Practice Quiz 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. 2. 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 A) No No No B) Yes Yes Yes C) No Yes Yes D) No Yes No 3. If income taxes are ignored, how is depreciation used in the following capital budgeting techniques? Internal Rate of Return Net Present Value A) Excluded Excluded B) Excluded Included C) Included Excluded D) Included Included 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) included as a cash outflow on an after-tax basis by multiplying the expense by one minus the tax rate. B) included as a cash outflow on an after-tax basis by multiplying the expense by the tax rate. C) included as a cash outflow on a before-tax basis. D) ignored. 6. (Ignore income taxes in this problem.) Given the following data: Cost of equipment. ............. $55,750 Annual cash inflows. .......... $10,000 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
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