**Unformatted text preview: **ACC204 Test # 5
Fall 2017
1. The net present value method assumes that the project's cash flows are reinvested at
the:
A. internal rate of return.
B. the simple rate of return.
C. the discount rate used in the net present value calculation.
D. the payback rate of return.
2. The total-cost approach and the incremental-cost approach to evaluating two competing
investment opportunities:
A. are dissimilar in that one deals with net present value and the other deals with
internal rate of return.
B. are similar in that they will recommend the same alternative as the best.
C. are dissimilar in that one uses the cost of capital as a discount rate and the other does
not.
D. are similar in that neither considers the time value of money.
3. Cresol Corporation has a large number of potential investment opportunities that are
acceptable. However, Cresol does not have enough investment funds to invest in all of
them. Which calculation would be the best one for Cresol to use to determine which
projects to choose?
A. payback period
B. simple rate of return
C. net present value
D. project profitability index
4. The capital budgeting method that divides a project's annual incremental net operating
income by the initial investment is the:
A. internal rate of return method.
B. the simple rate of return method.
C. the payback method.
D. the net present value method. 5. Given the following data:
Present investment required $12,000 Net Present Value $ Annual Cost Savings $ ?? 430 1 Discount Rate 12% Life of Project 10 years Based on the data given, the annual cost savings would be:
A. $1,630.00
B. $2,200.00
C. $2,123.89
D. $2,553.89
6. 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
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
7. Boston Company is contemplating the purchase of a new machine on which the
following information has been gathered: The company's discount rate is 16%, and the machine will be depreciated using the
straight-line method. Given these data, the machine has a net present value of:
A. ($26,100)
B. ($23,900)
C. $0
D. $26,100
8. The Whitton Company uses a discount rate of 16%. The company has an opportunity to
buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for
each of the next three years. The machine would have no salvage value. The net present
value of this machine to the nearest whole dollar is:
A. $22,460
B. $4,460
C. ($9,980)
D. $12,000 2 9. Kumanu, Inc. is considering investing in new FMS equipment for its factory. This
equipment will cost $80,000, is expected to last 6 years, and is expected to have a
$10,000 salvage value at the end of 6 years. The new equipment is expected to generate
cost savings of $20,000 per year in each of the 6 years. Kumanu's discount rate is 16%.
What is the net present value of this equipment?
A. $(2,200)
B. $3,700
C. $20,500
D. $(34,950)
10. 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
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
11. Arthur operates a part-time auto repair service. He estimates that a new diagnostic
computer system will result in increased cash inflows of $2,100 in Year 1, $3,200 in
Year 2, and $4,000 in Year 3. If Arthur's discount rate is 10%, then the most he would
be willing to pay for the new computer system would be:
A. $6,652
B. $6,984
C. $7,747
D. $7,556
12. Banderas Corporation is considering the purchase of a machine that would cost
$330,000 and would last for 9 years. At the end of 9 years, the machine would have a
salvage value of $79,000. By reducing labor and other operating costs, the machine
would provide annual cost savings of $59,000. The company requires a minimum
pretax return of 12% on all investment projects. The net present value of the proposed
project is closest to:
A. $12,871
B. $63,352
C. ($15,648)
D. $35,692 3 13. Fonics Corporation is considering the following three competing investment proposals: Using the project profitability index, how would the above investments be ranked
(highest to lowest)?
A. Aye, Bee, Cee
B. Aye, Cee, Bee
C. Cee, Bee, Aye
D. Bee, Cee, Aye
14. The management of Eversman Corporation is considering the following three
investment projects:
Project U: Investment Required ($27,000); PV of Cash Inflows $27,810
Project V: Investment Required ($44,000); PV of Cash Inflows $49,720
Project W: Investment Required ($72,000); PV of Cash Inflows $78,480
Rank the projects according to the profitability index, from most profitable to least
profitable.
A. V,U,W
B. U,W,V
C. W,V,U
D. V,W,U
15. Glassett Corporation is considering a project that would require an investment of
$62,000. No other cash outflows would be involved. The present value of the cash
inflows would be $70,060. The profitability index of the project is closest to:
A. 0.13
B. 1.13
C. 0.87
D. 0.12
Purvell Company has just acquired a new machine. Data on the machine follow:
Purchase Cost
$50,000 4 Annual Cost Savings
$15,000
Life of Machine
8 years
The company uses straight-line depreciation and a $5,000 salvage value. (The company
considers salvage value in making depreciation deductions.) Assume cash flows occur
uniformly throughout a year.
16. The payback period would be closest to:
A. 3.33 years
B. 3.0 years
C. 8.0 years
D. 2.9 years
17. The simple rate of return would be closest to:
A. 30.0%
B. 17.5%
C. 18.75%
D. 12.5% The following events occurred last year for the Cashback Company:
Issuance of Common Stock
Dividends paid to Shareholders
Dividends received from investments
Interest paid on Bonds Payable
Proceeds from sale of used equipment
Repurchase of Preferred Stock $46,000
$11,000
$ 4,000
$14,000
$19,000
$10,000 18. Based solely on the above information, the net cash provided by financing activities for
the year on the statement of cash flows was:
A. $44,000
B. $48,000
C. $25,000
D. $15,000 19. The following transactions occurred last year at Jowlson Company: Issuance of Common Stock
Dividends paid to shareholders
Dividends received from investments
Interest paid on Bonds Payable
Repay principle on Bonds Payable $ 40,000
$ 3,000
$ 5,000
$ 22,000
$100,000
5 Proceeds from sale of used equipment
Purchase of land $ 29,000
$ 80,000 Based solely on the above information, the net cash provided by financing activities for
the year on the statement of cash flows would be:
A. $(131,000)
B. $279,000
C. $(63,000)
D. $(85,000)
20. Last year Burbach Company's cash account increased by $10,000. Net cash provided by
investing activities was $16,000. Net cash used in financing activities was $34,000. On
the statement of cash flows, the net cash flow provided by (used in) operating activities
was:
A. $28,000
B. $(8,000)
C. $10,000
D. $(18,000) 6 Megenity Company's net income last year was $194,000. Changes in the company's balance
sheet accounts for the year appear below: The company declared and paid cash dividends of $132,000 last year. The following questions
pertain to the company's statement of cash flows.
21. The net cash provided by (used in) operating activities last year was:
A. $194,000
B. $253,000
C. $234,000
D. $293,000 22. The net cash provided by (used in) investing activities last year was:
A. $(75,000)
B. $75,000
C. $(95,000)
D. $95,000 23. The net cash provided by (used in) financing activities last year was:
A. $60,000
B. $(60,000)
C. $192,000
D. $(192,000) 7 24. No plant and equipment was disposed of during the year. The free cash flow for the
year was:
A. $248,000
B. $116,000
C. $161,000
D. $470,000 Use the following to answer questions 25, 26, and 27.
The Becker Company is interested in buying a piece of equipment that it needs. The
following data have been assembled concerning this equipment: This equipment is expected to have a useful life of 6 years. At the end of the sixth year the
working capital would be released for use elsewhere. The company's discount rate is 10%.
25. The present value of all future operating cash inflows is closest to:
A. $480,000
B. $452,300
C. $348,400
D. $278,700
26. The present value of the net cash flows (all cash inflows less all cash outflows)
occurring during year 4 is:
A. $40,000
B. $27,320
C. $54,640
D. $42,790
27. The present value of the net cash flows (all cash inflows less all cash outflows)
occurring during year 6 is closest to:
A. $270,000
B. $195,900
C. $107,200
D. $152,300 8 28. Grading Company's cash and cash equivalents consist of cash and marketable
securities. Last year the company's cash account decreased by $14,000 and its
marketable securities account increased by $18,000. Cash provided by operating
activities was $21,000. Net cash used for financing activities was $22,000. Based on
this information, the net cash flow from investing activities on the statement of cash
flows was:
A. a net $13,000 decrease.
B. a net $1,000 increase.
C. a net $3,000 decrease.
D. a net $5,000 increase.
29. Which of the following would be considered a "use" of cash for purpose of constructing
a statement of cash flows?
A. selling the company's own common stock to investors.
B. issuing long-term debt.
C. purchasing equipment.
D. amortizing a patent.
30. Which of the following would be considered a "use" of cash for purposes of
constructing a statement of cash flows?
A. an increase in accounts payable.
B. an increase in prepaid expenses.
C. an increase in accrued liabilities.
D. an increase in accumulated depreciation. 31. An increase in the accumulated depreciation account of $50,000 over the course of a
year would be shown on the company's statement of cash flows prepared under the
indirect method as:
A. an addition to net income of $50,000 in order to arrive at net cash provided by
operating activities.
B. a deduction from net income of $50,000 in order to arrive at net cash provided by
operating activities.
C. an addition of $50,000 under investing activities.
D. a deduction of $50,000 under investing activities. 9 Orebic Department Store had net income of $642,000 for the year just ended. Orebic
collected the following additional information to prepare its statement of cash flows for the
year: 32. 33. Orebic uses the indirect method to prepare its statement of cash flows. What is Orebic's
net cash provided (used) by operating activities?
A. $518,000
B. $588,000
C. $838,000
D. $870,000
Riveros, Inc., is considering the purchase of a machine that would cost $120,000 and
would last for 8 years. At the end of 8 years, the machine would have a salvage value of
$29,000. The machine would reduce labor and other costs by $25,000 per year.
Additional working capital of $9,000 would be needed immediately. All of this working
capital would be recovered at the end of the life of the machine. The company requires
a minimum pretax return of 18% on all investment projects. The net present value of
the proposed project is closest to:
A. ($18,050)
B. ($63,683)
C. ($10,336)
D. ($16,942) 34. Stern Corporation purchased a machine with an estimated useful life of seven years.
The machine will generate cash inflows of $9,000 each year over the next seven years.
If the machine has no salvage value at the end of seven years, if Stutz's discount rate is
10%, and if the net present value of this investment is $17,000 then the purchase price
of the machine was closest to:
A. $43,812
B. $26,812
C. $17,000
D. $22,195 10 35. Tangen Corporation is considering the purchase of a machine that would cost
$380,000 and would last for 6 years. At the end of 6 years, the machine would have a
salvage value of $80,000. By reducing labor and other operating costs, the machine
would provide annual cost savings of $104,000. The company requires a minimum pretax
return of 14% on all investment projects. The net present value of the proposed project is
closest to:
A. $104,456
B. $24,456
C. $133,753
D. $60,936 11 ...

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- Fall '14
- Net Present Value