Name: Score:

Instructor: Ms. July Joy S. Lumantas, CPA Midterm Comprehensive Quiz

1. The present value of a given sum to be received in five years will be exactly twice as great as the
present value of an equal sum to be received in ten years.

2 An increase in the discount rate will result in an increase in the present value of a given cash flow.
3 The present value of a cash flow decreases as it moves further into the future.
4. When the net present value method is used, the internal rate of return is the discount rate used to
compute the net present value of a project.
5. If net present value is negative, then interpolation is needed in order to make a proposed investment
acceptable.
6. The net present value method assumes that cash flows from a project are immediately reinvested at a
rate of return equal to the discount rate.
7. When using internal rate of return to evaluate investment projects, if the internal rate of return is less
than the required rate of return, the project should be accepted.
8. The internal rate of return for a project is the discount rate that makes the net present value of the
project equal to zero.
9. The payback period is the length of time it takes for an investment to recoup its own initial cost out of
the cash receipts it generates.
10. Projects with shorter payback periods are always more profitable than projects with longer payback
periods.
11. The payback method of making capital budgeting decisions gives full consideration to the time value
of money.
12. If new equipment is replacing old equipment, any salvage received from sale of the old equipment
should not be considered in computing the payback period of the new equipment.
13. One strength of the simple rate of return method is that it takes into account the time value of money
in computing the return on an investment project.
14. The preference rule for ranking projects by the profitability index is: the higher the profitability
index, the more desirable the project.
(Ignore income taxes in this problem.) White Company's required rate of return on capital budgeting
projects is 12%. The company is considering an investment opportunity which would yield a cash
15 flow of $10,000 in five years. What is the most that the company should be willing to invest in this
project?
a. $36,050. b. $2,774. c. $17,637. d. $5,670.

16. (Ignore income taxes in this problem.) In order to receive $12,000 at the end of three years and
$10,000 at the end of five years, how much must be invested now if you can earn 14% rate of return?
a. $12,978. b. $8,100. c. $13,290. d. $32,054.
(Ignore income taxes in this problem.) Sue Falls is the president of Sports, Inc. She is considering
buying a new machine that would cost $14,125. Sue has determined that the new machine promises
17. a internal rate of return of 12%, but Sue has misplaced the paper which tells the annual cost savings
promised by the new machine. She does remember that the machine has a projected life of 10 years.
Based on these data, the annual cost savings are:
a. it is impossible to determine from the data given. b. $1,412.50. c. $2,500.00. d. $1,695.00.
(Ignore income taxes in this problem.) The following information is available on a new piece of
equipment:

Cost of the equipment ...... $21,720

18. Annual cash inflows ........ $5,000
Internal rate of return ... 16%
Required rate of return ... 10%

The life of the equipment is approximately:

a. 6 years. b. 4.3 years. c. 8 years. d. it is impossible to determine from the data given.
19. (Ignore income taxes in this problem.) Hilltop Company invested $100,000 in a two-year project.
The cash flow was $40,000 for the first year. Assuming that the internal rate of return was exactly
12%, what was the cash flow for the second year of the project?
 a. $51,247. b. $60,000. c. $64,284. d. $80,652.

(Ignore income taxes in this problem.) Joe Flubup is the president of Flubup, Inc. He is considering
buying a new machine that would cost $25,470. Joe has determined that the new machine promises a
internal rate of return of 14%, but Joe has misplaced the paper which tells the annual cost savings
20.
promised by the new machine. He does remember that the machine has a projected life of 12 years.
Based on these data, the annual cost savings are:
a. impossible to determine from the data given. b. $2,122.50. c. $4,500.00. d. $4,650.00.

(Ignore income taxes in this problem.) The Baker Company purchased a piece of equipment with the
following expected results:

Useful life ................... 7 years

Yearly net cash inflow ........ $50,000
21. Salvage value ................. -0-
Internal rate of return ....... 20%
Discount rate ................. 16%

The initial cost of the equipment was:

a. $300,100. b. $180,250 c. $190,600. d. Cannot be determined from the information given.

(Ignore income taxes in this problem.) The following data pertain to an investment in equipment:

Investment in the project .......... $10,000

Net annual cash inflows ............ 2,400
Working capital required ........... 5,000
22. Salvage value of the equipment ..... 1,000
Life of the project ................ 8 years

At the completion of the project, the working capital will be released for use elsewhere. Compute the
net present value of the project, using a discount rate of 10%:
a. $606. b. $8,271. c. ($1,729). d. $1,729.

(Ignore income taxes in this problem.) A piece of equipment has a cost of $20,000. The equipment
will provide cost savings of $3,500 each year for ten years, after which time it will have a salvage
23.
value of $2,500. If the company's discount rate is 12%, the equipment's net present value is:
a. $580. b. ($225). c. $17,500. d. $2,275.

(Ignore income taxes in this problem.) Parks Company is considering an investment proposal in
which a working capital investment of $10,000 would be required. The investment would provide
cash inflows of $2,000 per year for six years. The working capital would be released for use
24.
elsewhere when the project is completed. If the company's discount rate is 10%, the investment's net
present value is:.
a. $1,290. b. ($1,290). c. $2,000. d. $4,350.

(Ignore income taxes in this problem.) Horn Corporation is considering investing in a four-year
project. Cash inflows from the project are expected to be as follows: Year 1, $2,000; Year 2, $2,200;
25. Year 3, $2,400; Year 4, $2,600. If using a discount rate of 8%, the project has a positive net present
value of $500, what was the amount of the original investment?
a. $1,411. b. $2,411. c. $7,054. d. $8,054.

(Ignore income taxes in this problem.) Stratford Company purchased a machine with an estimated
useful life of seven years. The machine will generate cash inflows of $90,000 each year over the next
seven years. If the machine has no salvage value at the end of seven years, and assuming the
26.
company's discount rate is 10%, what is the purchase price of the machine if the net present value of
the investment is $170,000?
a. $221,950. b. $170,000. c. $268,120. d. $438,120.

27. (Ignore income taxes in this problem.) The following data pertain to an investment proposal:

Present investment required ........ $26,500

 Annual cost savings ................ $ 5,000
Projected life of the investment ... 10 years
Projected salvage value ............ $ -0-

The internal rate of return, interpolated to the nearest tenth of a percent, would be:
a. 11.6%. b. 12.8%. c. 13.6%. d. 12.4%.

(Ignore income taxes in this problem.) The following data are available on a proposed investment
project:

Initial investment ......... $142,500

Annual cash inflows ........ $30,000
28.
Life of the investment ..... 8 years
Required rate of return .... 10%

The internal rate of return, interpolated to the nearest tenth of a percent, would be:
a. 13.3%. b. 12.1%. c. 15.3%. d. 12.7%.

(Ignore income taxes in this problem.) Jarvey Company is studying a project that would have a ten-
year life and would require a $450,000 investment in equipment that has no salvage value. The
project would provide net income each year as follows for the life of the project:

Sales ............................ $500,000

Less cash variable expenses ...... 200,000
Contribution margin .............. 300,000
29.
Less fixed expenses:
Fixed cash expenses ............ $150,000
Depreciation expenses .......... 45,000 195,000
Net income ....................... $105,000

The company's required rate of return is 12%. What is the payback period for this project?
a. 3 years b. 2 years c. 4.28 years d. 9 years

(Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering
prescriptions. The auto was purchased for $9,000 and will have a 6-year useful life and a $3,000
salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase
30. gross revenues by at least $5,000 per year. The cost of these prescriptions to the pharmacy will be
about $2,000 per year. The pharmacy depreciates all assets using the straight-line method. The
payback period for the auto is:
a. 3.0 years. b. 1.8 years. c. 2.0 years. d. 1.2 years.

(Ignore income taxes in this problem.) A company with $800,000 in operating assets is considering
31. the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by
$20,000 each year. The payback period for this machine in years is closest to:
a. 0.27 years. b. 10.7 years. c. 3.75 years. d. 40 years.
(Ignore income taxes in this problem.) The Jason Company is considering the purchase of a machine
32. that will increase revenues by $32,000 each year. Cash outflows for operating this machine will be
$6,000 each year. The cost of the machine is $65,000. It is expected to have a useful life of five years
with no salvage value. For this machine, the simple rate of return is:
a. 20%. b. 40%. c. 49.2%. d. 9.2%.
Perkins Company is considering several investment proposals, as shown below:
Investment Proposal o
A B C D
Investment required ... $80,000 $100,000 $60,000 $75,000
33. Present value of future
net cash flows ...... 96,000 150,000 84,000 120,000

Rank the proposals in terms of preference using the

profitability index:
a. D, B, C, A. b. B, D, C, A. c. B, D, A, C. d. A, C, B, D.