Question 1

What is the payback period for the new machine (rounded to nearest one-tenth of a year) ? (Assume that the cash inflows occur evenly throughout the year.)

Accepted Answer

A)  2.5 years.
B)  2.7 years.
C)  3.1 years.
D)  3.6 years.
E)  4.2 years.F) A) and B)
G) C) and E)

Question 2

Kravitz Company is planning to acquire a $250,000 machine to improve manufacturing efficiencies, thereby reducing annual cash operating costs (before taxes) by $80,000 for each of the next five years. The company has a minimum rate of return of 8% on all capital investments. The machine will be depreciated using straight-line method over a five-year life with no salvage value at the end of five years. Fritz is subject to a combined 40% income tax rate.
Note: at 8%, the PV annuity factor for five years is 3.993; at 8%, the PV $1 factor for year 1 = 0.926, the PV $1 factor for year 2 = 0.857, the PV $1 factor for year 3 = 0.794, the PV $1 factor for year 4 = 0.735, and the PV $1 factor for year 5 = 0.681.
Required:
1. What is the net present value of the proposed investment?
2. What is the present value payback period, in years (rounded to one decimal place, that is, to tenth of a year, e.g., 4.1 years)?
3. What is the estimated internal rate of return (IRR) on the proposed investment? Round your answer to one decimal place (i.e., tenth of a percent, e.g., 13.4%). (Note: to answer this question, you will need access to the tables presented in Chapter 12, Appendix C or to Excel.)

Accepted Answer

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Question 3

Which of the following statements regarding the determination of the weighted-average cost of capital is not true?

Accepted Answer

A)  The capital asset pricing model (CAPM)  cannot be used to estimate the cost of debt for a company.
B)  The capital asset pricing model (CAPM)  can be used to estimate the cost of equity for a non-public company.
C)  In estimating the cost of debt, the analyst typically estimates the current yield-to-maturity of the debt instruments in the company's capital structure.
D)  Market, not book, values of the components of capital are preferable in terms of determining weights for the weighted-average calculation.
E)  The cost of preferred stock is included in the estimation process.F) A) and E)
G) B) and D)

Question 4

The accounting (book)  rate of return based on average investment (rounded to two decimal places)  for this proposed investment is:

Accepted Answer

A)  12.73%.
B)  14.00%.
C)  25.45%.
D)  28.00%.
E)  50.90%.F) A) and C)
G) A) and B)

Question 5

Madson Company is analyzing several proposed investment projects. The firm has resources only for one project.  The company uses the payback period method for making capital investment decisions. On the basis of this decision model, which project should be selected? (Ignore taxes.)

Accepted Answer

A)  Project P.
B)  Project Q.
C)  Project R.
D)  Project S.
E)  Project T.F) B) and E)
G) None of the above

Question 6

Which of the following statements regarding real options is true?

Accepted Answer

A)  The farther away the expiration date, the less valuable the option is.
B)  They can be incorporated into the capital budgeting decision process through the use of decision trees.
C)  They allow decision makers to react to unfavorable, but not favorable, future information/news.
D)  Conventional DCF decision models cannot incorporate the effects of real options.
E)  Capital budgeting models cannot handle multiple options embedded in an investment project.F) D) and E)
G) B) and C)

Question 7

Which one of the following is true for the internal rate of return (IRR)  method?

Accepted Answer

A)  It assumes cash proceeds during the life of a project can be reinvested to earn the same rate of return as the weighted-average cost of capital.
B)  Unlike the NPV method, it assumes only a single discount rate.
C)  IRRs of multiple projects are additive (that is, can be added together) .
D)  It can be used to make optimal decisions regarding mutually exclusive investment projects.
E)  It makes it easy to incorporate multiple costs of capital.F) C) and D)
G) A) and B)

Question 8

When evaluating capital budgeting decision models, the payback period emphasizes:

Accepted Answer

A)  Liquidity.
B)  Profitability.
C)  Cost of capital.
D)  Average net income divided by average investment.
E)  Average after-tax cash inflow divided by average investment.F) B) and C)
G) A) and E)

Question 9

Two investments have the same total cash inflows and the same payback period. Therefore:

Accepted Answer

A)  These two investments are equally desirable.
B)  These two investments must be identical in terms of the present value of the cash inflows.
C)  The payback period method can help decision makers choose between these two investments.
D)  One pattern of cash inflows may, in a present value sense, be preferable to the other investment's pattern of cash inflows.
E)  Most likely, these two investments required approximately the same initial investment.F) B) and E)
G) A) and E)

Question 10

For capital budgeting purposes, a depreciation tax shield is

Accepted Answer

A)  An after-tax cash outflow.
B)  A reduction in income taxes otherwise due.
C)  The expense caused by depreciation.
D)  Equal to the amount of depreciation expense × (1 - t) , where t = the income tax rate.
E)  Caused by the fact that depreciation does not require a cash outflow.F) B) and E)
G) A) and E)

Question 11

In situations where a firm specifies different required rates of return (i.e., discount rates)  over the years, it is advantageous to use:

Accepted Answer

A)  The payback method.
B)  The book rate of return method.
C)  The net present value (NPV)  method.
D)  The internal rate of return (IRR)  method.
E)  Sensitivity analysis.F) B) and E)
G) A) and E)

Question 12

Which of the following is not a characteristic of the payback method for making capital budgeting decisions?

Accepted Answer

A)  It is easy to calculate and comprehend.
B)  It focuses primarily on liquidity, rather than profitability of an investment project.
C)  It can be considered a rough measure of risk.
D)  It considers returns over the entire life of the project.
E)  It requires estimates of after-tax cash inflows and after-tax cash outflows.F) A) and C)
G) B) and D)

Question 13

Which one of the following capital budgeting decision models consists of dividing the total initial investment outlay by annual after-tax cash inflows (when such inflows are assumed equal over time) ?

Accepted Answer

A)  Profitability index.
B)  Payback period.
C)  Book (accounting)  rate of return
D)  Internal rate of return.
E)  Adjusted payback period.F) B) and D)
G) A) and B)

Question 14

What is the annual book (accounting)  rate of return for the proposed investment, based on the initial investment?

Accepted Answer

A)  12%.
B)  14%.
C)  17%.
D)  20%.
E)  24%.F) A) and C)
G) A) and B)

Question 15

Ignoring income tax considerations, how is depreciation handled by the following capital budgeting techniques?

Accepted Answer

A)  Option A
B)  Option B
C)  Option C
D)  Option D
E)  Option EF) A) and D)
G) D) and E)

Question 16

The net present value (NPV)  method and the internal rate of return (IRR)  method are used to analyze proposed capital expenditures. The IRR method, as contrasted with the NPV method:

Accepted Answer

A)  Is considered inferior because it fails to calculate compounded rates of return.
B)  Incorporates the time value of money, while the NPV method does not.
C)  Almost always gives a different decision that the NPV method as to the acceptability ("go" versus "no go")  of a given proposed investment.
D)  Assumes that the rate of return on the reinvestment of the cash proceeds is at the indicated rate of return of the project analyzed rather than at the discount rate used.
E)  Is preferred in practice because it is able to handle multiple desired rates of return, which is impossible to do with the NPV method.F) A) and B)
G) A) and C)

Question 17

Results from the net present value (NPV)  method and the internal rate of return (IRR)  method may differ between projects if the projects differ in all of the following except:

Accepted Answer

A)  Required initial investment.
B)  Cash-flow pattern.
C)  Cost of capital (i.e., discount rate) .
D)  Length of useful life of the two projects.
E)  Book (accounting)  rate of return on the two projects.F) All of the above
G) A) and D)

Question 18

Which one of the following is an advantage of the payback method?

Accepted Answer

A)  It provides a (rough)  measure of risk.
B)  It is linearly related to the net present value (NPV)  of a proposed project.
C)  It considers all possible future cash flows.
D)  It applies conventional discounting procedures to anticipated future cash flows.
E)  It allows managers to choose between competing projects with different useful lives.F) A) and D)
G) A) and C)

Question 19

If the present value payback period is less than the life of the project, one may conclude that:

Accepted Answer

A)  The project's internal rate of return (IRR)  is less than the discount (hurdle)  rate.
B)  The project's accounting (book)  rate of return exceeds the discount (hurdle)  rate.
C)  The project is not desirable in a present-value sense.
D)  The project's net present value (NPV)  is positive.
E)  The project's IRR is equal to the weighted-average cost of capital.F) A) and B)
G) A) and C)

Question 20

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, for an asset with zero estimated salvage value at the end of its useful life, result in

Accepted Answer

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.
E)  MACRS producing lower annual depreciation in the early years of the asset's life.F) C) and E)
G) A) and B)

Exam 12: Strategy and the Analysis of Capital Investments

In situations where a firm specifies different required rates of return (i.e., discount rates) over the years, it is advantageous to use:

Correct Answer
verified

Which of the following statements regarding the determination of the weighted-average cost of capital is not true?

Correct Answer
verified

When evaluating capital budgeting decision models, the payback period emphasizes:

Correct Answer
verified

What is the payback period for the new machine (rounded to nearest one-tenth of a year) ? (Assume that the cash inflows occur evenly throughout the year.)

Correct Answer
verified

Which of the following is not a characteristic of the payback method for making capital budgeting decisions?

Correct Answer
verified

Two investments have the same total cash inflows and the same payback period. Therefore:

Correct Answer
verified

Which one of the following is an advantage of the payback method?

Correct Answer
verified

Ignoring income tax considerations, how is depreciation handled by the following capital budgeting techniques?

Correct Answer
verified

The net present value (NPV) method and the internal rate of return (IRR) method are used to analyze proposed capital expenditures. The IRR method, as contrasted with the NPV method:

Correct Answer
verified

What is the annual book (accounting) rate of return for the proposed investment, based on the initial investment?

Correct Answer
verified

Which of the following statements regarding real options is true?

Correct Answer
verified

Results from the net present value (NPV) method and the internal rate of return (IRR) method may differ between projects if the projects differ in all of the following except:

Correct Answer
verified

Correct Answer
verified
Answer may vary
Feedback: 1. As shown in...
View Answer

Madson Company is analyzing several proposed investment projects. The firm has resources only for one project. The company uses the payback period method for making capital investment decisions. On the basis of this decision model, which project should be selected? (Ignore taxes.)

Correct Answer
verified

The accounting (book) rate of return based on average investment (rounded to two decimal places) for this proposed investment is:

Correct Answer
verified

Which one of the following is true for the internal rate of return (IRR) method?

Correct Answer
verified

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, for an asset with zero estimated salvage value at the end of its useful life, result in

Correct Answer
verified

Which one of the following capital budgeting decision models consists of dividing the total initial investment outlay by annual after-tax cash inflows (when such inflows are assumed equal over time) ?

Correct Answer
verified

For capital budgeting purposes, a depreciation tax shield is

Correct Answer
verified

If the present value payback period is less than the life of the project, one may conclude that:

Correct Answer
verified

Exam 12: Strategy and the Analysis of Capital Investments

In situations where a firm specifies different required rates of return (i.e., discount rates) over the years, it is advantageous to use:

Correct AnswerverifiedShow Answer

Which of the following statements regarding the determination of the weighted-average cost of capital is not true?

Correct AnswerverifiedShow Answer

When evaluating capital budgeting decision models, the payback period emphasizes:

Correct AnswerverifiedShow Answer

What is the payback period for the new machine (rounded to nearest one-tenth of a year) ? (Assume that the cash inflows occur evenly throughout the year.)

Correct AnswerverifiedShow Answer

Which of the following is not a characteristic of the payback method for making capital budgeting decisions?

Correct AnswerverifiedShow Answer

Two investments have the same total cash inflows and the same payback period. Therefore:

Correct AnswerverifiedShow Answer

Which one of the following is an advantage of the payback method?

Correct AnswerverifiedShow Answer

Ignoring income tax considerations, how is depreciation handled by the following capital budgeting techniques?

Correct AnswerverifiedShow Answer

The net present value (NPV) method and the internal rate of return (IRR) method are used to analyze proposed capital expenditures. The IRR method, as contrasted with the NPV method:

Correct AnswerverifiedShow Answer

What is the annual book (accounting) rate of return for the proposed investment, based on the initial investment?

Correct AnswerverifiedShow Answer

Which of the following statements regarding real options is true?

Correct AnswerverifiedShow Answer

Results from the net present value (NPV) method and the internal rate of return (IRR) method may differ between projects if the projects differ in all of the following except:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedAnswer may varyFeedback: 1. As shown in...View AnswerShow Answer

Madson Company is analyzing several proposed investment projects. The firm has resources only for one project. The company uses the payback period method for making capital investment decisions. On the basis of this decision model, which project should be selected? (Ignore taxes.)

Correct AnswerverifiedShow Answer

The accounting (book) rate of return based on average investment (rounded to two decimal places) for this proposed investment is:

Correct AnswerverifiedShow Answer

Which one of the following is true for the internal rate of return (IRR) method?

Correct AnswerverifiedShow Answer

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, for an asset with zero estimated salvage value at the end of its useful life, result in

Correct AnswerverifiedShow Answer

Which one of the following capital budgeting decision models consists of dividing the total initial investment outlay by annual after-tax cash inflows (when such inflows are assumed equal over time) ?

Correct AnswerverifiedShow Answer

For capital budgeting purposes, a depreciation tax shield is

Correct AnswerverifiedShow Answer

If the present value payback period is less than the life of the project, one may conclude that:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
Answer may vary
Feedback: 1. As shown in...
View Answer

Correct Answer
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