1.The rate that yields a net present value of zero for an investment is the:
A. Zero rate of return.
B. Internal rate of return.
C. Accounting rate of return.
D. Payback rate of return.
E. Net present value rate of return.
2. A company is considering a 5-year project. The company plans to invest $60,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below:
Interest rate Present value of an annuity of $1 factor for year 5
a. The project should be accepted.
b. The project should be rejected because it earns less than 10%.
c. The project earns more than 10% but less than 12%. At a hurdle rate of 12%, the project should be rejected.
d. Only 9% is acceptable.
e. Only 10% is acceptable.
3. Walters manufactures a specialty food product that can currently be sold for $21.80 per unit and has 19,800 units on hand. Alternatively, it can be further processed at a cost of $11,800 and converted into 11,800 units of Deluxe and 5,800 units of Super. The selling price of Deluxe and Super are $31.20 and $19.80, respectively. The incremental net income of processing further would be:
4. A machine costs $184,000 and will have an eight-year life, a $33,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $16,500 each year. Compute the accounting rate of return for the investment.
5.Poe Company is considering the purchase of new equipment costing $88,500. The projected annual cash inflows are $38,700, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine.
Periods Present value of $1 at 10% Present value of an annuity of $1 at 10%
1 0.9091 0.9091
2 0.8264 1.7355
3 0.7513 2.4869
4 0.6830 3.1699
6.Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $2,100. The division sales for the year were $1,041,000 and the variable costs were $851,000. The fixed costs of the division were $184,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:
A. $55,200 decrease
B. $134,800 decrease
C. $53,100 decrease
D. $190,000 increase
E. $190,000 decrease
7. Granfield Company has a piece of manufacturing equipment with a book value of $39,500 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $21,900. Granfield can purchase a new machine for $119,000 and receive $21,900 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,900 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:
A. $21,500 increase
B. $75,600 decrease
C. $17,600 decrease
D. $51,650 increase
E. $21,500 decrease