Question 1

Fenwick Company is considering 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:

Accepted Answer

A)   12%.
B)   27%.
C)   17%.
D)   11%.E) B) and C)
F) None of the above

Question 2

Capital investment decisions involve investments in current assets.

Accepted Answer

A) True 
 B)False

Question 3

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%. What is the internal rate of return from the investment?

Accepted Answer

A)   less than the desired rate of return.
B)   equal to the desired rate of return.
C)   greater than the desired rate of return.
D)   the answer cannot be determined from the information provided.E) B) and D)
F) A) and D)

Question 4

Matt needs to compute the present value of $5,000 to be received four years from now. He should multiply $5,000 by the appropriate present value interest factor obtained from the present value of $1 table.

Accepted Answer

A) True 
 B)False

Question 5

The time value of money concept recognizes the fact that the present value of a dollar to be received in the future is worth more than a dollar.

Accepted Answer

A) True 
 B)False

Question 6

Paul Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $12,000 per year for 3 years. Assuming that the required rate of return is 10%, what is the present value of these cash inflows? Use Appendix Table 2. (Do not round PV factors and intermediate calculations. Round your final answer to the nearest dollar.)

Accepted Answer

A)   $9,016
B)   $28,822
C)   $29,842
D)   $27,047E) A) and B)
F) A) and C)

Question 7

Weston Company is considering a capital project that delivers a $50,000 annual net cash flow before tax. The investment will result in annual depreciation expense of $10,000 over the project's four-year useful life. Assuming a tax rate of 40%, what amount of annual after-tax net cash flow will be provided by this project?

Accepted Answer

A)   $40,000
B)   $16,000
C)   $34,000
D)   $24,000E) C) and D)
F) B) and D)

Question 8

The payback method of evaluating capital investments measures the recovery of the investment, but it does not measure profitability.

Accepted Answer

A) True 
 B)False

Question 9

A cash flow that only occurs in equal amounts each year is referred to as:

Accepted Answer

A)   a lump sum.
B)   a perpetuity.
C)   an annuity.
D)   None of these.E) C) and D)
F) A) and B)

Question 10

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?

Accepted Answer

A)   Current expenses.
B)   Earning potential, such as interest.
C)   Risk of uncollectibility.
D)   Inflation reduces future purchasing power.E) C) and D)
F) All of the above

Question 11

A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable investment.

Accepted Answer

A) True 
 B)False

Question 12

Joan Osborne is evaluating a potential capital investment. She has calculated the net present value using a minimum rate of return of 10%. Using this rate, the net present value is negative. What does this tell her about the rate of return expected for the project?

Accepted Answer

A)   If the net present value is negative; the expected rate of return for the project is greater than the 10% minimum or required rate of return.
B)   If the net present value is negative; the expected rate of return for the project is less than the 10% minimum or required rate of return.
C)   If the net present value is negative; the expected rate of return for the project is equal to the 10% minimum or required rate of return.
D)   None of the other answers are correct.E) B) and D)
F) None of the above

Question 13

What amount of cash would result at the end of one year, if $15,000 is invested today and the rate of return is 8%?

Accepted Answer

A)   $16,200
B)   $13,889
C)   $15,000
D)   $1,200E) A) and B)
F) A) and D)

Question 14

Findell Corporation is considering two projects, A and B, and it has gathered the following estimates for the projects:  What is the net present value of cash flows for project B?

Accepted Answer

A)   $7,360
B)   $6,100
C)   $1,260
D)   None of these answers is correct.E) B) and C)
F) None of the above

Question 15

Which of the following is not a criterion that is used to determine whether a project is acceptable under the net present value method?

Accepted Answer

A)   If the net present value is equal to zero
B)   If the net present value is greater than zero
C)   If the net present value is equal to the required rate of return
D)   None of these answers is correct.E) B) and C)
F) A) and B)

Question 16

An annuity is a series of equal payments over equal time intervals that earn a constant rate of return.

Accepted Answer

A) True 
 B)False

Question 17

Which one of the following statements best describes an ordinary annuity?

Accepted Answer

A)   Series of cash inflows of varying amounts collected at the end of each period
B)   Series of cash flows of equal amounts collected at the end of each period
C)   Series of cash flows of varying amounts collected at the beginning of each period
D)   Series of cash flows of equal amounts collected at the beginning of each periodE) A) and B)
F) A) and C)

Question 18

Select the incorrect statement regarding postaudits of capital investment decisions.

Accepted Answer

A)   A postaudit should be conducted at the end of the project.
B)   The postaudit helps management determine whether a project that had been accepted should have been rejected.
C)   A postaudit is only necessary for a capital investment selected using a technique that does not consider the time value of money.
D)   The goal of a postaudit is to provide feedback that can be used to improve the accuracy of future capital investment decisions.E) B) and C)
F) B) and D)

Question 19

Cash outflows can be categorized into all of the following groups except:

Accepted Answer

A)   opportunity costs associated with selecting a specific capital project.
B)   outflows associated with the initial investment.
C)   working capital commitments.
D)   increases in operating expenses.E) B) and D)
F) B) and C)

Question 20

Which of the following statements describes the cost of capital?

Accepted Answer

A)   The internal rate of return on investments
B)   The maximum acceptable rate of return on investments
C)   The minimum rate of return on investments
D)   The interest rate the bank charges its best customersE) A) and B)
F) A) and C)

Exam 16: Planning for Capital Investments

Fenwick Company is considering 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:

Correct Answer
verified

An annuity is a series of equal payments over equal time intervals that earn a constant rate of return.

Correct Answer
verified

Correct Answer
verified

Which one of the following statements best describes an ordinary annuity?

Correct Answer
verified

Capital investment decisions involve investments in current assets.

Correct Answer
verified

What amount of cash would result at the end of one year, if $15,000 is invested today and the rate of return is 8%?

Correct Answer
verified

Joan Osborne is evaluating a potential capital investment. She has calculated the net present value using a minimum rate of return of 10%. Using this rate, the net present value is negative. What does this tell her about the rate of return expected for the project?

Correct Answer
verified

A cash flow that only occurs in equal amounts each year is referred to as:

Correct Answer
verified

The payback method of evaluating capital investments measures the recovery of the investment, but it does not measure profitability.

Correct Answer
verified

Cash outflows can be categorized into all of the following groups except:

Correct Answer
verified

Findell Corporation is considering two projects, A and B, and it has gathered the following estimates for the projects: What is the net present value of cash flows for project B?

Correct Answer
verified

Which of the following statements describes the cost of capital?

Correct Answer
verified

Select the incorrect statement regarding postaudits of capital investment decisions.

Correct Answer
verified

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?

Correct Answer
verified

The time value of money concept recognizes the fact that the present value of a dollar to be received in the future is worth more than a dollar.

Correct Answer
verified

A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable investment.

Correct Answer
verified

Correct Answer
verified

Which of the following is not a criterion that is used to determine whether a project is acceptable under the net present value method?

Correct Answer
verified

Matt needs to compute the present value of $5,000 to be received four years from now. He should multiply $5,000 by the appropriate present value interest factor obtained from the present value of $1 table.

Correct Answer
verified

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%. What is the internal rate of return from the investment?

Correct Answer
verified

Exam 16: Planning for Capital Investments

Fenwick Company is considering 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:

Correct AnswerverifiedShow Answer

An annuity is a series of equal payments over equal time intervals that earn a constant rate of return.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements best describes an ordinary annuity?

Correct AnswerverifiedShow Answer

Capital investment decisions involve investments in current assets.

Correct AnswerverifiedShow Answer

What amount of cash would result at the end of one year, if $15,000 is invested today and the rate of return is 8%?

Correct AnswerverifiedShow Answer

Joan Osborne is evaluating a potential capital investment. She has calculated the net present value using a minimum rate of return of 10%. Using this rate, the net present value is negative. What does this tell her about the rate of return expected for the project?

Correct AnswerverifiedShow Answer

A cash flow that only occurs in equal amounts each year is referred to as:

Correct AnswerverifiedShow Answer

The payback method of evaluating capital investments measures the recovery of the investment, but it does not measure profitability.

Correct AnswerverifiedShow Answer

Cash outflows can be categorized into all of the following groups except:

Correct AnswerverifiedShow Answer

Findell Corporation is considering two projects, A and B, and it has gathered the following estimates for the projects: What is the net present value of cash flows for project B?

Correct AnswerverifiedShow Answer

Which of the following statements describes the cost of capital?

Correct AnswerverifiedShow Answer

Select the incorrect statement regarding postaudits of capital investment decisions.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

The time value of money concept recognizes the fact that the present value of a dollar to be received in the future is worth more than a dollar.

Correct AnswerverifiedShow Answer

A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable investment.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is not a criterion that is used to determine whether a project is acceptable under the net present value method?

Correct AnswerverifiedShow Answer

Matt needs to compute the present value of $5,000 to be received four years from now. He should multiply $5,000 by the appropriate present value interest factor obtained from the present value of $1 table.

Correct AnswerverifiedShow Answer

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%. What is the internal rate of return from the investment?

Correct AnswerverifiedShow Answer

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