years.
MCQ-12280

An entity is evaluating the following four independent projects as possible investments:

Internal Rate of Return

Project A 8 percent

Project B 5 percent

Project C 6 percent

Project D 4 percent

If the entity has a 6 percent cost of capital and no limitations on investment capital, under the
internal rate of return method, which one of the following is the most valid conclusion?

A. The entity should pursue Project A only.

B. The entity should pursue Project A and Project C only.

C. The entity should pursue Project B and Project C only.

D. The entity should pursue Project D only.

MCQ-11514

Janet Taylor Casual Wear has $75,000 in a bank account as of December 31, 1995. If the
company plans on depositing $4,000 in the account at the end of each of the next three years
(1996, 1997, and 1998) and all amounts in the account earn 8 percent per year, what will the
account balance be at December 31, 1998? Ignore the effect of income taxes.

8% Interest rate factors

Period Future value of $1 Future value of an annuity of $1

1 1.08 1.00

2 1.17 2.08

3 1.26 3.25

4 1.36 4.51

A. $87,750

B. $99,540

C. $107,500

D. $120,040
MCQ-12040

Long Inc. is analyzing a $1 million investment in new equipment to produce a product with
a $5 per-unit margin. The equipment will last five years, be depreciated on a straight-line
basis for tax purposes, and have no value at the end of its life. A study of unit sales
produced the following data:

Annual
unit sales Probability
80,000 0.10
85,000 0.20
90,000 0.30
95,000 0.20
100,000 0.10
110,000 0.10
Long utilizes a 12 percent hurdle rate and is subject to a 40 percent effective income tax rate. The
present value of an annuity of $1 at 12 percent for five years is 3.605. The expected net present
value of the project would be:

A. $261,750.

B. $283,380.

C. $297,800.

D. $427,580.
MCQ-07805

Which of the following items describes a weakness of the internal rate of return method?

The internal rate of return is difficult to calculate and requires a financial calculator or
A.
spreadsheet tool such as Excel to calculate efficiently.

Cash flows from the investment are assumed in the IRR analysis to be reinvested at
B.
the internal rate of return.

C. The internal rate of return calculation ignores time value of money.

The internal rate of return calculation ignores project cash flows occurring after the
D.
initial investment is recovered.
MCQ-11324

Dobson Corp. is analyzing a capital investment requiring a cash outflow at Time 0 of $2.5 million
and net cash inflows of $800,000 per year for five years. The net present value (NPV) was
calculated to be $384,000 at a 12 percent discount rate. Since several managers felt this was a
risky project, three separate scenarios were analyzed, as follows.

Scenario R: The annual cash inflows were reduced by 10 percent.

Scenario S: The discount rate was changed to 18 percent.
Scenario T: The cash inflow in Year 5 was reduced to zero.

Rank the three individual scenarios in the order of the effect on NPV, from least effect to greatest
effect.

A. R, S, T

B. R, T, S

C. S, T, R

D. T, S, R
MCQ-11420

Diane Harper, Vice President of Finance for BGN Industries, is reviewing material prepared by her
staff prior to the board of directors meeting, where she must recommend one of four mutually
exclusive options for a new product line. The summary information below indicates the initial
investment required, the present value of cash inflows (excluding the initial investment) at BGN's
hurdle rate of 16 percent, and the internal rate of return (IRR) for each of the four options.

Present value of
Option Investment cash inflows at 16% IRR

X $3,950,000 $3,800,000 15.5%

Y 3,000,000 3,750,000 19.0%

Z 2,000,000 2,825,000 17.5%

W 800,000 1,100,000 18.0%

If there are no capital rationing constraints, then which option should Harper recommend?

A. Option X

B. Option Y

C. Option Z

D. Option W
MCQ-11547

Barker Inc. has no capital rationing constraint and is analyzing many independent investment
alternatives. Barker should accept all investment proposals:

A. If debt financing is available for them.

B. That have positive cash flows.

C. That provide returns greater than the after‑tax cost of debt.

D. That have a positive net present value.

MCQ-12035

Smithco is considering the acquisition of scanning equipment to mechanize its procurement

process. The equipment will require extensive testing and debugging, as well as user training, prior
to its operational use. Projected after-tax cash flows are shown below:

Time period After-tax cash

year inflow/(outflow)
0 $(550,000)
1 $(500,000)
2 $450,000

3 $350,000
4 $350,000
5 $380,000

Management anticipates the equipment will be sold at the beginning of Year 6 for $50,000 when its
book value is zero. Smithco's internal hurdle and effective tax rates are 14 percent and 40 percent,
respectively.
Relevant present value factors at a discount rate of 14 percent are provided below:

PV of $1 at 14% for 1 year 0.877

PV of $1 at 14% for 2 years 0.769
PV of $1 at 14% for 3 years 0.675
PV of $1 at 14% for 4 years 0.592
PV of $1 at 14% for 5 years 0.519
PV of $1 at 14% for 6 years 0.456

The project's net present value would be:

A. $(1,780).

B. $(6,970).

C. $(17,350).

D. $8,600.
MCQ-11428

Molar Inc. is evaluating three independent projects for the expansion of different product lines. The
finance department has performed an extensive analysis of each project, and the chief financial
officer has indicated that there is no capital rationing in effect. Which of the following statements
are correct?

I. Reject any project with a payback period shorter than the company standard.

II. The project with the highest internal rate of return (IRR) exceeding the hurdle rate should
be selected and the others rejected.

III. All projects with positive net present values should be selected.

IV. Molar should reject any projects with negative IRRs.

A. I, II, and IV only

B. I, II, III and IV

C. II and III only

D. III and IV only

MCQ-14391

Long Inc. is analyzing a $1 million investment in new equipment to produce a product with a $5 per
unit margin. The equipment will last 5 years, be depreciated on a straight‐line basis for tax
purposes, and have no value at the end of its life. A study of unit sales produced the following
data.

If Long utilizes a 12 percent hurdle rate and is subject to a 40 percent effective income tax rate, the
expected net present value (NPV) of the project would be:

A. ($5,020).

B. ($437,620).

C. $780,000.

D. $283,380.
MCQ-14368

Verla Industries is trying to decide which one of the following two options to pursue. Either option
will take effect on January 1 of the next year.
Option One ‐ Acquire a new finishing machine
The cost of the machine is $1,000,000 and will have a useful life of five years. Net pretax cash
flows arising from savings in labor costs will amount to $100,000 per year for five years.
Depreciation expense will be calculated using the straight‐line method for both financial and tax
reporting purposes. As an incentive to purchase, Verla will receive a trade‐in allowance of $50,000
on their current fully depreciated finishing machine.
Option Two ‐ Outsource the finishing work
Verla can outsource the work to LM Inc. at a cost of $200,000 per year for five years. If they
outsource, Verla will scrap their current fully depreciated finishing machine. Assume removal costs
equal the machine's scrap value.
Verla's effective income tax rate is 40 percent. The weighted‐average cost of capital is 10 percent.
The net present value of acquiring the new finishing machine (i.e., Option One) is:

A. ($434,424).

B. ($419,260).

C. ($570,900).

D. ($722,540).
MCQ-14498

Foster Manufacturing is analyzing a capital investment project that is forecast to produce the
following cash flows and net income.

If Foster's cost of capital is 12 percent, the internal rate of return (IRR) (rounded to the nearest
whole percentage) is:

A. 13 percent.

B. 15 percent.

C. 12 percent.

D. 14 percent.
MCQ-11426

Foster Manufacturing is analyzing a capital investment project that is forecasted to produce the
following cash flows and net income.

After-tax
Year cash flows Net income

0 $(20,000) $0

1 6,000 2,000

2 6,000 2,000

3 8,000 2,000

4 8,000 2,000

The internal rate of return (IRR) (rounded to the nearest whole percentage) is:

A. 5%.

B. 12%.

C. 14%.

D. 40%.
MCQ-14367

Jasper Co. has a payback goal of three years on new equipment acquisitions. A new sorter is
being evaluated that costs $450,000 and has a five‐year life. Straight‐line depreciation will be
used; no salvage is anticipated. Jasper is subject to a 40 percent income tax rate. To meet the
company's payback goal, the sorter must generate reductions in equal annual cash operating
costs of at least:

A. $190,000

B. $114,000

C. $150,000

D. $60,000
MCQ-03851

A characteristic of the payback method (before taxes) is that it:

A. Incorporates the time value of money.

B. Neglects total project profitability.

C. Uses accrual accounting inflows in the numerator of the calculation.

D. Uses the estimated expected life of the asset in the denominator of the calculation.
MCQ-03756

In order to increase production capacity, Gunning Industries is considering replacing an existing

production machine with a new technologically improved machine effective January 1, Year 1. The
following information is being considered by Gunning Industries.

The new machine would be purchased for $160,000 in cash. Shipping, installation, and
testing would cost an additional $30,000.
The new machine is expected to increase annual sales by 20,000 units at a sales price of
$40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and
total fixed costs of $40,000 per year.
The investment in the new machine will require an immediate increase in working capital of
$35,000.
Gunning uses straight-line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of five years and zero salvage value.
Gunning is subject to a 40 percent corporate income tax rate.

Gunning uses the net present value method to analyze investments and will employ the following
factors and rates.

Present Value of an
Present Value of Ordinary Annuity of
Period $1 at 10% $1 at 10%

1 .909 .909

2 .826 1.736

3 .751 2.487

4 .683 3.170

5 .621 3.791

Gunning Industries' discounted annual depreciation tax shield for Year 1 would be:

A. $13,817

B. $15,200

C. $16,762

D. $20,725
MCQ-14352

Which of the following statements does not accurately describe payback method interpretation?

A. Projects that meet the target payback period should be profitable.

B. Large initiation outlay projects typically have longer payback periods.

The target payback period represents what the firm considers to be an acceptable
C.
length of time for a project to recoup its cost.

D. When comparing multiple projects, shorter payback periods are generally preferable.
MCQ-14393

The method that recognizes the time value of money by discounting the after‐tax cash flows over
the life of a project using the company's minimum desired rate of return is the:

A. Unadjusted return on investment method.

B. Net present value (NPV) method.

C. Internal rate of return method.

D. Accounting rate of return method.

MCQ-03747

All of the following items are included in discounted cash flow analysis, except:

A. Future operating cash savings.

B. The current asset disposal price.

C. The future asset depreciation expense.

D. The tax effects of future asset depreciation.

MCQ-03355

The Moore Corporation is considering the acquisition of a new machine. The machine can be
purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to install. It is
estimated that the machine will last 10 years, and it is expected to have an estimated salvage
value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with
a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax
regulations permit machines of this type to be depreciated using the straight-line method over 5
years with no consideration for salvage value. Moore has a marginal tax rate of 40 percent.
What is the net cash flow for the tenth year of the project that Moore Corporation should use in a
capital budgeting analysis?

A. $81,000

B. $68,400

C. $63,000

D. $60,000
MCQ-12015

The owner of Woofie's Video Rental cannot decide how to project the real costs of opening
a rental store in a new shopping mall. The owner knows the capital investment required
but is not sure of the returns from a store in a new mall. Historically, the video rental
industry has had an inflation rate equal to the economic norm. The owner requires a real
internal rate of return of 10 percent. Inflation is expected to be 3 percent during the next
few years. The industry expects a new store to show a growth rate, without inflation, of 8
percent. First year revenues at the new store are expected to be $400,000.
The revenues for the second year, using both the real rate approach and the nominal rate
approach, respectively, would be:

A. $432,000 real and $444,960 nominal.

B. $432,000 real and $452,000 nominal.

C. $440,000 real and $452,000 nominal.

D. $440,000 real and $453,200 nominal.

MCQ-17322

A profitability index greater than zero but less than one should be:

A. Accepted because it has a positive profitability index.

B. Rejected because it has a profitability index of less than one.

C. Accepted or rejected depending on the alternative projects available.

D. Recomputed because it is not possible to have an index of less than one.

MCQ-14343

Woods Inc. is considering four independent investment proposals. Woods has $3 million available
for investment during the present period. The investment outlay for each project and its projected
net present value (NPV) is presented below.

Which of the following project options should be recommended to Woods' management?

A. Projects I, II, and III only

B. Projects III and IV only

C. Projects II, III, and IV only

D. Projects I, II, and IV only

MCQ-12279

The management of a company will rent office space if the present value of the lease payments for
each space is less than 1,500,000 yen (¥). The company uses a discount rate of 10 percent, and
all payments are due on December 31 of each year. The facilities manager for the company has
found the following potential office spaces to rent.

Location Building Rental Period

Building X ¥450,000 4 years

Building Y ¥650,000 2 years

Building Z ¥615,000 3 years

Based on the management's selection criteria, which lease(s) should the company accept?

A. Building X only.

B. Building Y only.

C. Building X and Building Z only.

D. Building X and Building Y only.

MCQ-14341

Which of the following best describes a potential pitfall of the net present value (NPV) method?

A. NPV uses cash flows rather than net earnings and ignores depreciation.

B. NPV is only as reliable as the discount rate used.

C. NPV generally ignores risk or uncertainty.

NPV cannot be used to evaluate a project where the required rate of return varies over
D.
the life of the investment.
MCQ-11506

If income tax considerations are ignored, how is depreciation handled by the following capital
budgeting techniques?

Internal Accounting
rate of return rate of return Payback

A. Excluded Included Excluded

B. Included Excluded Included

C. Excluded Excluded Included

D. Excluded Excluded Excluded

MCQ-11512

All of the following items are included in discounted cash flow analysis except:

A. Future operating cash savings.

B. The current asset disposal price.

C. The future asset depreciation expense.

D. The tax effects of future asset depreciation.

MCQ-17325

Sahara Company is analyzing a group of potential projects to invest their available cash. There are
five potential projects, and Sahara has $185,000 to invest. The chart below shows the initial
investment and present value of future cash flows related to these five projects.

Initial Investment Present Value of Future Inflows

Project 1 $70,000 $95,000

Project 2 $85,000 $100,000

Project 3 $35,000 $80,000

Project 4 $20,000 $55,000

Project 5 $120,000 $115,000

Given the total amount available to invest and using the profitability index, indicate the most
desirable order for Sahara.

A. Projects 4, 3, and 1

B. Projects 5, 2, 1, 3, and 4

C. Projects 2, 1, 3, and 4

D. Projects 4, 3, 1, 2, and 5
MCQ-11551

Willis Inc. has a cost of capital of 15 percent and is considering the acquisition of a new machine,
which costs $400,000 and has a useful life of five years. Willis projects that earnings and cash flow
will increase as follows.

Net After-tax
Year Earnings Cash Flow
1 $ 100,000 $ 160,000
2 100,000 140,000
3 100,000 100,000
4 100,000 100,000
5 200,000 100,000

15% Interest Rate Factors

Present Present Value of
Period Value of $1 an Annuity of $1
1 0.87 0.87
2 0.76 1.63
3 0.66 2.29
4 0.57 2.86
5 0.50 3.36

The net present value of this investment is:

A. Negative, $114,000.

B. Negative, $14,000.

C. Positive, $18,600.

D. Positive, $200,000.
MCQ-14493

Nolan Hospital has decided to acquire diagnostic equipment from Weber Medical Products based
on Weber's reputation for quality. Weber has offered Nolan four payment options, as shown in the
following table. All payments would be due and paid at the beginning of each year.

Nolan's cost of funds is 8 percent. Which payment option should Nolan choose?

A. III

B. IV

C. I

D. II
MCQ-11366

Which one of the following is not a shortcoming of the payback method?

A. It offers no consideration of cash flows beyond the expiration of the payback period.

B. It ignores the time value of money.

C. It offers no indication of a project's liquidity.

D. It encourages establishing a short payback period.

MCQ-09145

Investo Corporation plans to invest $500,000 in a project that will produce after tax cash flows of
$125,000 per year for the next four years. The project has a positive net present value of $5,875
assuming an 8% hurdle rate. Discount factors for 8% are as follows:

Discount factors, PV of $1 @ 8% Discount PV of an annuity @ 8%

Year 1 0.9259 Year 1 0.9259

Year 2 0.8573 Year 2 1.7832

Year 3 0.7938 Year 3 2.5770

Year 4 0.7350 Year 4 3.3120

Expressed as a percentage, what is the salvage value of the project?

A. 0%

B. 8%

C. 12.5%

D. 25%
MCQ-03347

In order to increase production capacity, Gunning Industries is considering replacing an existing

production machine with a new technologically improved machine effective January 1, Year 1. The
following information is being considered by Gunning Industries.

The new machine would be purchased for $160,000 in cash. Shipping, installation, and
testing would cost an additional $30,000.
The new machine is expected to increase annual sales by 20,000 units at a sales price of
$40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and
total fixed costs of $40,000 per year.
The investment in the new machine will require an immediate increase in working capital of
$35,000.
Gunning uses straight-line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of five years and zero salvage value.
Gunning is subject to a 40 percent corporate income tax rate.

Gunning uses the net present value method to analyze investments and will employ the following
factors and rates.

Present Value of an
Present Value of Ordinary Annuity of
Period $1 at 10% $1 at 10%

1 .909 .909

2 .826 1.736

3 .751 2.487

4 .683 3.170

5 .621 3.791

The overall discounted cash flow impact of Gunning Industries' working capital investment for the
life of the new production machine would be:

A. ($7,959)

B. ($10,680)

C. ($13,265)
D. ($35,000)
MCQ-09125

Xavier Exports has the opportunity to make a capital investment for $200,000 that promises to
provide after-tax cash flows of $65,000 in each of the next two years and $35,000 per year in
years three through five. The investment has a 10% after-tax salvage value. If the tax rate is 25%
and the anticipated hurdle rate is 9%, what is the net present value of the investment given the
following discount factors at 9% (rounded to the nearest whole number)?

Present Value of $1.00 Present Value of an Annuity

Year 1 0.91743 0.91743

Year 2 0.84168 1.75911

Year 3 0.77218 2.53129

Year 4 0.70843 3.23972

Year 5 0.64993 3.88965

A. ($11,028)

B. ($4,080)

C. $1,910

D. $11,487
MCQ-12030

The net present value of an investment project represents the:

A. Total actual cash inflows minus the total actual cash outflows.

B. Excess of the discounted cash inflows over the discounted cash outflows.

C. Total after-tax cash flow, including the tax shield from depreciation.

D. Cumulative accounting profit over the life of the project

MCQ-14370

Bell Delivery Co. is financing a new truck with a loan of $30,000, to be repaid in five annual
installments of $7,900 at the end of each year. What is the approximate annual interest rate Bell is
paying?

A. 4%

B. 10%

C. 5%

D. 16%
MCQ-11555

Andrew Corporation is evaluating a capital investment that would result in a $30,000 higher
contribution margin benefit and increased annual personnel costs of $20,000. The effects of
income taxes on the net present value computation on these benefits and costs for the project are
to:

A. Decrease both benefits and costs.

B. Decrease benefits but increase costs.

C. Increase benefits but decrease costs.

D. Increase both benefits and costs.

MCQ-11342

Which of the following is not a shortcoming of the internal rate of return (IRR) method?

IRR assumes that funds generated from a project will be reinvested at an interest rate
A.
equal to the project's IRR.

B. IRR does not take into account the difference in the scale of investment alternatives.

C. IRR is easier to visualize and interpret than net present value (NPV).

D. Sign changes in the cash flow stream can generate more than one IRR.
MCQ-07783

Using the payback period method, if the annual after-tax cash flows for a project are $90,000 per
year over ten years, and the initial outflow is $420,000, then:

A. The project will be profitable during Year 4.

B. The project will be profitable during Year 5.

C. It will take five full years to recover the initial investment.

D. Incorporating time value of money will make the payback period shorter.
MCQ-03859

Which one of the following statements about the payback method of investment analysis is
correct? The payback method:

A. Does not consider the time value of money.

B. Uses discounted cash flow techniques.

C. Generally leads to the same decision as other methods for long-term projects.

D. Is rarely used in practice.

MCQ-11374

Ironside Products is considering two independent projects, each requiring a cash outlay of
$500,000 and having an expected life of 10 years. The forecasted annual net cash inflows
for each project and the probability distributions for these cash inflows are as follows.

Project R Project S

Probabilities Cash inflows Probabilities Cash inflows

0.10 $75,000 0.25 $70,000

0.80 95,000 0.50 110,000

0.10 115,000 0.25 150,000

Ironside has decided that the project with the greatest relative risk should meet a hurdle rate of 16
percent, and the project with less risk should meet a hurdle rate of 12 percent. Given these
parameters, which of the following actions should be recommended for Ironside to undertake?

A. Reject both projects

B. Accept Project R and reject Project S

C. Reject Project R and accept Project S

D. Accept both projects

MCQ-14351

Miller Inc. uses straight‐line depreciation for both tax and financial reporting purposes. The
following data relate to Machine No. 108, which cost $400,000 and is being written‐off over a five‐
year life. The Operating Income numbers below are already net of the depreciation related to
Machine No. 108.

Year Operating Income

1 $150,000

2 200,000

3 225,000

4 225,000

5 175,000

All of these amounts are on a before‐tax basis. Miller is subject to a 40 percent income tax rate.
The company strives for a 12 percent rate of return. The traditional payback period for Machine
No. 108 would be:

A. 2.22 years.

B. 2.14 years.

C. 1.15 years.

D. 3.00 years.
MCQ-14384

Webster Products is performing a capital budgeting analysis on a new product it is considering.

Annual sales are expected to be 50,000 units in the first year, 100,000 units in the second year,
and 125,000 units the year thereafter. Selling price will be $80 in the first year and is expected to
decrease by 5 percent per year. Annual costs are forecasted as follows.

The investment of $2 million will be depreciated on a straight‐line basis over 4 years for financial
reporting and tax purposes. Webster's effective tax rate is 40 percent. When calculating net
present value (NPV), the net cash flow for Year 3 would be:

A. $858,750.

B. $1,431,250.

C. $1,058,750.

D. $558,750.
MCQ-14295

Manny Corp. is a well diversified company with multiple manufacturing facilities. Manny's Los
Angeles-based plant has supplied widgets to a major retail chain for well over 20 years.
Unfortunately, the demand is not there for the widgets any more, therefore Manny's has decided to
discontinue the production of widgets. Management is now considering what to do with the Los
Angeles based plant since it will no longer be required to produce widgets. There are three
potential options that Manny's management must consider:
1. Nomar Enterprises has made an offer to buy the Los Angeles plant for $2.5 million cash on
January 1, 2011.
2. Martinez Production Masters has offered to lease the Los Angeles facility for six years beginning
January 1, 2011. Annual lease payments would be $300,000 plus 15 percent of the gross sales of
all items produced in the Los Angeles plant. Gross sales and their probabilities for the lease period
are as follows:

3. Manny's management is considering the production of a new, technologically advanced widget.

The Los Angeles plant would be used to produce 10,000 items per month at an annual cash
outflow of $3,000,000 for 2011, 2012, 2013, and 2014. Katelyn Joan, vice president of marketing,
recommends a selling price of $30 per item, and believes the new widgets will sell consistently
throughout 2012, 2013, 2014, and 2015.
Manny's management is looking at the financials and sees that the adjusted basis of the Los
Angeles facility is $6,500,000, and has used straight‐line depreciation for the capital assets at the
plant. If the plant is not sold, additional depreciation charges of $1,000,000 will occur each year for
the next six years. The market value of the plant and equipment are estimated to be $1,600,000 on
December 31, 2016.
Manny Corporation requires an after tax rate of return of 14 percent for capital investment
decisions. Their corporate income tax rates are 40 percent on operating income.
What is the present value of the expected after‐tax cash flow for the first option?

A. $4,100,000

B. ($4,000,000)

C. $900,000
D. $2,500,000
MCQ-12031

Kunkle Products is analyzing whether or not to invest in equipment to manufacture a new product.
The equipment will cost $1 million, is expected to last 10 years, and will be depreciated on a
straight-line basis for both financial reporting and tax purposes. Kunkle's effective tax rate is 40
percent, and its hurdle rate is 14 percent. The present value of an annuity of $1 at 14 percent for
10 years is 5.216. Other information concerning the project is as follows:
Sales per year = 10,000 units
Selling price = $100 per unit
Variable cost = $70 per unit
A 10 percent reduction in variable costs would result in the net present value increasing
by approximately:

A. $42,000.

B. $219,000.

C. $313,000.

D. $365,000.
MCQ-03577

When employing the MACRS method of depreciation in a capital budgeting decision, the use of
MACRS as compared to the straight-line method of depreciation will result in:

A. Equal total depreciation for both methods.

B. MACRS producing less total depreciation than straight line.

C. Equal total tax payments, after discounting for the time value of money.

D. MACRS producing more total depreciation than straight line.

MCQ-11326

Logan Enterprises is at a critical decision point and must decide whether to go out of business or
continue to operate for five more years. Logan has a labor contract with five years remaining that
calls for $1.5 million in severance pay if Logan's plant shuts down. The firm also has a contract to
supply 150,000 units per year, at a price of $100 each, to Dill Inc. for the next five years. Dill is
Logan's only remaining customer. Logan must pay Dill $500,000 immediately if it defaults on the
contract. The plant has a net book value of $600,000, and appraisers estimate the facility would
sell for $750,000 today but would have no market value if operated for another five years. Logan's
fixed costs are $4 million per year, and variable costs are $75 per unit. Logan's appropriate
discount rate is 12 percent. Ignoring taxes, the optimal decision is to:

A. Shut down, because the annual cash flow is negative $250,000 per year.

B. Keep operating to avoid the severance pay of $1,500,000.

Shut down, since the breakeven point is 160,000 units, while annual sales are 150,000
C.
units.

Keep operating, since the incremental net present value (NPV) is approximately
D.
$350,000.
MCQ-14344

Which of the following statements is not necessarily true about net present value (NPV)?

A. A project with a positive NPV should be accepted.

A positive NPV indicates that future discounted cash flows are greater than the initial
B.
investment cost.

A negative NPV means that future cash flows will earn a return less than the required
C.
rate of return.

An NPV of zero means that the investment earns the same rate of return as the
D.
required rate of return.
MCQ-10196

McLean Inc. is considering the purchase of a new machine that will cost $150,000. The machine
has an estimated useful life of three years. Assume for simplicity that the equipment will be fully
depreciated 30, 40, and 30 percent in each of the three years, respectively. The new machine will
have a $10,000 resale value at the end of its estimated useful life. The machine is expected to
save the company $85,000 per year in operating expenses. McLean uses a 40 percent estimated
income tax rate and a 16 percent hurdle rate to evaluate capital projects.
Discount rates for a 16 percent rate are as follows:

Present Value of an
Present Value of $1 Ordinary Annuity of $1

Year 1 .862 .862

Year 2 .743 1.605

Year 3 .641 2.246

The payback period for this investment would be:

A. 2.95 years.

B. 1.76 years.

C. 2.09 years.

D. 2.94 years.
MCQ-11397

Verla Industries is trying to decide which one of the following two options to pursue. Either option
will take effect on January 1 of the next year.
Option One: Acquire a new finishing machine
The cost of the machine is $1,000,000, and the machine will have a useful life of five years. Net
pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for five
years.
Depreciation expense will be calculated using the straight-line method for both financial and tax-
reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000
on its current fully depreciated finishing machine.
Option Two: Outsource the finishing work
Verla can outsource the work to LM Inc. at a cost of $200,000 per year for five years. If it
outsources, Verla will scrap its current fully depreciated finishing machine.
Verla's effective income tax rate is 40 percent. The weighted average cost of capital is 10 percent.
The net present value (NPV) of acquiring the new finishing machine is:

A. $229,710 net cash outflow.

B. $267,620 net cash outflow.

C. $369,260 net cash outflow.

D. $434,424 net cash outflow.

MCQ-14390

Brown and Company uses the internal rate of return (IRR) method to evaluate capital projects.
Brown is considering four independent projects with the following IRRs.

Brown's cost of capital is 13 percent. Which one of the following project options should Brown
accept based on IRR?

A. Project IV only

B. Projects I and II only

C. Projects III and IV only

D. Projects I, II, III, and IV

MCQ-09115

Exeter Corporation has the opportunity to make a $150,000 capital investment that management
anticipates will produce a $40,000 after-tax income stream in each of the next five years. The
investment will have a 10% salvage value after taxes at the end of year five. The company's tax
rate is 25% and the company's hurdle rate is 10%. What is the net present value of this investment
given the following present value factors at 10%?

Present Value of $1.00 Present Value of an Annuity

Year 1 0.909 0.909

Year 2 0.826 1.736

Year 3 0.751 2.487

Year 4 0.683 3.170

Year 5 0.621 3.791

A. ($1,640)

B. $1,640

C. $9,315

D. $10,955
MCQ-10161

Whatney Co. is considering the acquisition of a new, more efficient press. The cost of the press is
$360,000, and the press has an estimated six-year life with zero salvage value. Whatney uses
straight-line depreciation for both financial reporting and income tax reporting purposes and has a
40 percent corporate income tax rate. In evaluating equipment acquisitions of this type, Whatney
uses a goal of a four-year payback period. To meet Whatley's desired payback period, the press
must produce a minimum annual before-tax, operating cash savings of:

A. $ 90,000

B. $110,000

C. $114,000

D. $150,000
MCQ-11363

Foggy Products is evaluating two mutually exclusive projects, one requiring a $4 million initial
outlay and the other a $6 million outlay. The finance department has performed an extensive
analysis of each project. The chief financial officer has indicated that there is no capital rationing in
effect. Which of the following statements are correct?

Both projects should be rejected if their payback periods are longer than the company
I.
standard.

The project with the highest internal rate of return (IRR) should be selected (assuming both
II.
IRRs exceed the hurdle rate).

III. The project with the highest positive net present value (NPV) should be selected.

Select the project with the smaller initial investment, regardless of which evaluation method
IV.
is used.

A. I, II, and IV only

B. I, II, and III only

C. I and III only

D. II and III only

MCQ-14371

What is the significance of the criterion (hurdle) rate in internal rate of return (IRR) calculations?

A. The criterion rate is used to find the discount rate in a present value annuity table.

B. Projects above the criterion rate should be rejected.

C. Projects below the criterion rate should be rejected.

The criterion rate is used to find the discount rate in a present value interest factor
D.
table.
MCQ-11343

A company is in the process of evaluating a major product line expansion. Using a 14 percent
discount rate, the firm has calculated the present value of both the project's cash inflows and cash
outflows to be $15.8 million. The company will likely evaluate this project further by:

A. Taking a closer look at the expansion's contribution margin.

B. Comparing the internal rate of return versus the accounting rate of return.

C. Comparing the internal rate of return versus the discount rate used.

Comparing the internal rate of return versus the company's cost of capital and hurdle
D.
rate.
MCQ-11531

The method that recognizes the time value of money by discounting the after-tax cash flows over
the life of a project, using the company's minimum desired rate of return, is the:

A. Accounting rate of return method.

B. Net present value method.

C. Internal rate of return method.

D. Payback method.
MCQ-11558

The length of time required to recover the initial cash outlay of a capital project is determined by
using the:

A. Discounted cash flow method.

B. Payback method.

C. Net present value method.

D. Accounting rate of return method.

MCQ-14350

What is the payback period for a capital budgeting project where the total initial capital investment
is $175,000 and the expected annual net after‐tax cash flow is $35,000?

A. 2.5 years

B. 6 years

C. 3 years

D. 5 years
MCQ-11468

The internal rate of return (IRR) is the:

Rate of interest that equates the present value of cash outflows with the present value
A.
of cash inflows.

B. Risk-adjusted rate of return.

C. Required rate of return.

D. Weighted average rate of return generated by internal funds.

MCQ-11467

The internal rate of return (IRR) for a project can be determined:

A. Only if the project cash flows are constant.

B. By finding the discount rate that yields a net present value (NPV) of zero for the project.

C. By subtracting the firm's cost of capital from the project's profitability index.

D. Only if the project's profitability index is greater than one.

MCQ-03832

Willis, Inc. has a cost of capital of 15 percent and is considering the acquisition of a new machine,
which costs $400,000 and has a useful life of five years. Willis projects that earnings and cash flow
will increase as follows.

Year Net Earnings After-Tax Cash Flow

1 $100,000 $160,000

2 100,000 140,000

3 100,000 100,000

4 100,000 100,000

5 200,000 100,000

15% interest rate factors

Present Present value of

Period value of $1 an annuity of $1

1 0.87 0.87

2 0.76 1.63

3 0.66 2.29

4 0.57 2.86

5 0.50 3.36

The net present value of this investment is:

A. Negative, $64,000

B. Negative, $14,000

C. Positive, $18,600

D. Positive, $200,000
MCQ-14364

Which of following statements accurately compares the discounted payback and payback
methods?

A. Both methods provide simple measures of project profitability.

B. Both methods distinguish between types of cash inflows.

Discounted payback ignores cash flows after the payback period expiration; payback
C.
does not.

D. Discounted payback uses the present values of net cash inflows; payback does not.
MCQ-14492

Willis Inc. has a cost of capital of 15 percent and is considering the acquisition of a new machine,
which costs $400,000 and has a useful life of five years. Willis projects that earnings and cash flow
will increase as follows.

What is the payback period of this investment?

A. 1.5 years

B. 4 years

C. 3 years

D. 3.33 years
MCQ-03793

Barker Inc. has no capital rationing constraint and is analyzing many independent investment
alternatives. Barker should accept all investment proposals:

A. If debt financing is available for them.

B. That have positive cash flows.

C. That provide returns greater than the after-tax cost of debt.

D. That have a positive net present value.

MCQ-14494

Willis Inc. has a cost of capital of 15 percent and is considering the acquisition of a new machine
that costs $400,000, has a useful life of five years, and a zero estimated final salvage value. Willis
projects that earnings and cash flow will be as follows:

The net present value (NPV) of this investment is:

A. $418,600.

B. $18,600.

C. $200,000.

D. $600,000.
MCQ-11505

The internal rate of return is the:

Rate of interest that equates the present value of cash outflows and the present value
A.
of cash inflows.

B. Risk-adjusted rate of return.

C. Required rate of return.

D. Weighted average rate of return generated by internal funds.

MCQ-11562

Willis Inc. has a cost of capital of 15 percent and is considering the acquisition of a new machine,
which costs $400,000 and has a useful life of five years. Willis projects that earnings and cash flow
will increase as follows.

Net After-tax
Year Earnings Cash Flow

1 $100,000 $160,000

2 100,000 140,000

3 100,000 100,000

4 100,000 100,000

5 200,000 100,000

15% Interest Rate Factors

Present Present value

Period value of $1 of an Annuity of $1

1 0.87 0.87

2 0.76 1.63

3 0.66 2.29

4 0.57 2.86

5 0.50 3.36

What is the payback period of this investment?

A. 1.58 years

B. 3.00 years

C. 3.33 years
D. 4.00 years
MCQ-11421

If the present value of expected cash inflows from a project equals the present value of expected
cash outflows, then the discount rate is the:

A. Payback rate.

B. Internal rate of return.

C. Accounting rate of return.

D. Net present value rate.

MCQ-14360

Which of the following investment analysis methods ignores the time value of money?

A. Payback method

B. Internal rate of return

C. Net present value

D. Future value of an annuity

MCQ-11370

Foster Manufacturing is analyzing a capital investment project forecasted to produce the following
cash flows and net income.

After-tax Net
Year cash flow income

0 ($20,000) $0

1 6,000 2,000

2 6,000 2,000

3 8,000 2,000

4 8,000 2,000

The payback period of this project will be:

A. 2.5 years.

B. 2.6 years.

C. 3.0 years.

D. 3.3 years.
MCQ-14361

Jorelle Co.'s financial staff has been requested to review a proposed investment in new capital
equipment. Applicable financial data is presented below. There will be no salvage value at the end
of the investment's life and, due to realistic depreciation practices, it is estimated that the salvage
value and net book value are equal at the end of each year. Jorelle uses a 12 percent after‐tax
target rate of return.

The traditional payback period for the investment proposal is:

A. 1.05 years.

B. 2.83 years.

C. 3.00 years.

D. 2.23 years.
MCQ-14342

The capital budgeting model that is generally considered the best model for long‐range decision
making is the:

A. Discounted payback model.

B. Payback model.

C. Unadjusted rate of return model.

D. Net present value (NPV) model.

MCQ-12284

A company is considering the purchase of five construction cranes for its recently awarded
construction project. The cranes cost $20,000 each. These cranes are projected to provide a total
cash savings of $190,000 over the next eight years. The projected cash savings by year is shown
below.

Year Cash Savings

0 –

1 $35,000

2 32,000

3 28,000

4 26,000

5 24,000

6 20,000

7 15,000

8 10,000

The payback period is closest to:

A. 4.0 years.

B. 3.2 years.

C. 3.4 years.

D. 3.0 years.
MCQ-14365

The Keego Co. is planning a $200,000 equipment investment, which has an estimated five‐year
life with no estimated salvage value. The company has projected the following annual cash flows
for the investment:

Assuming that the estimated cash inflows occur evenly during each year, the payback period for
the investment is:

A. 3 years.

B. 3.94 years.

C. 0.83 years.

D. 2.5 years.
MCQ-14378

Consider the following scenario regarding the certainty equivalent approach to selecting projects:

Annual net after‐tax cash inflows over the life of a five‐year investment are $18,000,
$14,400, $12,600, $10,800, and $9,000.
Certainty equivalent factors are estimated to be 95 percent, 90 percent, 80 percent, 75
percent, and 50 percent.
The total initial investment for the project is $43,000.
The risk‐free rate of return is 4 percent.

Is the project acceptable?

A. Yes, as there is a positive net present value of $5,024.

B. No, as there is a negative net present value of $48,024.

C. No, as there is a negative net present value of $5,024.

D. Yes, as there is a positive net present value of $48,024.

MCQ-14495

The net present value (NPV) figures for projects A and B are as follows for a range of discount
rates.

The approximate internal rates of return (IRR) for Projects A and B, respectively, are:

A. 20.5% and 26.5%.

B. 0% and 0%.

C. 19.0% and 21.5%.

D. 19.5% and 25.5%.

MCQ-11463

As used in capital budgeting analysis, the internal rate of return uses which of the following items
in its computation?

Net Incremental Incremental Average Net Annual,

Investment Operating Income After-tax Cash Flows

A. Yes No Yes

B. Yes Yes No

C. No No Yes

D. No Yes Yes
MCQ-14383

Jorelle Co.'s financial staff has been requested to review a proposed investment in new capital
equipment. Applicable financial data is presented below. There will be no salvage value at the end
of the investment's life and, due to realistic depreciation practices, it is estimated that the salvage
value and net book value are equal at the end of each year. All cash flows are assumed to take
place at the end of each year. For investment proposals, Jorelle uses a 12 percent after‐tax target
rate of return.

The net present value (NPV) for the investment proposal is:

A. $230,000.

B. ($35,000).

C. ($97,970).

D. $106,160.
MCQ-12034

Allstar Company invests in a project with expected cash inflows of $9,000 per year for
four years. All cash flows occur at year-end. The required return on investment is 9
percent. The present value of an annuity of $1 at 9 percent for four years is 3.24.
If the project generates a net present value (NPV) of $3,000, then what is the amount of
the initial investment in the project?

A. $9,720

B. $19,440

C. $26,160

D. $29,160
MCQ-14366

An investment project requires an initial investment of $100,000. The project is expected to

generate net cash inflows of $28,000 per year for the next five years. Assuming a 12 percent cost
of capital, the project's payback period is:

A. 1.79 years.

B. 4.00 years.

C. 3.57 years.

D. 3.00 years.
MCQ-14397

Foster Manufacturing is analyzing a capital investment project that is forecasted to produce the
following cash flows and net income:

If Foster's cost of capital is 12 percent, the net present value (NPV) for this project is:

A. $8,000.

B. $924.

C. $5,004.

D. ($13,924).
MCQ-17324

Olive Corporation’s management is deciding how to invest their excess cash and has four potential
projects to choose from. Each project’s initial investment and the present value of their future cash
flows are as follows:

Initial Investment Present Value of Future Inflows

Project 1 $80,000 $100,000

Project 2 $45,000 $50,000

Project 3 $120,000 $160,000

Project 4 $95,000 $115,000

If only one project may be chosen, which project is the most desirable based on a profitability
index analysis?

A. Project 1

B. Project 2

C. Project 3

D. Project 4
MCQ-12428

Slater Five Star Foods (SFSF) is planning to purchase a new meat processor machine for
$250,000 and asked its accountant how many years must elapse in order for SFSF to
recoup the $250,000 investment. SFSF provided the following schedule of after-tax cash
flow savings from this purchase:

Year 1 $65,000

Year 2 $75,000

Year 3 $55,000

Year 4 $80,000

Year 5 $45,000

What is the payback period for the new meat processing packing machine?

A. 3.31

B. 3.69

C. 4.00

D. 4.22
MCQ-11556

The Keego Company is planning a $200,000 equipment investment which has an estimated five-
year life with no estimated salvage value. The company has projected the following annual cash
flows for the investment.

Projected Present
Year Cash Inflows Value of $1

1 $120,000 0.91

2 60,000 0.76

3 40,000 0.63

4 40,000 0.53

5 40,000 0.44

Totals $300,000 3.27

The net present value for the investment is:

A. $18,800

B. $218,800

C. ($3,800)

D. $36,800
MCQ-03375

The capital budgeting model that is generally considered the best model for long-range decision
making is the:

A. Payback model.

B. Accounting rate of return model.

C. Unadjusted rate of return model.

D. Discounted cash flow model.

MCQ-14489

Quint Co. uses the payback method as part of its analysis of capital investments. One of its
projects requires a $140,000 investment and has the following projected before‐tax cash flows.

Quint has an effective 40 percent tax rate. Based on these data, the after‐tax payback period is:

A. 3.7

B. 2.3

C. 4.00

D. 1.9
MCQ-14357

Eagle Co. has an investment opportunity with expected after‐tax cash flows of $50,000 a year in
Years 1 and 2, $60,000 a year in Years 3 and 4, and $75,000 in Year 5. The initial outlay of this
investment is $250,000 today. The firm uses four years as a maximum payback criterion. Assume
cash flows occur evenly during the year. What is the payback period for this investment and should
the firm accept the project?

A. 2.4 years; accept the project

B. 4.4 years; reject the project

C. 4.4 years; accept the project

D. 5 years; reject the project

MCQ-14395

Which of the following describes the amount in dollars today that an investment earns after
yielding the required rate of return for each period during the life of the investment?

A. Internal rate of return

B. Net present value

C. Discounted payback

D. Profitability index
MCQ-14491

Smithco is considering the acquisition of scanning equipment to mechanize its procurement

process. The equipment will require extensive testing and debugging, as well as user training prior
to its operational use. Projected after‐tax cash flows are shown below.

Management anticipates the equipment will be sold at the beginning of Year 6 for $50,000 when its
book value is zero. Smithco's internal hurdle and effective tax rates are 14 percent and 40 percent,
respectively. The project's payback period will be:

A. 3 years.

B. 2.3 years.

C. 2.2 years.

D. 4 years.
MCQ-11540

All of the following are the rates used in net present value analysis except for the:

A. Cost of capital.

B. Hurdle rate.

C. Discount rate.

D. Accounting rate of return.

MCQ-14490

Foster Manufacturing is analyzing a capital investment project with an initial investment of $20,000
at Year 0 that is forecasted to produce the following cash flows and net income.

The payback period of this project will be:

A. 1.7 years.

B. 4 years.

C. 2 years.

D. 3 years.
MCQ-03764

A company has unlimited capital funds to invest. The decision rule for the company to follow in
order to maximize shareholders' wealth is to invest in all projects having a (n):

A. Present value greater than zero.

B. Net present value greater than zero.

C. Internal rate of return greater than zero.

Accounting rate of return greater than the hurdle rate used in capital budgeting
D.
analyses.
MCQ-14376

In order to increase production capacity, Gunning Industries is considering replacing an existing

production machine with a new technologically improved machine effective January 1. The
following information is being considered by Gunning Industries.

The new machine would be purchased for $160,000 in cash. Shipping, installation, and
testing would cost an additional $30,000.
The new machine is expected to increase annual sales by 20,000 units at a sales price of
$40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and
total fixed costs of $40,000 per year.
The investment in the new machine will require an immediate increase in working capital of
$35,000.
Gunning uses straight‐line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of five years and zero salvage value.
Gunning is subject to a 40 percent corporate income tax rate.

Gunning uses the net present value method to analyze investments and will employ the following
factors and rates.

The acquisition of the new production machine by Gunning Industries will contribute a discounted
net‐of‐tax contribution margin of:

A. $372,600.

B. $454,920.

C. $380,400.

D. $545,400.
MCQ-11466

All of the following capital budgeting analysis techniques use after-tax cash flows as the primary
basis for the calculation except for the:

A. Net present value.

B. Internal rate of return.

C. Discounted payback period.

D. Accounting rate of return.

MCQ-14388

Which of the following methods of evaluating capital investment projects estimates the discount
rate that will make the present value of net cash inflows equal to the initial investment?

A. Internal rate of return

B. Profitability index

C. Net present value method

D. Payback method
MCQ-17323

Bowers Corporation has excess cash available this month and is analyzing whether they should
invest in a project that was proposed by one of their managers. The project would cost $200,000
and has the following after-tax cash flow increases for the next four years:

Year 1 $30,000

Year 2 $65,000

Year 3 $140,000

Year 4 $50,000

Bowers uses a 10% discount rate to evaluate all projects and has determined the present value
factors for the four-year period to be:

Present Value of $1 Present Value of an Ordinary Annuity of $1

Year 1 0.909 0.909

Year 2 0.826 1.736

Year 3 0.751 2.487

Year 4 0.683 3.170

Using this information, what is the profitability index for this project?

A. 0.91

B. 4.52

C. 0.22

D. 1.10
MCQ-03758

In order to increase production capacity, Gunning Industries is considering replacing an existing

production machine with a new technologically improved machine effective January 1, Year 1. The
following information is being considered by Gunning Industries.

The new machine would be purchased for $160,000 in cash. Shipping, installation, and
testing would cost an additional $30,000.
The new machine is expected to increase annual sales by 20,000 units at a sales price of
$40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and
total fixed costs of $40,000 per year.
The investment in the new machine will require an immediate increase in working capital of
$35,000.
Gunning uses straight-line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of five years and zero salvage value.
Gunning is subject to a 40 percent corporate income tax rate.

Gunning uses the net present value method to analyze investments and will employ the following
factors and rates.

Present Value of an
Present Value of Ordinary Annuity of
Period $1 at 10% $1 at 10%

1 .909 .909

2 .826 1.736

3 .751 2.487

4 .683 3.170

5 .621 3.791

Gunning Industries' net initial cash outflow in a capital budgeting decision would be:

A. $190,000

B. $195,000

C. $204,525

D. $225,000
MCQ-07778

If a project has a hurdle rate of 6 percent, which of the following statements is correct?

A. The NPV will be positive if the IRR is equal to 5 percent.

B. The project will be rejected if the IRR is equal to 7 percent.

C. The NPV will be negative if the IRR is greater than 6 percent.

D. The project will be accepted if the IRR is greater than 6 percent.

MCQ-07801

Which of the following results would likely lead a manager to decide not to invest in a project
requiring an investment of $750,000? Assume that the company’s weighted average cost of capital
is 10%.

A. The project has residual income of $325,000.

B. The project has a net present value of $325,000.

C. The project has an internal rate of return of 8%.

D. The project has a payback period of three years.

MCQ-11554

If the net present value of a capital budgeting project is positive, it would indicate that the:

A. Present value of cash outflows exceeds the present value of cash inflows.

Internal rate of return is equal to the discount percentage rate used in the net present
B.
value computation.

C. Present value index would be less than 100 percent.

Rate of return for this project is greater than the discount percentage rate used in the
D.
net present value computation.
MCQ-14356

An analyst at Rockville Enterprises estimates that a project has the following after‐tax net cash
flows:

Cash Flows By Year

Year Net Cash Flows

0 (500,000)

1 150,000

2 200,000

3 150,000

4 125,000

5 75,000

6 50,000

PV Factor Table

Period 12.00%

1 0.8929

2 0.7972

3 0.7118

4 0.6355

5 0.5674

6 0.5066

7 0.4523

If the company's cost of capital is 12 percent, the project's discounted payback period is closest to:

A. 3 years.

B. 4.48 years.
C. 1.73 years.

D. 5 years.
MCQ-14353

Which of the following statements is not true of using the payback method in capital budgeting?
The payback method:

A. Takes into account the time value of money.

B. Represents the breakeven point for an investment.

C. Provides a rough measure of project risk.

D. Does not distinguish between types of cash inflows.

MCQ-12024

For each of the next six years, Atlantic Motors anticipates a net income of $10,000,
straight-line tax depreciation of $20,000, a 40 percent tax rate, a discount rate of 10
percent, and cash sales of $100,000. The depreciable assets are all being acquired at the
beginning of Year 1 and will have a salvage value of zero at the end of six years. The
present value of an annuity of $1 at 10 percent for six years is equal to 4.355.
The present value of the total depreciation tax savings
would be:

A. $8,000.

B. $34,840.

C. $48,000.

D. $87,100.
MCQ-11383

Foster Manufacturing is analyzing a capital investment project that is forecasted to produce the
following cash flows and net income.

After-tax
Years cash flows Net income

0 ($20,000) $ 0

1 6,000 2,000

2 6,000 2,000

3 8,000 2,000

4 8,000 2,000

If Foster's cost of capital is 12 percent, the net present value (NPV) for this project is:

A. $(1,600).

B. $924.

C. $6,074.

D. $6,998.
MCQ-14348

All of the following are advantages of the payback method except:

A. It provides a rough measure of liquidity.

B. It uses a simple calculation.

C. It provides a measure of project profitability.

D. It yields results that are easy to understand.

MCQ-14358

A company wants to replace its old stand‐alone systems with a retail point‐of‐sale system. The
costs of the new system include $30,000 for new hardware and software, $20,000 for systems
training, and estimated costs of $5,000 for learning curves and $5,000 for lost sales during
transition. The per year benefits of the new system include increased customer knowledge
(~$10,000), better fraud prevention (~$20,000), and improved customer service and retention
(~$10,000). How many years will it take this project to repay its investment?

A. 0.75 years

B. 1.5 years

C. The project will never repay itself and should not be done

D. 1 year
MCQ-03861

Willis, Inc. has a cost of capital of 15 percent and is considering the acquisition of a new machine,
which costs $400,000 and has a useful life of five years. Willis projects that earnings and cash flow
will increase as follows.

Year Net Earnings After-Tax Cash Flow

1 $100,000 $160,000

2 100,000 140,000

3 100,000 100,000

4 100,000 100,000

5 200,000 100,000

15% interest rate factors

Present Present value of

Period value of $1 an annuity of $1

1 0.87 0.87

2 0.76 1.63

3 0.66 2.29

4 0.57 2.86

5 0.50 3.36

What is the payback period of this investment?

A. 1.50 years

B. 3.00 years

C. 3.33 years

D. 4.00 years
MCQ-11376

Smithco is considering the acquisition of scanning equipment to mechanize its procurement

process. The equipment will require extensive testing and debugging, as well as user training, prior
to its operational use. Projected after-tax cash flows are shown below.

Time After-tax cash

period year inflow/(outflow)

0 ($550,000)

1 ($500,000)

2 $450,000

3 $350,000

4 $250,000

5 $150,000

Management anticipates the equipment will be sold at the beginning of Year 6 for $50,000 when its
book value is zero. Smithco's internal hurdle and effective tax rates are 14 percent and 40 percent,
respectively.
What is the after-tax payback period?

A. 2.3 years.

B. 3.0 years.

C. 3.5 years

D. 4.0 years.
MCQ-03373

In evaluating a capital budget project, the use of the net present value model is generally not
affected by the:

A. Method of funding the project.

B. Initial cost of the project.

C. Amount of added working capital needed for operations during the term of the project.

D. Amount of the project's associated depreciation tax allowance.

MCQ-14345

Maple Haven Industries is trying to decide which of three projects to choose: Project Vader, Project
Skywalker, or Project Solo. The capital costs and estimated after‐tax cash flows of each mutually
exclusive project are listed below. Maple Haven's desired after‐tax opportunity cost is 12 percent,
and the company has a capital budget for the year of $705,000. Maple Haven cannot reinvest idle
funds for greater than 12 percent.
Consider the following cash flows:

Vader Skywalker Solo

Initial Cash Flow $313,000 $367,775 $328,650

Annual Cash Flows

Year 1 $145,545 $140,850 $ 62,600

Year 2 145,545 133,025 78,250

Year 3 145,545 117,375 93,900

Year 4 - 86,075 101,725

Year 5 - 78,250 117,375

Which of the following projects should be chosen if only one project can be accepted?

A. Project Skywalker

B. Any can be chosen

C. Project Solo

D. Project Vader
MCQ-14500

Maple Haven Industries is trying to decide which of three projects to choose, Project Vader, Project
Skywalker, or Project Solo. The capital costs and estimated after-tax cash flows of each
independent project are listed below. Maple Haven's desired after‐tax opportunity cost is 14
percent, and the company has a capital budget for the year of $705,000. Maple Haven cannot
reinvest idle funds for greater than 14 percent.
Consider the following cash flows:

Vader Skywalker Solo

Initial cash flow $313,000 $367,775 $328,650

Annual cash flows

Year 1 $145,545 $140,850 $ 62,600

Year 2 145,545 133,025 78,250

Year 3 145,545 117,375 93,900

Year 4 - 86,075 101,725

Year 5 - 78,250 117,375

Which of the following projects (may be more than one) can be chosen by Maple Haven Industries,
based on net present value (NPV)?

A. Projects Vader, Skywalker, and Solo

B. Projects Vader and Skywalker

C. Project Skywalker

D. Project Vader
MCQ-07793

Which of the following statements is true if the NPV of a project is −$4,000 (negative $4,000) and
the required rate of return is 5 percent?

A. The project’s IRR is less than 5 percent.

B. The required rate of return is lower than the IRR.

C. The NPV assumes cash flows are reinvested at the IRR.

D. The NPV would be positive if the IRR was equal to 5 percent.

MCQ-12037

An investment decision is acceptable if the:

A. Net present value is greater than or equal to $0.00.

B. Present value of cash inflows is less than the present value of cash outflows.

C. Present value of cash outflows is greater than or equal to $0.00.

D. Present value of cash inflows is greater than or equal to $0.00.

MCQ-11429

Jones & Company is considering the acquisition of scanning equipment to mechanize its
procurement process. The equipment will require extensive testing and debugging as well as user
training prior to its operational use. Projected after-tax cash flows are as follows.

Time After-tax cash

period year inflow/(outflow)

0 $(600,000)

1 (500,000)

2 450,000

3 450,000

4 350,000

5 250,000

Management anticipates the equipment will be sold at the beginning of Year 6 for $50,000, and its
book value will be zero. Jones' internal hurdle and effective income tax rates are 14 percent and
40 percent, respectively. Based on this information, a negative net present value (NPV) was
computed for the project. Accordingly, it can be concluded that:

The project has an internal rate of return (IRR) less than 14 percent, since IRR is the
A.
interest rate at which NPV is equal to zero.

Jones should examine the determinants of its hurdle rate further before analyzing any
B.
other potential projects.

Jones should calculate the project payback to determine if it is consistent with the NPV
C.
calculation.

The project has an IRR greater than 14 percent, since IRR is the interest rate at which
D.
NPV is equal to zero.
MCQ-14340

Why is net present value (NPV) the preferable method to use when comparing investment projects
when the timing and amount of cash flows differ over the life of a capital investment project?

A. The initial investment amount has no effect—the scale of the investment is ignored.

NPV assumes that all of a project's net cash inflows earn the same rate of return once
B.
reaching the payback period.

NPV more readily identifies when proceeds from project termination might be better
C.
applied to new projects.

NPV assumes that all net cash flows earn the same rate as the discount rate used in
D.
the NPV calculation.
MCQ-14380

As used in capital budgeting analysis, the internal rate of return (IRR) uses which of the following
items in its computation?

Net incremental investment—yes; incremental average operating income—no; net

A.
annual cash flows—yes

Net incremental investment—yes; incremental average operating income—yes; net

B.
annual cash flows—yes

Net incremental investment—no; incremental average operating income—yes; net

C.
annual cash flows—yes

Net incremental investment—yes; incremental average operating income—yes; net

D.
annual cash flows—no
MCQ-11478

Smithco is considering the acquisition of scanning equipment to mechanize its procurement

process. The equipment will require extensive testing and debugging, as well as user training prior
to its operational use. Projected after-tax cash flows are shown below.

Time After-tax cash

period year inflow/(outflow)

0 $(550,000)

1 $(500,000)

2 $450,000

3 $350,000

4 $250,000

5 $150,000

Management anticipates the equipment will be sold at the beginning of Year 6 for $50,000 when its
book value is zero. Smithco's internal hurdle and effective tax rates are 14 percent and 40 percent,
respectively. The project's payback period will be:

A. 2.3 years.

B. 3.0 years.

C. 3.5 years.

D. 4.0 years.
MCQ-03753

The method that recognizes the time value of money by discounting the after-tax cash flows over
the life of a project, using the company's minimum desired rate of return is the:

A. Accounting rate of return method.

B. Net present value method.

C. Internal rate of return method.

D. Payback method.
MCQ-07026

Kuchman Kookies has invested $100,000 in new ovens to improve their baking and production
process. The ovens have a useful life of 5 years with no salvage value. The tax rate is 20%. The
after-tax cash flows from the investment are expected to be as follows:

Year 1 $ 35,000

Year 2 38,000

Year 3 25,000

Year 4 20,000

Year 5 10,000

If the company uses an 8% hurdle rate for its investments, what is the payback period in years for
the ovens?

A. 2.3

B. 3.1

C. 4.0

D. 4.7
MCQ-11422

The net present value (NPV) profiles of Projects A and B are as follows:

Discount rate Net present value

(percent) $(000)

Project A Project B

0 $2,220 $1,240

10 681 507

12 495 411

14 335 327

16 197 252

18 77 186

20 (26) 128

22 (115) 76

24 (193) 30

26 (260) (11)

28 (318) (47)

The approximate internal rates of return for Projects A and B, respectively, are:

A. 0% and 0%.

B. 19.0% and 21.5%.

C. 19.5% and 25.5%.

D. 20.5% and 26.5%.

MCQ-11425

Jenson Copying Company is planning to buy a copying machine costing $25,310. The NPV of this
investment, at various discount rates, are as follows.

Discount rate NPV

4% $2,440

6% $1,420

8% $460

10% $(440)

Jenson's approximate internal rate of return (IRR) on this investment is:

A. 6%

B. 8%

C. 9%

D. 10%
MCQ-14381

Topeka Products uses the net present value (NPV) method to evaluate capital projects. Topeka
plans to acquire a depreciable asset on January 1 of next year for $2.4 million.

The new asset has an estimated service life of four years, a zero terminal disposal value,
and will be depreciated on a straight‐line basis.
The new asset will replace an existing asset that is expected to be sold for $350,000.
The tax basis of the existing asset is $330,000.
Topeka is subject to an effective income tax rate of 40 percent and assumes that any gains
or losses affect the taxes paid at the end of the year in which the gains or losses occur.
Topeka uses a 10 percent discount rate for NPV analyses.

The present value of the new asset's depreciation tax‐shield that would be included in an NPV
analysis is:

A. $960,000.

B. $1,141,200.

C. $760,800.

D. $1,902,000.
MCQ-11534

In order to increase production capacity, Gunning Industries is considering replacing an existing

production machine with a new technologically improved machine effective January 1, Year 1. The
following information is being considered by Gunning Industries.

The new machine would be purchased for $160,000 in cash. Shipping, installation, and
testing would cost an additional $30,000.
The new machine is expected to increase annual sales by 20,000 units at a sales price of
$40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and
total fixed costs of $40,000 per year.
The investment in the new machine will require an immediate increase in working capital of
$35,000.
Gunning uses straight-line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of five years and zero salvage value.
Gunning is subject to a 40 percent corporate income tax rate.

Gunning uses the net present value method to analyze investments and will employ the following
factors and rates.

Present value of
an ordinary
Present value annuity of
Period of $1 at 10% $1 at 10%
1 0.909 0.909
2 0.826 1.736
3 0.751 2.487
4 0.683 3.170
5 0.621 3.791

The overall discounted cash flow impact of Gunning Industries' working capital investment for the
new production machine would be:

A. $(10,080)

B. $(11,370)

C. $(13,265)

D. $(35,000)
MCQ-11538

A company has unlimited capital funds to invest. The decision rule for the company to follow in
order to maximize shareholders' wealth is to invest in all projects having a(n):

A. Present value greater than zero.

B. Net present value greater than zero.

C. Internal rate of return greater than zero.

Accounting rate of return greater than the hurdle rate used in capital budgeting
D.
analyses.
MCQ-11549

The net present value method of capital budgeting assumes that cash flows are reinvested at:

A. The risk-free rate.

B. The cost of debt.

C. The rate of return of the project.

D. The discount rate used in the analysis.

MCQ-03835

A disadvantage of the net present value method of capital expenditure evaluation is that it:

A. Is calculated using sensitivity analysis.

B. Does not provide the true rate of return on investment.

C. Is difficult to apply because it uses a trial and error approach.

D. Is difficult to adapt for risk.

MCQ-14297

Company ABC is considering merging with Company XYZ. After analyzing both companies, it is
determined that the incremental after‐tax free cash flow resulting from the merger is estimated to
be $3,500,000 and is expected to last for 20 years. Assuming a required rate of return of 12
percent for the acquired company, using the discounted cash flow method, what is the maximum
amount Company ABC should offer to purchase Company XYZ for?

A. $29,280,219

B. $25,780,219

C. $26,467,011

D. $26,143,053
MCQ-11546

McLean Inc. is considering the purchase of a new machine that will cost $150,000. The machine
has an estimated useful life of three years. Assume for simplicity that the equipment will be fully
depreciated 30, 40, and 30 percent in each of the three years, respectively. The new machine will
have a $10,000 resale value at the end of its estimated useful life. The machine is expected to
save the company $85,000 per year in operating expenses. McLean uses a 40 percent estimated
income tax rate and a 16 percent hurdle rate to evaluate capital projects.
Discount rates for a 16 percent rate are as follows.
Present value of an
Present value of $1 ordinary annuity of $1
Year 1 0.862 0.862
Year 2 0.743 1.605
Year 3 0.641 2.246
What is the net present value of this project?

A. $15,842

B. $13,278

C. $9,432

D. $(35,454)
MCQ-11541

A depreciation tax shield is:

A. An after-tax cash outflow.

B. A reduction in income taxes.

C. The expense caused by depreciation.

D. Caused by the fact that depreciation does not affect cash flow.
MCQ-11344

Hobart Corporation evaluates capital projects using a variety of performance screens, including a
hurdle rate of 16 percent, payback period of three years or less, and an accounting rate of return
of 20 percent or more. Management is completing review of a project on the basis of the following
projections.

Capital investment $200,000

Annual cash flows $74,000

Straight-line depreciation 5 years

Terminal value $20,000

The projected internal rate of return (IRR) is 20 percent. Which one of the following alternatives
reflects the appropriate conclusions for the indicated evaluative measures?

Internal
rate of return Payback

A. Accept Reject

B. Reject Reject

C. Accept Accept

D. Reject Accept
MCQ-14399

Tendulkar Inc. has a project that requires a $40,000,000 initial investment and is expected to
generate annual after‐tax cash flows of $6,000,000 for 12 years. Tendulkar's weighted average
cost of capital is 14 percent. This project's net present value (NPV) and the approximate internal
rate of return (IRR) are:
(Use one or both of the following Present Value tables to calculate your answer.)

A. NPV: ($7,282,000); IRR: 10%

B. NPV: ($6,040,000); IRR: 12%

C. NPV: ($6,040,000); IRR: 10%

D. NPV: ($7,282,000); IRR: 12%

MCQ-14374

The net present value (NPV) of a proposed investment is negative; therefore, the discount rate
used must be:

A. Less than the incremental borrowing rate.

B. Greater than the firm's cost of equity.

C. Less than the project's IRR.

D. Greater than the project's internal rate of return (IRR).

MCQ-14379

The net present value (NPV) method of capital budgeting assumes that cash flows are reinvested
at:

A. The rate of return of the project.

B. No rate as they are not reinvested.

C. The cost of debt.

D. The discount rate used in the analysis.

MCQ-11564

When evaluating capital budgeting analysis techniques, the payback period emphasizes:

A. Liquidity.

B. Profitability.

C. Net income.

D. The accounting period.

MCQ-10126

The internal rate of return for a project can be determined:

A. Only if the project cash flows are constant.

B. By finding the discount rate that yields a net present value of zero for the project.

C. By subtracting the firm's cost of capital from the project's profitability index.

D. Only if the project's profitability index is greater than one.

MCQ-07792

As part of a new project, Enpeve purchases two new pieces of equipment to be used for the next
five years. The first machine will save Enpeve $15,000 per year. The second machine will result in
cash inflows of $20,000 per year. If Enpeve’s tax rate is 30 percent, and the applicable present
value factor at a 5 percent discount rate is 4.329, the present value of the cash flows for both
machines is closest to:

A. $15,150

B. $21,645

C. $106,060

D. $151,515
MCQ-14286

Mintz Corp. is considering the acquisition of a new technologically efficient packaging machine at a
cost of $300,000. The equipment requires an immediate, fully recoverable, investment in working
capital of $40,000. Mintz plans to use the machine for five years, is subject to a 40 percent income
tax rate, and uses a 12 percent hurdle rate when analyzing capital investments. The company
employs the net present value method (NPV) to analyze projects.
The overall impact of the working capital investment on Mintz's NPV analysis is in present value
equal to:

A. $(22,680).

B. $(17,320).

C. $0.

D. $(40,000).
MCQ-14392

Kunkle Products is analyzing whether or not to invest in equipment to manufacture a new product.
The equipment will cost $1 million, is expected to last 10 years, and will be depreciated on a
straight‐line basis for both financial reporting and tax purposes. Kunkle's effective tax rate is 40
percent, and its hurdle rate is 14 percent. Other information concerning the project is as follows.

Sales per year = 10,000 units

Selling price = $100 per unit
Variable cost = $70 per unit

A 10 percent reduction in variable costs would result in the net present value increasing by
approximately:

A. $146,048.

B. $219,000.

C. $420,000.

D. $365,000.
MCQ-12427

The IRR method evaluates investment alternatives based on the achieved IRR. IRR methodology
to accept or reject a capital budgeting project has limitations. All of the following are limitations of
the IRR method except:

If internal rates of return are unrealistically high or low, IRR rates could lead to
A.
inappropriate conclusions.

IRR method does not consider the market rate of interest and seeks to determine the
B.
maximum rate of interest at which funds invested in any project could be repaid.

IRR evaluation method becomes easier when the capital project has variations in cash
C.
flows and the timing of cash flows.

Using IRR assumes that the reinvestment rate will be equal to the IRR and that each
D.
cash flow will be reinvested at the same interest rate.
MCQ-12287

A company with a 10 percent required rate of return is evaluating a $35,000 capital budgeting
proposal. The anticipated cash inflows from this project are shown below.

Year 1 $10,000

Year 2 20,000

Year 3 30,000

The discounted payback period for this project is:

A. 2.42 years.

B. 2.31 years.

C. 2.28 years.

D. 2.17 years.
MCQ-03834

The net present value of a proposed investment is negative; therefore, the discount rate used must
be:

A. Greater than the project's internal rate of return.

B. Less than the project's internal rate of return.

C. Greater than the firm's cost of equity.

D. Less than the incremental borrowing rate.

MCQ-12429

Invincible OB GYN Inc. wants to purchase a new ultrasound medical unit having the
newest technology. Hologram PLLC has made a presentation to the physicians, who are
most interested. The cost of the unit is $65,000, which includes a two-year warranty. The
warranty has a value of $24,000 but is included in the price of the machine. Invincible
anticipates that the new unit will yield a higher-level image resulting in increased profits of
$22,000 per year during the unit's seven-year life. To move forward with the purchase, the
physicians ask their accountant to calculate the NPV of this purchase. The details and
facts are as follows:

Hologram ultrasound machine: $65,000

Purchasing, using, and disposing of the unit will not affect working capital requirements.
Net, after-tax cash flows per year: $22,000
After seven years, the scrap value of the unit will equal the costs of removal and disposition
of the unit.
Discount rate: 9 percent
PV factor (9 percent) for an annuity for seven years: 5.03295
PV factor (9 percent) of a lump sum for two years: 0.84168

Calculate the net present value of the new ultrasound machine using the fact pattern
above.

A. $45,724

B. $65,924

C. $69,724

D. $89,000
MCQ-11471

As used in capital budgeting analysis, the internal rate of return (IRR) uses which of the following
items in its computation?

Net incremental Incremental average Net annual, after-tax

investment operating income cash flows

A. Yes No Yes

B. Yes Yes No

C. No No Yes

D. No Yes Yes
MCQ-03345

Under which one of the following conditions is the internal rate of return method less reliable than
the net present value technique?

A. When the net present value of the project is equal to zero.

B. When income taxes are considered in the analysis.

When both benefits and costs are included, but each is separately discounted to the
C.
present.

D. When there are several alternating periods of net cash inflows and net cash outflows.
MCQ-11545

An advantage of the net present value method over the internal rate of return model in discounted
cash flow analysis is that the net present value method:

A. Computes a desired rate of return for capital projects.

Can be used when there is no constant rate of return required for each year of the
B.
project.

C. Uses a discount rate that equates the discounted cash inflows with the outflows.

D. Uses discounted cash flows whereas the internal rate of return model does not.