Name: Instructor: Ms. July Joy S. Lumantas, CPA
Score: Midterm Comprehensive Qui
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"he present value o# a $iven sum to %e received in #ive years &ill %e e'actly t&ice as $reat as the present value o# an e(ual sum to %e received in ten years.
)
An increase in the discount rate &ill result in an increase in the present value o# a $iven cash #lo&.
*
"he present value o# a cash #lo& decreases as it moves #urther into the #uture.
+.
hen the net present value method is used, the internal rate o# r eturn is the discount rate used to compute the net present value o# a pro-ect.
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I# net present value is ne$ative, then interpolation is needed in order to ma/e a proposed investment accepta%le.
0.
"he net present value method assumes that cash #lo&s #rom a pro-ect are immediately reinvested at a rate o# return e(ual to the discount rate.
1.
hen usin$ internal rate o# return to evaluate investment pro-ects, i# the internal rate o# return is less than the re(uired rate o# return, the pro-ect should % e accepted.
2.
"he internal rate o# return #or a pro-ect is the discount rate that ma/es the net present value o# the pro-ect e(ual to ero.
3.
"he pay%ac/ period is the len$th o# time it ta/es #or an investment to recoup its o&n initial cost out o# the cash receipts it $enerates.
!4.
Pro-ects &ith shorter pay%ac/ periods are al&ays more pro#ita%le than pro-ects &ith lon$er pay%ac/ periods.
!!.
"he pay%ac/ method o# ma/in$ capital %ud$etin$ decisions $ives #ull consideration to the time value o# money.
!).
I# ne& e(uipment is replacin$ old e(uipment, any salva$e received #rom sale o# the old e(uipment should not %e considered in computin$ the pay%ac/ period o# the ne& e(uipment.
!*.
5ne stren$th o# the simple rate o# return method is that it ta/es in to account the time value o# money in computin$ the return on an investment pro-ect.
!+.
"he pre#erence rule #or ran/in$ pro-ects %y the pro#ita%ility inde' is: the hi$her the pro#ita%ility inde', the more desira%le the pro-ect.
!
!0.
!1.
6I$nore income ta'es in this pro%lem.7 hite Company8s re(uired rate o# return on capital %ud$etin$ pro-ects is !)9. "he company is is considerin$ an investment opportunity &hich &ould &ould yield a cash #lo& o# !4,444 in #ive years. hat is the most that the company should %e &illin$ to invest in this pro-ect; a. *0,44. %. ),11+. c. !1,0*1. d. ,014. 6I$nore income ta'es in this pro%lem.7 In order to receive !),444 at the end o# three years and !4,444 at the end o# #ive years, ho& much must %e invested no& i# you can earn !+9 rate o# return; a. !),312. %. 2,!44. c. !*,)34. d. *),4+. 6I$nore income ta'es in this pro%lem.7 Sue
!2.
Annual cash in#lo&s ........ ,444 Internal rate o# return ... !09 >e(uired rate o# return ... !49 "he li#e o# the e(uipment is appro'imately: a. 0 years. %. +.* years. c. 2 years. d. it is impossi%le to determine #rom the data $iven.
!3. !3.
6I$nore income ta'es 'es in this pro% ro%lem.7 ?illtop Company pany invested !44 !44,444 in a t&o@year pro-e o-ect. "he cash #lo& &as +4,444 #or the #irst year. Assumin$ that the internal rate o# return &as e'actly !)9, &hat &as the cash #lo& #or the second year o# the pro-ect;
a. !,)+1.
)4.
%. 04,444.
c. 0+,)2+.
d. 24,0).
6I$nore income ta'es in this pro%lem.7 Joe
)!.
Salva$e value ................. @4@ Internal rate o# return ....... )49 iscount rate ................. !09 "he initial cost o# the e(uipment &as: a. *44,!44. %. !24,)4 c. !34,044.
d. Cannot %e determined #rom the in#ormation $iven.
6I$nore income ta'es in this pro%lem.7 "he #ollo&in$ data pertain to an investment in e(uipment:
)).
Investment in the pro-ect .......... !4,444 Net annual cash in#lo&s ............ ),+44 or/in$ capital re(uired ........... ,444 Salva$e value o# the e(uipment ..... !,444 Li#e o# the pro-ect ................ 2 years At the completion o# the pro-ect, the &or/in$ capital &ill %e released #or use else&here. Compute the net present value o# the pro-ect, usin$ a discount r ate o# !49: a. 040. %. 2,)1!. c. 6!,1)37. d. !,1)3.
)*.
6I$nore income ta'es in this pro%lem.7 A piece o# e(uipment has a cost o# )4,444. "he e(uipment &ill provide cost savin$s o# *,44 each year #or ten years, a#ter &hich time it &ill have a salva$e value o# ),44. I# the company8s discount rate is !)9, the e(uipment8s net present value is: a. 24. %. 6))7. c. !1,44. d. ),)1.
)+.
6I$nore income ta'es in this pro%lem.7 Par/s Company is considerin$ an investment proposal in &hich a &or/in$ capital investment o# !4,444 &ould %e re(uired. "he investment &ould provide cash in#lo&s o# ),444 per year #or si' years. "he &or/in$ capital &ould %e released #or use else&here &hen the pro-ect is completed. I# the company8s discount rate is !49, the investment8s net present value is:. a. !,)34. %. 6!,)347. c. ),444. d. +,*4.
).
6I$nore income ta'es in this pro%lem.7 ?orn Corporation is considerin$ investin$ in a #our@year pro-ect. Cash in#lo&s #rom the pro-ect are e'pected to %e as #ollo&s: Bear !, ),444D Bear ), ),)44D Bear *, ),+44D Bear +, ),044. I# usin$ a discount rate o# 29, the pro-ect has a positive net present value o# 44, &hat &as the amount o# the ori$inal investment; a. !,+!!. %. ),+!!. c. 1,4+. d. 2,4+.
)0.
6I$nore income ta'es in this pro%lem.7 Strat#ord Company purchased a machine &ith an estimated use#ul li#e o# seven years. "he machine &ill $enerate cash in#lo&s o# 34,444 each year over the ne't seven years. I# the machine has no salva$e value at the end o# seven years, and assumin$ the company8s discount rate is !49, &hat is the purchase price o# the machine i# the net present value o# the investment is !14,444; a. ))!,34. %. !14,444. c. )02,!)4. d. +*2,!)4.
)1.
6I$nore income ta'es in this pro%lem.7 "he #ollo&in$ data pertain to an investment proposal: Present investment re(uired ........ )0,44
Annual cost savin$s ................ ,444 Pro-ected li#e o# the investment ... !4 years Pro-ected salva$e value ............ @4@ "he internal rate o# return, interpolated to the nearest tenth o# a percent, &ould %e: a. !!.09. %. !).29. c. !*.09. d. !).+9. 6I$nore income ta'es in this pro%lem.7 "he #ollo&in$ data are availa%le on a proposed investment pro-ect:
)2.
Initial investment ......... !+),44 Annual cash in#lo&s ........ *4,444 Li#e o# the investment ..... 2 years >e(uired rate o# return .... !49 "he internal rate o# return, interpolated to the nearest tenth o# a percent, &ould %e: a. !*.*9. %. !).!9. c. !.*9. d. !).19. 6I$nore income ta'es in this pro%lem.7 Jarvey Company is studyin$ a pro-ect that &ould have a ten@ year li#e and &ould re(uire a +4,444 investment in e(uipment that has no salva$e value. "he pro-ect &ould provide net income each year as #ollo&s #or the li#e o# the pro-ect: Sales ............................ 44,444 Less cash varia%le e'penses ...... )44,444
)3.
Contri%ution mar$in .............. *44,444 Less #i'ed e'penses:
*4.
*!.
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6I$nore income ta'es in this pro%lem.7 =uy@>ite Pharmacy has purchased a small auto #or deliverin$ prescriptions. "he auto &as purchased #or 3,444 and &ill have a 0@year use#ul li#e and a *,444 salva$e value. eliverin$ prescriptions 6&hich the pharmacy has never done %e#ore7 should increase $ross revenues %y at least ,444 per year. "he cost o# these prescriptions to the pharmacy &ill %e a%out ),444 per year. "he pharmacy depreciates all assets usin$ the strai$ht@line method. "he pay%ac/ period #or the auto is: a. *.4 years. %. !.2 years. c. ).4 years. d. !.) years. 6I$nore income ta'es in this pro%lem.7 A company &ith 244,444 in operatin$ assets is considerin$ the purchase o# a machine that costs 1,444 and &hich is e'pected to reduce operatin$ costs %y )4,444 each year. "he pay%ac/ period #or this machine in years is closest to: a. 4.)1 years. %. !4.1 years. c. *.1 years. d. +4 years. 6I$nore income ta'es in this pro%lem.7 "he Jason Company is considerin$ the purchase o# a machine that &ill increase revenues %y *),444 each year. Cash out#lo&s #or operatin$ this machine &ill %e 0,444 each year. "he cost o# the machine is 0,444. It is e'pected to have a use#ul li#e o# #ive years &ith no salva$e value.
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Investment re(uired ... 24,444 !44,444 04,444 1,444 Present value o# #uture net cash #lo&s ...... 30,444 !4,444 2+,444 !)4,444 >an/ the proposals in terms o# pre#erence usin$ the pro#ita%ility inde': a. , =, C, A. %. =, , C, A. c. =, , A, C.
d. A, C, =, .
