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7/31/2011

Evaluating Business Investments Quiz |

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Evaluating Business Investments


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NOTE: For multiple-choice and true/false questions, simply place your cursor over what you think is the correct answer. (There is no need to click the answer.) For fill-in-the-blank questions place your cursor over the _________. If you have difficulty answering the following questions, learn more about this topic by reading our Evaluating Business Investments Explanation. We also have Crosswords and Q&A for this topic.

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1.

Which of the following models for evaluating capital expenditures considers the time value of money by discounting the future cash flows? Accounting Rate of Return Internal Rate of Return Payback

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2.

Which of the following models for evaluating capital expenditures does NOT consider the time value of money (does not discount the future cash flows)?

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Accounting Rate of Return Internal Rate of Return Net Present Value Join Our Newsletter 3. Which of the following models does NOT use cash flows? Accounting Rate of Return Internal Rate of Return Payback

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4.

A company used the net present value method for evaluating a project. The project requires an immediate cash outlay of $450,000. The company discounted the cash flows by 16% and determined that the net present value of the project was a negative $300. From this information it is likely that the project had an internal rate of return that was slightly GREATER than 16% had an internal rate of return that was slightly LESS than 16%

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7/31/2011

had an internal rate of return that was slightly LESS than 16% had a negative internal rate of return

Evaluating Business Investments Quiz |

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A company is contemplating an investment of $100,000 on January 1, 2011 that will return cash of $50,000 on December 31, 2011; $40,000 on December 31, 2012; and $60,000 on December 31, 2013. Using the present value of 1 factors for 16% (see above), the net present value of this investment is ($11,000) $11,000 $100,000 $111,000

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5.

6.

A $100,000 investment will be made on January 1, 2011. The cash generated from this investment is expected to be received uniformly during each year. The yearly amounts are: $50,000 in year 2011; $40,000 in year 2012; $60,000 in year 2013. W hat is the expected payback period? 2.0 years 2.1 years 2.17 years 3 years

7.

A project's cash flows are discounted by 16% and result is a positive net present value. The positive net present value indicates that the project has an internal rate of return that is GREATER than 16% has an internal rate of return that is LESS than 16%

8.

Depreciation Expense is a negative cash flow that needs to be discounted. W hile depreciation does not result in a payment of cash, tax depreciation does reduce the cash payments for income taxes. Depreciation Expense can be ignored when computing the accounting rate of return. If the net present value of a project is $0, the project should be rejected. A project whose future cash flows are discounted by 10% will have a larger net present value than the same cash flows discounted by 8%?

True

False

9.

True

False

10.

True

False

11.

True

False

12.

True

False

13.

W hat amount w ould you invest today in return for a one-time $10,000 receipt one year from today, if you want to earn 8%? (Use the factors above.) $9,200 $9,300 $9,920

14.

How much would you invest today in return for $20,000 to be received two years from today, if you want to earn 10%? (Use the factors above.) $16,000 $16,600 $18,260

A potential investment today will provide all of the following cash receipts

End of first year End of second year


15.

$2,000 $ 0 $4,000

End of third year

If you want to earn a 12% internal rate of return, how much would you invest today to receive these cash amounts? (Use the factors above.) $4,260 $4,620 $4,980

16.

If you invest $68,000 today and get repaid $100,000 at the end of five years, w hat is the internal rate of return on your investment? (Use the factors above.) 6% 8% 10% 12% 16%

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Evaluating Business Investments Quiz |

17.

If you invest $15,900 today and receive $10,000 at the end of one year plus $10,000 at the end of four years, what is the internal rate of return on your investment? (Use the factors above.) 6% 8% 10% 12% 16%

18.

If you invest $15,300 today and receive $10,000 at the end of one year and $10,000 at the end of four years, what is the internal rate of return on your investment? (Use the factors above.) 6% 8% 10% 12% 16%

19.

You invest $10,000 immediately plus an additional $100,000 at the end of one year. If the time value of money is 10%, what is the present value of your investment? (Use the factors above.) $100,000 $101,000 $110,000

20.

The state lottery offers a $500,000 prize consisting of $100,000 immediately and then four annual payments of $100,000 each. If the w inner prefers to receive an immediate lump sum, the state discounts the future payments by 6%. What will be the immediate lump sum amount before any taxes? (Use the factors above.) $346,000 $400,000 $446,000 $470,000

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years. He is the author of the 2011 Master Accounting Download Package which has been praised for its ability to simplify accounting in a way that anybody can understand.

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