ACC 211 CH 12 study guide problems

B

A firm considers purchasing a new machine, which will generate an annual cash flow of $60,000 for 4 years, for $200,000. Calculate the internal rate of return. A. 7% B. 8% C. 9% D. 10%

.10

Accounting Rate of Return Uchdorf Company invested $10,480,000 in a new product line. The life cycle of the product is projected to be seven years with the following net income stream: $360,000, $360,000, $600,000, $1,080,000, $1,200,000, $2,520,000, and $1,444,000. Required: Calculate the ARR. Enter your answer as a decimal, do not convert to a percent. Round your answer to two decimal places.

C

An administrative manager has to choose between two mutually exclusive projects. Project X Project Y Net present value $300,000 $310,000 Internal rate of return 12% 10% The company will invest in any project that earns at least 12 percent. The manager estimates that he will be able to reinvest the cash inflows from the project at a rate of 12 percent. The manager is most likely _____. A. to invest in project Y B. to reject both projects C. to invest in project X D. to invest in both projects

C

An administrative manager is considering a project with a significant initial investment. The company's higher management will approve the project if the return is at least 14 percent. The manager is most likely to use the _____ method. A. balanced scorecard B. payback period C. net present value D. nondiscounting

A

An investment of $1,000 produces a net cash inflow of $500 in the first year and $750 in the second year. What is the payback period? a. 1.67 years b. 0.50 year c. 2.00 years d. 1.20 years e. Cannot be determined.

C

An investment of $2,000 provides an average net income of $400. Depreciation is $40 per year with zero salvage value. The ARR using the original investment is a. 44%. b. 22%. c. 20%. d. 40%. e. None of these.

D

An investment of $6,000 produces a net annual cash inflow of $2,000 for each of 5 years. What is the payback period? a. 2 years b. 1.5 year c. Unacceptable d. 3 years e. Cannot be determined.

12%

Basic Internal Rate of Return Analysis For discount factors use Exhibit 12B-1 and Exhibit 12B-2. Julianna Cardenas, owner of Baker Company, was approached by a local dealer of air-conditioning units. The dealer proposed replacing Baker's old cooling system with a modern, more efficient system. The cost of the new system was quoted at $339,000, but it would save $60,000 per year in energy costs. The estimated life of the new system is 10 years, with no salvage value expected. Excited over the possibility of saving $60,000 per year and having a more reliable unit, Julianna requested an analysis of the project's economic viability. All capital projects are required to earn at least the firm's cost of capital, which is 8%. There are no income taxes. Required: 1. Calculate the project's IRR. (Round your answer to the nearest percent.)

B

Benson has invested $150,000 in a business project, and he expects to receive an income of $26,000 every year. The investment is for 10 years. Calculate the accounting rate of return. A. 14.46% B. 17.33% C. 01.45% D. 01.73%

E

CalculatorPrint Item To make a capital investment decision, a manager must: a. estimate the quantity and timing of cash flows. b. assess the risk of the investment. c. consider the impact of the investment on the firm's profits. d. choose a decision criterion to assess viability of the investment (such as payback period or NPV). e. All of these.

A

Capital investment decisions involve A. the process of planning, setting goals and priorities, arranging financing, and using certain criteria to select long-term assets. B. the process of identifying the least cost source of debt and the optimum duration for such debt. C. the process of determining the total profitability of a firm and also determining whether or not a firm should accept a special order. D. the process of analyzing business transactions and determining their effects on the components of the financial statements of a firm.

A

Capital investments should a. earn back their original capital outlay plus a reasonable return. b. always be done using a payback criterion. c. always have a NPV which is equal to zero. d. always produce an increase in market share. e. None of these.

A

Carol has invested $140,000 in a retail business. She expects to receive a cash income of $16,000 every year and a depreciation expense of $1,000 every year. Calculate the payback period. A. 8.75 years B. 9.33 years C. 5.85 years D. 8.24 years

A

Identify the reason for a discount factor for 20X5 to be less than a discount factor for 20X4. A. A dollar on hand can be invested to provide returns. B. The present value is lesser than the future value. C. The risk free rate is always assumed to be near zero. D. Compounding has an effect only when more than five years are involved.

E

If the NPV is positive, it signals a. that the IRR is greater than the discount rate used in the NPV calculation. b. that the value of the firm has increased. c. that the initial investment has been recovered. d. Both "that the initial investment has been recovered" and "that the value of the firm has increased" are correct. e. All of these.

10%

Internal Rate of Return Lisun Company produces a variety of gardening tools and aids. The company is examining the possibility of investing in a new production system that will reduce the costs of the current system. The new system will require a cash investment of $4,607,200 and will produce net cash savings of $800,000 per year. The system has a projected life of 9 years. Required: Calculate the IRR for the new production system. For discount factors use Exhibit 12B-2. Round your answer to the nearest whole percentage.

A

NPV is calculated by using a. the required rate of return. b. accounting income. c. the IRR. d. the future value of cash flows. e. None of these.

B

Mutually exclusive capital budgeting projects are those that: a. if accepted will produce a negative NPV. b. if accepted preclude the acceptance of all other competing projects. c. if rejected imply that all other competing projects have a positive NPV. d. if rejected preclude the acceptance of all other competing projects. e. if accepted or rejected do not affect the cash flows of other projects.

A

Net present value measures the _____. A. profitability of an investment B. minimum discount rate C. return on a project in terms of income D. recovery period on initial investments

A. 1.5 years B. 5 years

Payback Period Payson Manufacturing is considering an investment in a new automated manufacturing system. The new system requires an investment of $1,200,000 and either has: A. Even cash flows of $800,000 per year or B. The following expected annual cash flows: $150,000, $150,000, $400,000, $400,000, and $100,000. Required: Calculate the payback period for each case. Round your answer to one decimal place.

True

T or F Net present value (NPV) is the difference between the present value of the cash inflows and outflows associated with a project.

False

T or F Projects with a negative NPV should be accepted because they have the highest rate of return

True

T or F If the cash flows of a project are an equal amount each period, then the payback period is equal to the original investment divided by the annual cash flow.

False

T or F Internal rate of return should be used for choosing among competing, mutually exclusive projects or competing projects when capital funds are limited.

True

T or F The first step in selecting the best project from several competing projects is to assess the cash flow pattern for each project.

False

T or F The intangible benefits of an investment should also be considered when evaluating a project proposal.

False

T or F The payback period is the expected amount of money to be made from an investment.

True

T or F To accept any project, the internal rate of return must be greater than the cost of capital.

E

The ARR has one specific advantage not possessed by the payback period in that it a. considers the time value of money. b. measures the value added by a project. c. is always an accurate measure of profitability. d. is more widely accepted by financial managers. e. considers the profitability of a project beyond the payback period.

A

The internal rate is defined as the A. interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost. B. return on a project that can be made by selling internally. C. difference between the present value of the cash inflows and the present values of the cash outflows associated with a project. D. rate required by a firm to recover its original investment in a project.

B

Using IRR, a project is rejected if the IRR a. is equal to the required rate of return. b. is less than the required rate of return. c. is greater than the cost of capital. d. is greater than the required rate of return. e. produces an NPV equal to zero.

B

Using NPV, a project is rejected if it is a. equal to zero. b. negative. c. positive. d. equal to the required rate of return. e. greater than the cost of capital.

A

Which of the following conditions is likely to lead to an independent project being accepted? A. If the net present value is positive. B. If the internal rate of return is less than the required rate of return. C. If the net present value is negative. D. None of the above.

B

Which of the following differentiates independent projects from mutually exclusive projects? A. Independent projects, if accepted, do not affect the sales and revenues of a firm, whereas mutually exclusive projects, if accepted, decrease the sales and revenues of a firm. B. Independent projects, whether accepted or rejected, do not affect the cash flows of other projects, whereas mutually exclusive projects, if accepted, preclude the acceptance of all other competing projects. C. Independent projects, whether accepted or rejected, affect the cash flows of other projects, whereas mutually exclusive projects, if accepted, do not affect the cash flows of other projects. D. Independent projects, if rejected, affect the sales and reduce the revenues of a firm, whereas mutually exclusive projects, if accepted, do not affect the sales and revenue of a firm.

B

Which of the following differentiates the net present value (NPV) from the internal rate of return (IRR) ? A. The NPV assumes that each cash inflow received is reinvested at a discount, whereas for the IRR, it is reinvested at the required rate of return. B. The NPV measures profitability in absolute terms, whereas the IRR measures profitability in relative terms. C. The NPV considers the time value of money, whereas the IRR does not consider the time value of money. D. The NPV is a discounting model, whereas the IRR is a nondiscounting model.

C

Which of the following is a limitation of the accounting rate of return? A. It does not measure the return on a project in terms of income. B. It does not consider a project's profitability. C. It ignores the time value of money. D. It ignores net income, which is the financial measure most likely to be used by managers.

B

Which of the following is an advantage of a postaudit? A. It is a cost-effective tool in planning a project and deals with budgeted data. B. It evaluates profitability and ensures that resources are used wisely. C. It does not require additional funding for the projects. D. It does not consider changes in the actual operating environment as compared to the others techniques.

B

Which of the following signifies that the return on investment is less than the discount rate? A. The current ratio is positive. B. The net present value is negative. C. The net present value is zero. D. The current ratio is negative.

B

_____ is a series of future cash flows. A. Net present value B. Annuity C. Discounted earning D. Indemnity