Chapter 10 Quiz questions and answers

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 $8,000 $6,000 $5,000 $6,000 $5,000 Using the incremental approach, the payback period for the investment is: A. 2.4 years B. 1.66 years C. 5 years D. 2 years

A. 2.4 years

Assuming equal time intervals between the payments and a constant rate of return, which of the following cash flow patterns represents an annuity? Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 A) $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 B) $500 $0 $500 $500 $500 $0 C) $100 $200 $300 $400 $500 $600 A. A B. B C. C D. Any of the answers can represent an annuity

A. A

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow. Which of the following is not a factor in causing the present value of cash inflows to diminish over time? A. Current expenses B. Earning potential, such as interest C. Risk of uncollectibility D. Inflation reduces future purchasing power

A. Current expenses

Which of the following is not a factor in explaining why the present value of a future dollar is less than one dollar? A. Historic cost B. Risk of failure to receive expected cash inflows C. Interest D. Inflation

A. Historic cost

Cash inflows generated by capital investments include all of the following except: A. Increase in operating expenses B. Cost savings C. Reduction in the amount of required working capital D. Incremental revenues

A. Increase in operating expenses

Generro Company is considering the purchase of equipment that would cost $56,000 and offer annual cash inflows of $15,100 over its useful life of 5 years. Assuming a desired rate of return of 8%, is the project acceptable? A. Yes, since the positive net present value indicates the investment will earn a rate of return greater than 8% B. Yes, since the investment will generate $75,500 in future cash flows, which is greater than the purchase cost of $56,000 C. The answer cannot be determined D. No, since the negative net present value indicates the investment will yield a rate of return below the desired rate of return

A. Yes, since the positive net present value indicates the investment will earn a rate of return greater than 8%

The length of time required to recover the initial investment in a capital asset is known as the: A. payback period B. investment period C. rate of return D. present value period

A. payback period

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 $8,000 $6,000 $5,000 $6,000 $5,000 Using the incremental approach, the payback period for the investment is: A. 1.66 years B. 2.4 years C. 5 years D. 2 years

B. 2.4 years

An investment that costs $20,000 will produce annual cost flows of $4,000 for a period of 6 years. Further, the investment has an expected salvage value of $2,500. Given a desired rate of return of 9%, what will the investment generate? A. A positive net present value of $17,944 B. A negative net present value of $566 C. A positive net present value of $20,000 D. A positive net present value of $1,491

B. A negative net present value of $566

Garrison Company has two investment opportunities. A cash flow schedule for the investments is provided below: Year Investment A Investment B 0 $(5,000) $(6,000) 1 2,000 3,000 2 2,000 2,000 3 2,000 2,000 4 2,000 1,000 Considering the unequal investments, which of the following techniques would be most appropriate for choosing between Investment A and Investment B? A. Payback method B. Present value index C. Net present method D. None of these answers are correct

B. Present value index

An investment that cost $30,000 provided annual cash inflows of $9,000 per year for five years. The desired rate of return is 10%. The internal rate of return from the investment is: A. less than the desired rate of return B. greater than the desired rate of return C. equal to the desired rate of return D. the answer cannot be determined from the information provided

B. greater than the desired rate of return

Jiminez Company has two investment opportunities. Both investments cost $5,000 and will provide the following net cash flows: Year Investment A Investment B 1 $3,000 $3,000 2 3,000 4,000 3 3,000 2,000 4 3,000 1,000 What is the total present value of Investment A's cash flows assuming an 10% minimum rate of return? A. $10,628 B. $3,452 C. $4,510 D. $3,000

C. $4,510

Jiminez Company has two investment opportunities. Both investments cost $5,000 and will provide the following net cash flows: Year Investment A Investment B 1 $3,500 $3,500 2 3,500 4,600 3 3,500 2,500 4 3,500 1,200 What is the total present value of Investment A's cash flows assuming an 8% minimum rate of return? A. $10,051 B. $12,520 C. $6,592 D. $3,500

C. $6,592

An investment that costs $5,000 will produce annual cash flows of $2,000 for a period of 4 years. Given a desired rate of return of 8%, what is the present value index? A. 0.755 B. 2.500 C. 1.325 D. 1.600

C. 1.325

Fenwick Company is considering a purchase of equipment that costs $60,000 and is expected to offer annual cash inflows of $16,645 for 5 years. Fenwick Company's required rate of return is 10%. The internal rate of return of this investment project is closest to: A. 11% B. 17% C. 12% D. 27%

C. 12%

Which of the following is the approximate internal rate of return for an investment that costs $33,550 and provides a $5,000 annuity for 10 years? A. 5% B. 6% C. 8% D. 10%

C. 8%

Ashley projects that she can get $150,000 cash per year for 5 years on a real estate investment project. If Ashley wants to earn a rate of return of 10%, what is the maximum that she should pay for the investment? A. $508,082 B. $106,948 C. $697,500 D. $568,618

D. $568,618

Which of the following statements concerning payback analysis is true? A. An investment with a shorter payback is preferable to an investment with a longer payback B. The payback method ignores the time value of money concept C. The payback method and the unadjusted rate of return are different approaches that will not consistently lead to the same conclusion D. All of these answers are correct

D. All of these answers are correct

Which method for evaluating capital investment proposals reduces the present value of cash outflows from the present value of cash inflows? A. Internal rate of return B. Payback method C. Unadjusted rate of return D. Net present value

D. Net present value

Benson Corporation is considering an investment in equipment that would cost $50,000 and provide annual cash inflows of $14,000. The company's required rate of return is 12%; the internal rate of return for the investment is 10.5%. Should the company make this investment? A. The answer cannot be determined B. Yes, since the internal rate of return is less than the company's required rate of return C. No, since the internal rate of return is more than the company's required rate of return D. No, since the internal rate of return is less than the company's required rate of return

D. No, since the internal rate of return is less than the company's required rate of return