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Quiz Practice 14 1. Suture Corporation's discount rate is 12%. If Suture has a 5-year investment project that has a project profitability index of zero, this means that: A) the net present value of the project is equal to zero. B) the internal rate of return of the project is equal to the discount rate. C) the payback period of the project is equal to the project's useful life. D) both A and B above are true. Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's: Payback Net Present Value Internal Rate of Return No No No Yes Yes Yes No Yes Yes No Yes No 2. A) B) C) D) 3. If income taxes are ignored, how is depreciation used in the following capital budgeting techniques? Internal Rate of Return Net Present Value Excluded Excluded Excluded Included Included Excluded Included Included A) B) C) D) 4. Zonifugal Corporation needs to purchase a new conveyor system for its factory. Four different conveyor systems have been proposed. Which calculation would be the best one for Zonifugal to use to determine which system to purchase? A) payback period B) simple rate of return C) net present value D) project profitability index 5. When evaluating a project, the portion of the fixed corporate headquarters expense that would be allocated to the project should be: 1 A) B) C) D) 6. included as a cash outflow on an after-tax basis by multiplying the expense by one minus the tax rate. included as a cash outflow on an after-tax basis by multiplying the expense by the tax rate. included as a cash outflow on a before-tax basis. ignored. (Ignore income taxes in this problem.) Given the following data: Cost of equipment.............. $55,75 0 Annual cash inflows........... $10,00 0 Internal rate of return......... 16% The life of the equipment must be: A) it is impossible to determine from the data given B) 15 years C) 12.5 years D) 5.75 years 7. (Ignore income taxes in this problem.) Heap Company is considering an investment in a project that will have a two year life. The project will provide a 10% internal rate of return, and is expected to have a $40,000 cash inflow the first year and a $50,000 cash inflow in the second year. What investment is required in the project? A) $74,340 B) $77,660 C) $81,810 D) $90,000 A company anticipates a depreciation deduction of $70,000 in year 4 of a project. The company's tax rate is 30% and its discount rate is 12%. The present value of the depreciation tax shield resulting from this deduction is closest to: A) $31,140 B) $49,000 C) $21,000 D) $13,356 (Ignore income taxes in this problem.) Congener Beverage Corporation is 8. 9. 2 considering an investment in a capital budgeting project that has an internal rate of return of 20%. The only cash outflow for this project is the initial investment. The project is estimated to have an 8 year life and no salvage value. Cash inflows from this project are expected to be $100,000 per year in each of the 8 years. Congener's discount rate is 16%. What is the net present value of this project? A) $5,215 B) $15,464 C) $50,700 D) $55,831 10. (Ignore income taxes in this problem.) Given the following data: Initial investment............... $80,00 0 Annual cash inflow............ ? Salvage value..................... $0 Net present value................ $13,60 0 Life of the project............... 6 years Discount rate...................... 16% Based on the data given above, the annual cash inflow from the project after the initial investment is closest to: A) $50,116 B) $21,710 C) $25,400 D) $38,376 11. (Ignore income taxes in this problem.) Nevland Corporation is considering the purchase of a machine that would cost $130,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $44,000. The requires company a minimum pretax return of 19% on all investment projects. The net present value of the proposed project is closest to: A) $38,040 B) $26,376 C) $74,902 D) $20,040 3 12. (Ignore income taxes in this problem) The management of Elamin Corporation is considering the purchase of a machine that would cost $365,695 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $61,000 per year. The internal rate of return on the investment in the new machine is closest to: A) 9% B) 11% C) 12% D) 10% (Ignore income taxes in this problem) Boe Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 9 years. The company uses a discount rate of 10% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is -$439,527. Management is having difficulty estimating the salvage value of the aircraft. To the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive? A) $439,527 B) $43,953 C) $4,395,270 D) $1,036,620 (Ignore income taxes in this problem.) The management of Solar Corporation is considering the following three investment projects: Project L Project M Project N $37,000 $55,000 $82,000 $38,480 $62,150 $90,200 13. 14. Investment required....................... Present value of cash inflows......... Rank the projects according to the profitability index, from most profitable to least profitable. A) M,N,L B) L,N,M C) N,L,M D) N,M,L 4 15. (Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $263,000 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The payback period of the project is closest to: A) 3.8 years B) 2.6 years C) 2.7 years D) 4.0 years (Ignore income taxes in this problem.) An expansion at Fey, Inc., would increase sales revenues by $150,000 per year and cash operating expenses by $47,000 per year. The initial investment would be for equipment that would cost $328,000 and have a 8 year life with no salvage value. The annual depreciation on the equipment would be $41,000. The simple rate of return on the investment is closest to: A) 41.3% B) 18.9% C) 12.5% D) 31.4% A company anticipates a taxable cash receipt of $80,000 in year 3 of a project. The company's tax rate is 30% and its discount rate is 10%. The present value of this future cash flow is closest to: A) $42,056 B) $56,000 C) $24,000 D) $18,032 Dunn Construction, Inc., has a large crane that cost $35,000 when purchased ten years ago. Depreciation taken to date totals $25,000. The crane can be sold now for $6,000. Assuming a tax rate of 40%, if the crane is sold the total aftertax cash inflow for capital budgeting purposes will be: A) $8,400 B) $12,000 C) $7,600 D) $10,000 16. 17. 18. 5 19. (Ignore income taxes in this problem.) You have deposited $7,620 in a special account that has a guaranteed interest rate of 19% per year. If you are willing to completely exhaust the account, what is the maximum amount that you could withdraw at the end of each of the next 7 years? 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$1,295 B) $2,056 C) $2,219 D) $1,089 (Ignore income taxes in this problem.) Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. What is the present value of the lease payments if the discount rate is 5%? A) $12,528 B) $14,103 C) $14,808 D) $11,050 20. 6 ...