Accounting 403 – Capital Budgeting
Name ____________________________________________
1. Capita Capitall budg budgeti eting ng is concer concerned ned with with a. Decisions aecting onl! capital"intensi#e $ndustries. b. Anal!sis o short"range decisions c. Anal Analys ysis is of long long-r -ran ange ge deci decisi sion onss d. %cheduling o oice personnel in oice buildings &. 'hich o the the ollowing ollowing actors actors should should be considere consideredd when e#aluati e#aluating ng a proposed proposed capital capital in#estmen in#estment( t( c. Cost o capital a. Amount o in#estment b. Annual returns d. All of the above 3. $n computing computing the amount o initial initial in#estmen in#estmentt or decision"ma)in decision"ma)ing* g* ta+es would would be rele#ant rele#ant or all o the ollowing ollowing** e+cept, a. A#oi A#oida dabl blee repa repair irss o old old ass asset et b. -roit -roit on on sale sale o old asse assett replac replaced ed b! a new new one one c. oss on on write"o write"o o other other assets assets disposed disposed because because o new new capital capital $n#estment $n#estment d. Increase Increase in working working capital capital required required to support support new capital capital investment investment 4. ABC Compan! Compan! is considerin consideringg the sale o a machine machine with with a boo) #alue #alue o - /0*000 /0*000 and 3 !ears remaini remaining ng in its useul lie. %traight"line depredation o - &*000 annuall! is a#ailable. he machine has a current mar)et #alue o - 100*000. 'hat $s the cash low rom selling the machine i the ta+ rate is 402( a. - &*000 c. P 92!!! d. - 100*000 b. - /0*000 . ld euipm euipment ent with with a boo) boo) #alue o - 1*000 1*000 will be replac replaced ed b! new euipme euipment nt with a purchas purchasee price o -0*000* e+clusi#e o reight charges o - &*000. he mar)et #alue o the old euipment is - 11*000. 5epair costs o - &6000 can be a#oided i the new euipment is acuired* Assume a ta+ rate o 32. 'hat is the initial 7net8 in#estment o the pro9ect( a. - 33*/ 33*/00 00 c. - 3:*; 3:*;00 00 b. P "#"!! d. - &*000 <. he most most con#enient con#enient wa! wa! to handle handle procee proceeds ds rom the the disposal disposal o an an old asset asset is to c. $ffset the amount against the cash outlay a. reat reat itit as as a cas cash. h. low low b. reat reat it as a reduction reduction in sal#age sal#age #alue d. Add to the $n#estment $n#estment ;. o a. b. c. d.
appro+i appro+imate mate annual annual cash cash inlow inlow** depreda depredation tion $s Added Added bac) bac) to net net incom incomee becaus becausee it is an an inlow inlow o o cash cash %ubtra %ubtracted cted rom rom net net income income becaus becausee it is an outl outlow ow o cash cash %ubtra %ubtracted cted rom net $nco $ncome me becau because se it is an an e+pen e+pense se Added back to to net income income because because it is not an outflow outflow of of cash
/. Annual cash inlows inlows rom the the capital capital pro9ect pro9ectss are measured measured in terms o o a. Net income income beore beore deprec depreciat iation ion and and ta+e ta+ess b. Net income income ater ater depr depreda edatio tionn and and ta+es ta+es c. %et inco income me befor beforee depred depredatio ation n and afte afterr ta&es ta&es d. Net inco income me ater ater depred depredati ation on and and beor beoree ta+es ta+es :. A pro9ect pro9ect costing costing -1/0*000 -1/0*000 will will produce produce the ollowi ollowing ng annual annual cash beneits beneits and and sal#age sal#age #alue, #alue, D =uipment N=' =uipment 5e#enue -10*000 -1/0*000 Cash operating costs ;0*000 <0*000 Annual depredation 30*000 0*000 $ncome ta+* 4<2 'hat is the incremental annual cash income ater ta+es( a. - 30*0 30*000 00 c. - 40*0 40*000 00 b. P "!#!! d. - 3/*000
10. D=> $nc.?s depreciati depreciation on deduction deduction last !ear was - 0*000 0*000 and its ta+ rate was 302. he compan!?s compan!?s ta+ sa#ings sa#ings rom the depredation ta+ shield or the !ear was a. P '(!!! c. - 0*000 b. - 3*0 3*000 00 d. - 30*0 30*000 00 11. 'hich statement statement describes describes the rele#ance o depredation depredation $n calculating calculating cash lows( lows( a. )eprec )epreciat iation ion Is relev relevant ant only only when when income income ta&es ta&es e&ist e&ist b. Depr Depred edat atio ionn is alw alwa! a!ss rele rele#a #ant nt c. Depr Depred edat atio ionn is ne#e ne#err rele rele#a #ant nt d. Depreciation Depreciation is rele#ant rele#ant onl! with discounted discounted cash low methods methods 1&. @ Compan! is anal!ing anal!ing a capital in#estment in#estment proposal proposal or a new machiner! to produce produce a new product o#er the ne+t 10 !ears. At the end o ten !ears* the machiner! must be disposed o with a ero net boo) #alue but with a scrap scr ap sal#age #alue o - &0*000. $t will reuire some - 30*000 to remo#e rem o#e the machiner!. machiner!. he applicable ta+ rate is 32. he appro+imate end"o"lieE cash low based on the oregoing inormation is, a. $nlow $nlow o - 30*000 30*000 c. utlo utlow w o - 10*000 10*000 b. $utflow of P *(!! d. utlow o - 1;*000 13. Cost Cost o capital capital is a. he amount the compan! must pa! or its plant assets b. he di#idends a compan! must pa! on its euit! securities. c. +he cost cost the the company company must incur to obtain obtain its capital capital resources. resources. d. he cost the compan! is charged b! in#estment ban)ers who handle the issuance o euit! or long"term debt securities. 14. >or a certain pro9ect* pro9ect* the return return that in#estors in#estors demand or in#esting in#esting in a irm is )nown as, as, a. DC DC> > rate rate o retu return rn c. -a!b -a!bac ac)) d. ,ost of capital b. Net Net pre prese sent nt #al #alue ue 1. $n an in#estment in#estment in plant asset* the return return that should should )eep the mar)et price price o the irm stoc) unchanged unchanged is a. Net present #alue c. Ad9usted rate o return b. ,ost of capital d. Fnad9usted return 1<. All o the ollowing ollowing reer to the discount discount rate used b! a irm in capital capital budgeting budgeting e+cept, e+cept, c. $pportunity costs a. Cost o capital b. 5euired rate o return d. Gurdle rate 1;. FH' Compan! Compan! has 2 preer preerred red stoc) stoc) with with a par #alue #alue o - 100. %elling %elling price is - 1&3.0 1&3.0 per share and lotation costs are - 0.0 per share. he compan!?s ta+ rate is &02. 'hat is the cost o preerred stoc)( c. ./ a. 4.032 b. 4.0;2 d. 2 1/. D=> Compan! is attempting attempting to compute the cost o $nternal and e+ternal e+ternal euit!. euit!. he compan!?s compan!?s common stoc) is currentl! selling at - <&.0 per share with lotation cost o - per share. he ne+t di#idend per share is - .4&* =arnings and di#idends are e+pected to grow at a constant rate o 2. 'hat is the cost o new common stoc) and retained earnings( a. CI%, 13.<;26 5I=, 13.<;2 c. CI%, 13.<;26 5I=, 14.432 . b. ,01 '."/3 405 '".*/ d. CI%, 14.4326 5I=,14.432
1:. he mar)et #alue #alue o JG$ Compan!?s Compan!?s common stoc) 7boo) 7boo) #alue, - <K8 is estimated estimated at - <0 K and the mar)et #alue o its interest bearing debt 7boo) #alue, -3K8 is estimated at -40K. he a#erage beore ta+ !ield on these liabilities is 12 per !ear. $ncome ta+es are 402. he compan! is e+pected to pa! di#idend o - 10 per share and the stoc) $s selling at a price o - 100 per share. he growth rate o di#idend is pro9ected to be &.2 per !ear. 'hat is the weighted a#erage cost o capital 7'ACC8 o the compan! as a whole( a . :2 b. &1.2
b.
''.'/
c. &2
&0. he weighted weighted a#erage cost o capital approach approach to decision ma)ing ma)ing is not directl! aected aected b! the a. Halue alue o comm common on stoc stoc)) b. ,urr ,urren entt budge budgett for e&p e&pan ansio sion n c. Cost Cost o o debt debt out outst stan andi ding ng d. -roposed -roposed mi+ o o debt* euit!* euit!* and e+isting e+isting unds used used to $mplement $mplement the pro9ect pro9ect &1. A compan! with cost o capital o 12 plans plans to inance an an in#estment with debt that bears 102 interest. he rate it should use to discount the cash lows is a . 1 02 c. &2 b. '(/ d. %ome other rate. &&. 'hich o the ollowing ollowing methods measures measures the reco#er! period period o a proposed proposed in#estment( in#estment( a. -a!b -a!bac ac)) c. -H pa!b pa!bac ac)) d. All of given b. Bail Bail"o "out ut pa! pa!ba bac) c) &3. he techniue techniue that does not use cash cash low or capital in#estme in#estment nt decisions. decisions. c. A44 a. -a!bac) b. N-H d. $55 &4. 'hich o the ollowing ollowing cash low methods o e#aluating e#aluating capital capital in#estment in#estment ignores the time #alue o mone!( a. $55 $55 c. Disc Discou ount nted ed pa!b pa!bac ac). ). b. N-H d. Payback reciprocal &. ABC Compan! is considering considering a certain pro9ect pro9ect with the ollowing ollowing pro9ected pro9ected cash income ater ta+es or 4 !ears* the lie o the pro9ect, =nd o !ear 1* - 11*0006 !ear &* - :*0006 !ear 3* - /*0006 !ear 4* - ;*000. $ the pro9ect reuires an in#estment o - &*000 with a sal#age #alue o - *000* what is the pa!bac) period( a. &.&< !ears c. &.&< !ears d. 2.*2( years b. &.<& !ears &<. 'hich o the ollowing ollowing is necessar! necessar! in order to calculate calculate the pa!bac) pa!bac) period or or a pro9ect( a. Fse Fseul ul lie lie c. Net Net pres presen entt #alu #aluee d. Annual cash flow b. Cost Cost o capi capita tall &;. An ad#antage ad#antage o using the the pa!bac) method method is that the the method is, a. -recise in estimates tes o proitabilit! b. 1imple to compute c. Not based on cash low data d. $nse $nsens nsititi# i#ee to the the lie lie o the the pro9 pro9ec ectt bein beingg e#al e#alua uate tedd &/. G$L $nc. recentl! recentl! acuired acuired a machine at a cost o - <4*000. $t will be depreciat depreciated ed on a straight"line straight"line basis o#er o#er !ears* with no estimated sal#age #alue. G$L estimates that this machine will produce a - 1/*000 annual net cash low beore income ta+. Assuming an income ta+ rate o 02* *the appropriate pa!bac) period on this in#estment is, a. 3.< !ears c. ;.1 !ears b. .9 years d. 1&./ !ears &:. A compan! compan! is in#estigating in#estigating the possibilit! possibilit! o acuiring acuiring a machine that will cost - 1&*000 1&*000 and will ha#e annual depreciation or ta+ purposes o - &*400 or !ears. he machine is e+pected to result in cash sa#ings rom operations o - 4*000 per !ear. $ the ta+ rate is 02* what is the pa!bac) period or the new machine( a. 3 !ear !earss c. !ea !ears d. < !ears b. ".( ye years 30. MK Compan! is planning planning to purchase a new machine. machine. he pa!bac) pa!bac) period is estimated estimated to be < !ears. he pro9ect?s ater ta+ cash low is estimated to be - &*000 !earl! or the irst three !ears and - 3*000 !earl! or the ne+t three !ears o the pa!bac) period. Annual depredation o - 1*300 will be charged to income or each o the < !ears o the pa!bac) period. he machine will cost, c. - :*000 a. P '(!!!
b. - 1&*0 1&*000 00
d. - <*00 <*0000
31. ABC Compan! Compan! is planning to purchase purchase a new machine or - 30*000. 30*000. he pa!bac) pa!bac) period is e+pected e+pected to be i#e !ears. he new machine is e+pected to produce cash lows rom operations* net o income ta+es* o -;*000 a !ear in each o the ne+t three !ears and - *00 $n the ourth !ear. Depreciation o - *000 a !ear will be charged to income or each o the i#e !ears o the pa!bac) period. 'hat is the amount o cash low rom operations* net o income ta+es* that the new machine is e+pected to produce $n the last 7ith8 !ear o the pa!bac) period( a. - 1*00 1*0000 c. - *0 *000 d. - /*00 b . P " ( ! ! 3&. As a capital capital budgeting budgeting techniue* techniue* the pa! bac) period period considers considers depreciation depreciation e+pense 7D=8 and time #alue o mone! 7KH8 as ollows, a. D=* rele#ant rele#ant and HK* rele#ant rele#ant c. D=* irrele#ant. irrele#ant. and HK* rele#ant rele#ant b. )5 irrele irrelevan vantt and and +67 +67 Irre Irrelev levant ant d. D=* rele#ant and HK* irrele#ant 33. he pa!bac) pa!bac) method assumes assumes that all cash inlows inlows are rein#ested rein#ested to !ield a return return eual to a. he discou discount nt rate rate c. he intern internal al rate rate o return return d. 8ero b. he he hurd hurdle le rate rate 34. A pro9ect costing -1/0*000 will produce the ollowing ollowing annual cash beneits and sal#age #alue, =nd o !ear Cash beneits %al#age #alue 1 -0*000 -;0*000 & 0*000 <0*000 3 0*000 0*000 'hat is the bailout pa!bac)( a. 3 !ears c. &.4 !ears b. 2.* years d. & !ears 3. H'@ Compan! purchased a new machine on Lanuar! 1 o this !ear or - :0*000* with an estimated estimated useul lie o !ears and a sal#age #alue o - 10*000. he machine will be depreciated using the straight"line method. he machine machine is e+pected e+pected to produce produce cash low rom operations* operations* net o ta+* o - 3<*000 a !ear in each o the ne+t !ears. he new machine?s sal#age #alue is - &0*000 in !ears 1 and &* and - 1*000 in !ears 3 and 4. 'hat will be the bailout period or this machine( c. '.9 years a. 1.4 !ears b. &.& &.& !ear !earss d. 3.4 3.4 !ear !earss 3<. $n#estment $n#estment A has a pa!bac) period period o .4 !ears6 in#estment in#estment B* <.; !ears. >rom this* this* we can conclude a. hat in in#estme tment A has a higher NN-H th than B b. hat in in#estme tment A has a higher $5 $55 than B c. hat hat in#e in#est stme ment nt A?s A?s boo boo)) rat ratee o o ret retur urnn is is high higher er than than B?s B?s d. %one of the above 3;. 'hen computing computing or the accounting accounting rate o return return 7A558* which which o the ollowing ollowing is used( a. $ncome beore depreciatio depreciationn and ta+es c. $ncome beore depreciation depreciation but not ta+es b. Income Income after after depr depreci eciati ation on and ta&es ta&es d. $ncome ater depreciation but beore ta+es 3/. -5 Compan! Compan! is considering considering the acuisition acuisition o a personal personal computer that costs costs - 1&0*000 with an economic economic lie o 1& !ears and a terminal sal#age #alue o - 1&*000. $t is estimated that the increase in net income beore ta+es as a result rom this in#estment wilt amount to - ;*000 annuall!. $ncome ta+es are 32. he compan! uses the straight"line method o depreciation. 'hat is the accounting rate o return on the a#erage cost o in#estment( a. 3.;:2 c. *.#9/ b. ./32 d. <.:/ .:/2 3:. * $nc.* a calendar calendar !ear compan!* compan!* purchased a new machine machine or - &/*000 on Lanuar! 1* &00<. he machine machine has an estimated useul lie o eight !ears with no sal#age #alue and is being depreciated on the straight"line basis. he accounting 7boo) #alue8 rate o return is e+pected to be 12 on the initial increase in reuired
in#estment. n the assumption o a uniorm cash low* this in#estment is e+pected to pro#ide annual cash low rom operations* net o income ta+es* o, a . - 3 * 0 0 c . - 4 *& 0 0 b . - 4 *0 & d. P!! 40. he time"#al time"#alue ue o mone! means means that that a. A peso peso toda toda!! is is wor worth th more more than than a pes pesoo in in the the utu uture re.. b. he he lon longe gerr one one wait waitss or or a pes peso* o* the the mor moree unc uncer erta tain in the the rec recei eipt pt is c. oth of these d. None o these 41. 'hich o the ollowing ollowing rate o return return methods considers considers the time #alue #alue o mone!( a. I44 c. -a!bac) reciprocal b. A55 A55 d. None None o the the gi#e gi#enn 4&. 'hich o the ollowing ollowing methods is a discounted discounted cash low method or e#aluating e#aluating capital $n#estment( $n#estment( a. -a!bac) c. Internal rate of return b. Ball"o Ball"out ut pa!bac pa!bac)) d. -a!bac -a!bac)) recipr reciproca ocall 43. Net prese present nt #alue #alue 7N-H 7N-H88 is a. he sum o discounted cash inlows b. he sum o discounted cash outlows c. +he +he sum sum of of dis disco coun unte ted d cas cash h inflo inflows ws les lesss the the sum sum of the the dis disco coun unte ted d cash cash outf outflo lows ws he sum o discounted cash inlows plus discounted cash outlows d. 44. he discount discount rate that euates euates the present present #alue o e+pected e+pected cash lows with the cost o in#estments in#estments is the a. Net Net pres presen entt #alu #aluee c. Acco Accoun untiting ng rate rate o retu return rn Internal rate of return b. d. -a!bac) period 4. 'hich one o the ollowing ollowing is a pro9ect pro9ect ran)ing method method rather than a pro9ect screening screening method( a. Net Net pre prese sent nt #al #alue ue c. Profitability inde& b. %imple %imple rate rate o return return d. %ophis %ophistic ticate atedd rate o return return 4<. A pro9ect pro9ect that has a positi#e positi#e N-H discounted discounted at a rate o 12 would ha#e a discounted discounted rate o return return o c. 7ore than '(/ a . 02 b. 12 12 d. less less than than 12 12 4;. $n computing computing the -H o uture cash inlows inlows that are uniorm* uniorm* reerence reerence will be made to a table that shows shows c. Present value of annuity of P' a. Amount o -1 b. -H o - 1 d. >uture #alue o annuit! o - 1 4/. he present present #alue o - 0*000 due in i#e i#e !ears would be highest highest i discounted discounted at a rate o !/ a. c. 12 b. 102 d. &02 4:. A pro9ect pro9ect reuires an in#estment in#estment o - 40*000 and has a net present #alue o - 10*000. he pro9ect?s pro9ect?s proitabilit! proitabilit! $nde+ would be, a. 0./0 c. 4.0 b. '.2( d. 1.0 0. 'hich o the ollowing ollowing methods methods measures measures cash lows and outlows outlows o a pro9ect pro9ect as i the! occurred at a single single point in time( a. -a!bac) and bail"out pa!bac) period c. %et present value and internal rate of return b. Accounting and internal rate o return d. 5eturn on original and a#erage in#estment 1. he present #alue and discounted discounted cash low rate o return methods methods o e#aluating e#aluating capital capital e+penditure e+penditure proposals are superior to the pa!bac) method in that the!, a. Are easier to implement b. ,onsider the time value of money
c. d.
5euires less input 5el 5elec ects ts the the e eect ectss o o dep depre reci ciaation tion and and inc incom omee ta ta+
&. A compan! compan! purchased purchased Kachine 1&3 on Karch * &00* or - *000 cash. he he estimated sal#age sal#age #alue was &00 and the estimated lie was 11 !ears. n Karch * &00<* the compan! learned that $t could purchase a dierent machine or - /*000 cash. he new machine would sa#e the compan! an estimated - &0 per !ear* compared to machine 1&3. he new machine would ha#e no estimated sal#age #alue and an estimated lie o 10 !ears. he compan! could get - 3*000 rom selling Kachine 1&3 on Karch * &00<. $gnoring income ta+* the calculation that would best assist the compan! in deciding whether to purchase new machine is, a. Pres Presen entt val value ue of P 2(! 2(! for for eac each h of of the the ne&t ne&t '! year yearss : P "!! "!!!! - P #!! #!!!! -resent #alue o - &0 or each o the ne+t 10 !ears " - /*000 b. c. -resent #alue o - &0 or each o the ne+t 10 !ears O - 3*000 " - /*000 " - *000 d. -resent #alue o - &0 or each o the ne+t 10 !ears O - 3*000 " - /*000 " - 4*000 3. he eecti#eness eecti#eness o the present #alue method has been appropriatel appropriatel!! uestioned as a capital e+penditure e+penditure e#aluation techniue because, a. Pred Predic ictin ting g futu future re cas cash h flow flowss is oft often en diff diffic icul ultt an and d of ofte ten n asso associ ciat ated ed wit with h un unce cert rtai aint ntie iess he a#erage return on $n#estment method $s more accurate and useul b. c. he pa!bac) method is theoreticall! more reliable d. he computation $n#ol#es diicult mathematical applications most accountants cannot perorm 4. ou ha#e been consulted consulted to ad#ise ad#ise KN Corp. Corp. on the pro9ected pro9ected acuisitio acuisitionn o another productio productionn costing -1 million. he line has an e+pected useul lie o i#e 78 !ears without an! sal#age #alue. he ollowing additional inormation was made a#ailable, ear ear =sti =stima mate tedd Annu Annual al Cash Cash $nl $nloow -res -resen entt Halue alue o -1 1 -<00*000 0 . :1 & 3 0 0 *0 0 0 0 . ;< 3 & 0 0 *0 0 0 0 . <3 4 &00*000 0.3 & 0 0 *0 0 0 0 . 44 A -1*00*000 3 . &; Assuming that the cash low is generated e#enl! during the !ear* !our ad#ice is a. o in#est in#est due due to net net prese present nt #alue #alue o -&1 -&1*&/ *&/00 b. +o invest invest due due to net pres present ent valu valuee of P9! P9!!! !! c. o in#es in#estt due due to net ad#anta ad#antage ge o o -00* -00*000 000 d. o in#est in#est due due to net net prese present nt #alue #alue o -<3 -<3*00 *0000 . Assume the same data in No. 4* onl! onl! that the annual cash inlow inlow was uniorm uniorm through the !ears* !ears* how much is the net present #alue( a. -:4*000 c. -:1*000 b. ;P'9!!!< d. Cannot be determined rom inormation <. 'hat capital capital budgeting methods methods assumes that the unds are rein#ested rein#ested at the compan!Ps compan!Ps cost o capital( capital( a. -a!bac) c. %et present value b. Accounti Accounting ng rate rate o return return d. ime ime ad9ust ad9usted ed rate o return return ;. FH'* FH'* $nc. acuired a turning machine machine that has a useul lie o 10 !ears with no sal#age sal#age #alue. he incremental incremental annual net income beore ta+es is -/*00. $ncome ta+es are &2 each !ear. he -H o an annuit! o p1 or 10 !ears at 1/2 7the compan!Ps cost o capital8 is 4.4:4. Annual depreciation is -*000. he N-H is positi#e -1*11:.&. Gow much is the amount o in#estment( a. -30*000 c. P(!!!! b. -40*000 d. -<0*000 /. A pro9ect pro9ect costing -&/*;1 -&/*;1 will produce the ollowing ollowing cash beneits beneits ater ta+es, =nd o !ear Ater"ta+ cash beneits 1 -11*000 & 1*000
3 1 / *0 0 0 he compan!Ps cost o capital is 1<2. he -H o -1 or one !ear at 1<2 is 0./<&6 or two !ears is 0.;436 or three !ears is 0.<41. 'hat is the discounted 7-H8 pa!bac) period( c. &.3 !ears a. 1.; !ears b. & !ears d. 2. years :. Consider Consider an in#estment in#estment with the the ollowing ollowing cash inlows, inlows, ear Cash lows -H o -1 at 142 0 7-31*0008 1.000 1 1 0 *0 0 0 0./;; & & 0 *0 0 0 0.;;0 3 10*000 0.<; 4 1 0 *0 0 0 0.:& 'hat is the proitabilit! inde+( a. 1./&4 c. '.#2 b. 1.&/4 d. 1./4& <0. $gnorin $gnoringg income income ta+es* ta+es* how are the ollowin ollowingg used used in the calcul calculati ation on o the net present present #alue o a proposed proposed pro9ect( Depreciation Depreciation e+pense e+pense %al#age %al#age #alue a. $ncl $nclud udee $ncl $nclud udee b. $nclude =+clude c. 5&clude Include d. =+cl =+clud udee =+c =+clu lude de <1. $ an $n#estment $n#estment has a positi#e positi#e N-H a. Its I44 I44 is great greater er than than th thee compan company=s y=s cost cost of of capita capitall b. Cost Cost o capi capital tal e+ce e+ceeds eds the the cuto cuto rate rate o retu return rn c. $ts $55 $55 is less less than than the the compan compan!?s !?s cuto cuto rate rate o retu return rn d. the cuto cuto rate rate o retu return rn e+cee e+ceeds ds cost cost o capita capitall <&. D=> Compan! purchased purchased a machine* which will be depreciated depreciated on the straight"line straight"line basis o#er an estimated useul lie o se#en !ears and no sal#age #alue. he machine is e+pected to generate cash lows rom operations* net o income ta+es o - /0*000 in each o the se#en !ears. D=>?s e+pected rate o return is 1&2. $normation on present #alue actors is as ollows, -resent #alue o -lat 1&2 or se#en periods, 0.4& -resent #alue o an ordinar! annuit! o -lat 1&2 or ; periods, 4.<4 Assuming a positi#e net present #alue o - 1&*;&0* what is the cost o the machine( c. P "(2!! a . - & 4 0 *4 0 0 b. - &3* &3*1& 1&00 d. - 3;;* 3;;*/4 /400 <3. n Lanuar! 1* a compan! compan! in#ested in#ested in an asset with a useul lie o 3 !ears. !ears. he compan!?s compan!?s e+pected e+pected rate o return is 102. he cash low and present and uture #alue actors or tile 3 !ears are as ollows, ear Cash inlows -resent #alue o - 1 Q 102 >uture #alue o - 1 Q 102 1 -/*000 0.:1 1.10 & - :*000 0./3 1.&1 3 - 10*000 0.; 1.33 All cash inlows are assumed to occur at !ear"end. $ the asset generates a positi#e net present #alue o -&*000* what was the amount o t he original in#estment( a. P 2!2(! c. - 30*::1 b. - &&*&0 d. - 33*::1 <4. An in#estment in#estment in a new piece o euipment euipment costing - 0*000 0*000 is e+pected to !ield the ollowin ollowingg o#er its "!ear useul lie, 5e#enues 7cash8* - 40*0006 40*0006 operating operating costs 7cash8* 7cash8* - 1/*0006 depreciation* depreciation* - 10*000. 10*000. he present #alue o - 1 recei#ed annuall! or !ears and discounted at the compan!?s cost o capital is 4.10 assuming that all cash lows occur at !ear"end. he beneit cost ratio 7proitabilit 7proitabilit!! $nde+8 or this piece o euipment* ignoring ignoring ta+ eect* is a. 0.:/4 c. '.#!
b. 1.&00
d. &.&00
<. he internal internal rate o return 7$558 is is the a. Gurdle rate b. 5ate o return or which the net present #alue is greater than 1.0 c. 5ate o return generated rom the operational cash lows d. 4ate of of return return for which the net net present present value value is equal equal to to >ero <<. %F* $nc. is planning planning to in#est in#est - 1&0*000 in a 10"!ear 10"!ear pro9ect. %F estimates estimates that the annual cash inlow* inlow* net o income ta+es* rom this pro9ect will be - &0*000. %FPs desired rate or return on in#estments o this t!pe is 102. $normation on present #alue actors is as ollows, Q 102 Q 1&2 -resent #alue o - 1 or 10 periods 0.3/< <.14 -resent #alue o an annuit! o - 1 or 10 periods 0.3&& .<0 %F?s e+pected rate o return on this in#estment is a. ess than 102* but more than 02 c. ?ess than '2/ but more than '!/ d. 1&2 b. 102 <;. 'hich o the ollowing is a basic dierence dierence between $55 and A55 criteria or e#aluating in#estments( a. $55 emphas emphasie iess e+penses e+penses66 A55 emphas emphasie iess e+pendit e+penditure uress b. $55 empha emphasi sies es re#enu re#enues6 es6 A55 empha emphasi sies es receip receipts ts c. $55 is used or internal internal in#estments6 in#estments6 A55 $s $s used or e+ternal e+ternal in#estments in#estments d. I44 concentra concentrates tes on receipts receipts and and payments3 payments3 A44 A44 concentrate concentratess on revenues revenues and e&pense e&penses. s. actor 14R .&1< 1 2 .01/ 1 <2 4./33 1 ;2 4.</ 'hat is the compan!?s internal rate o return( 7Choose the best answer8 a. '(.'/ c. 1.32 b. 1.&2 d. 1.42 ;0. A planned planned actor! e+pansion e+pansion pro9ect pro9ect has an estimated initial initial cost o - /00*000. Fsing a &02 discount discount rateI the present #alue o uture cost sa#ings rom the e+pansion is - /43*000. o !ield e+actl! a &02 time ad9usted rate o return* the actual in#estment cost cannot e+ceed the - /00*000 estimate b! more than, c. P "!!! a . - 1 < 0 *0 0 0 b. - &0*0 &0*000 00 d. - 1*;0 1*;0 ;1. >JG Corporation Corporation is planning planning to in#est - /0*000 in a three"!ear pro9ect pro9ect >JG?s e+pected e+pected rate o return is 102. he present #alue o -1 at 102 or 1 !ear is 0.:0:* or two !ears is 0./&< and or the three !ears is 0.;1. he cash lows* net o income ta+es* will be - 30*000 or the irst !ear 7present #alue, - &;*&;08 and - 3
a. Accrual accounting rate o return c. Discounted cash low rate o return b. -a!bac) method d. @uture value of cash flow ;3. he reason or using using probabilitie probabilitiess in capital budgeting budgeting decision decision is, a. 4isk and uncertainty c. ime #alue o mone! b. Cost Cost o capita capitall d. -ro9ec -ro9ects ts with with uneua uneuall li#es li#es
;4. $ applied in capital capital budgeting budgeting e#aluation e#aluation** sensiti#it! sensiti#it! anal!sis anal!sis a. $s used e+tensi#el! when cash lows are )nown with certaint!. b. Is a what ifB ifB technique technique that asks asks how a given given outcome outcome will change change if the original original estimate= estimate=ss of the capital budgeting model are changed. c. Keasures the amount o time it will ta)e or a pro9ect to reco#er its initial capital outlow. d. $s a techniue used to ran) #arious capital pro9ects. ;. 'hich o the ollowi ollowing ng combinations combinations is possibl possible( e( -roitabilit! $nde+ N-H $55 a. Jreater than 1 -ositi#e =uals cost o capital Negati#e ess than cost o capital b. Jreater than 1 c. ?ess ?ess than than ' %egati %egative ve ?ess ?ess than than cost cost of capita capitall d. ess than 1 -ositi#e ess than cost o capital ;<. LM Co. uses a 1&2 hurdle hurdle rate or ali capital capital e+penditures e+penditures.. $t has lined up our pro9ects, pro9ects, $n housand -esos $nitial cash outlow -ro9ect 1 -ro9ect & -ro9ect 3 -ro9ect 4 Annual net cash inlows 400 :< 4:< 44 ear 1 130 &00 1<0 1:0 ear & 140 &;0 1:0 &0 ear 3 1<0 1/0 1/0 1/0 ear 4 /0 130 1<0 1<0 1< 0 Net present #alue 7;*:<8 /*& &/*1&/ &:*3&4 -roitabilit! $nde+ 728 : /2 1012 1 0 <2 102 $nternal rate o return 112 132 142 12 $ the compan! has no budgetar! limitations* which pro9ects should be pursued( a. -ro9ects 3 and 4 c. ProCects 2 " and b. -ro9ect 4 d. All the our pro9ects ;;. KN Corporation Corporation is contemplat contemplating ing our pro9ects* pro9ects* * K* N* and . he capital costs costs or the initiation initiation o each pro9ect and its estimated ater"ta+* net cash lows are listed below. he compan!?s desired ater"ta+ opportunit! costs is 1&2. $t has - :00*000 capital budget or the !ear. $dle unds cannot be rein#ested at greater than 1&2. $n thousand pesos $nitial cash outlow K N Annual net cash inlows 400 4;0 3/0 4&0 ear 1 113 1/0 :0 /0 ear & 113 1;0 110 100 ear 3 113 10 13 0 1&0 ear 4 113 110 14 0 130 ear 113 100 1 0 10 Net present #alue -;*40 -:*<4 -4*<<< 7-1*;0/8 -roitabilit! inde+ 1.0& 1.13 1 . 14 0 .: < $nternal rate o return 1 & .; 2 1;.<2 1 ; .& 2 1 0 .< 2 he compan! will choose, a. -ro9 -ro9ec ects ts** K* K* N* N* and and 0 b. ProC ProCec ects ts 7 and and % c. -ro9ects a and N d. -ro9 -ro9ec ects ts and and K
;/. A compan!?s compan!?s marginal marginal cost o new capital capital is 102 up to - <00*000. $t increases increases 0.2 or the ne+t - 400*000 400*000 and another 0.2 thereater. %e#eral propose capital pro9ect are under consideration* with pro9ected cost and internal rates o return as ollows, -ro9ect Cost $ 55 A - 100*000 10.2 B - 300*000 14.02 C - 40*000 10./2 D - 30*000 13,2 = - 400* 000 1&.02 'hat should the compan!?s capital budget be( a . - < 0 *0 0 0 b . P ' ! ( ! ! ! ! c. - 1*00*000 d. - 1* 1*<00*000 ;:. >or - 40*000* 40*000* BCD Corp. purchased purchased a new machine with an estimated estimated useul lie o i#e !ears with with no sal#age #alue. he machine is e+pected to produce cash low rom operations* net o 402 income ta+es* as ollows, >irst !ear - 1<0*000 %econd !ear 140*000 hird !ear 1/0*000 >ourth !ear 1&0*000 >ith !ear 100*000 BCD Corp. will use the sum"o"!ears"digits? method to depreciate the new machine, >irst !ear - 10*000 %econd !ear 1&0*000 hird !ear :0*000 >ourth !ear - <0*000 >ith !ear 30*000 he present #alue o - 1 or periods at 1&2 is 3.<04;/. he present #alues o -1at 1&2 at end o each period are, -eriod -H actor 1 0./:&/0 & 0.;:;1: 3 0.;11;/ 4 0 .< 3 & 0 . < ; 4 3 Gad BCD used the straight"line method o depreciation* what is the dierence in net present #alue pro#ided b! the machine at a discount rate o 1&2( a. $ncreas $ncreasee o - :*;0 :*;0 c. Decrea Decrease se o - &4*3;< &4*3;< b. )ecrease of P 9(! d. $ncrease o - &4*3;<