Chapter 14—Capital Investment Decisions
TRUE/FALSE
1. Proj Projec ects ts that that do not affect affect the cash flows of other projects are called mutually exclusive projects. 2. The process of planning, planning, setting goals and priorities, arranging arranging financing, financing, and using using certain criteria to select long-term assets is called capital investment decisions. 3. Projects that that if accepted preclude preclude the the acceptance of all other competing competing projects projects are called mutually mutually exclusive projects. . !n capital investment decision decision ma"ing, ma"ing, it is usually assumed assumed that managers managers should should select projects projects that that attempt to maximi#e the wealth of the owners of the firm. $. Taxes are importan importantt considerat consideration ion in forecas forecasting ting cash cash flows. flows. %. &efore-tax &efore-tax cash flows flows must must 'e forecasted forecasted and used in capital capital investme investment nt decision decision ma"ing. ma"ing. (. The two major categories categories of capital investment investment decision models are independent and mutually mutually exclusive. ). !n order order to use the the pay'ac" pay'ac" period period model model,, the proposed proposed inves investment tment must have have even cash inflows. *. !f cash flows flows are uneven, uneven, the pay'ac" pay'ac" period assumes that that the inflows inflows during the last fraction of a year occur evenly. 1+. ne way to to use the the pay'ac" period period is to set a maximum pay'ac" period for all projects projects and to reject any project that exceeds this level. 11. 11. ometimes ometimes firms firms reuire reuire ris"ier ris"ier projects projects to have longer longer pay'ac" pay'ac" periods. periods. 12. /ompanies considering considering projects projects with with shorter shorter lives are interested interested in longer pay'ac" pay'ac" periods. periods. 13. 0 disadvantage of the pay'ac" period is that it ignores a projects total profita'ility. profita'ility. 1. 0 disadvantage of the pay'ac" period is that it ignores the time value of money. 1$. nly accoun accounting ting rate rate of return return ignore ignoress the time time value value of money money. 1%. The pay'ac" pay'ac" period period considers considers the profita' profita'ility ility of a project project over its entire entire life life span. 1(. Two discounting discounting models for capital investment decision decision ma"ing ma"ing are net present value and internal rate of return.
1). The difference difference 'etween the present value of the cash inflows and outflows associated associated with a project is is the internal rate of return model. 1*. The minimum minimum accepta' accepta'le le rate of return return for for a project project is the reuired reuired rate rate of return. return. 2+. !n practice, practice, managers managers often choose choose a discount discount rate rate that is higher higher than the cost cost of capital. capital. 21. uppose that the actual cost of capital is 1+ percent, 'ut the firm chooses a discount discount rate of 1) percent. anagers of that company will 'e more li"ely to choose relatively short term investments. 22. !f the net net present value of an investment is is #ero, the the investment earns less than the minimum reuired reuired rate of return. 23. The interest rate that sets the present value value of a projects cash cash inflows eual to the present value of the projects cost is called called the internal rate of return. return. 2. The internal internal rate of return return is the least least widely used used of the capital capital investment investment techni techniues ues.. 2$. ne draw'ac" to the internal rate of return model model is that that cash inflows must must occur evenly evenly over the life of the investment. 2%. The internal internal rate of return is the most widely widely used of the capital investment techniues. 2(. 0 postaudit evaluates evaluates the overall outcome outcome of the investment and and proposes corrective action action if needed. needed. 2). !n general, it is 'est 'est if postaudits postaudits are are done 'y company management, management, since they they understand understand the actual actual operating conditions. 2*. 0 disadvantage of postaudits is that they are costly. 3+. 0 postaud postaudit it is an analysis analysis of of a capital capital project project 'efore 'efore it is implement implemented. ed. 31. 0 "ey "ey element element in the capital capital investme investment nt process process is called called a postaudit postaudit.. 32. /ompanies /ompanies that that perform perform postaudits postaudits of capital capital projects projects experien experience ce a num'er of 'enefits. 'enefits. 33. Postaudit Postauditss ensure that resource resourcess are used wisely 'y evaluati evaluating ng profita'il profita'ility ity.. 3. &ecause of the postaudit, postaudit, managers are are more li"ely li"ely to ma"e capital investment investment decisions decisions in the the 'est interests of the firm. 3$. Postaudit Postauditss supply feed'ac" feed'ac" to managers managers that should should help improve improve future decisio decision n ma"ing. 3%. ess o'jective o'jective results are o'taina'le o'taina'le if an independent party performs the postaudit postaudit of a capital investment. 3(. The internal audit staff staff is usually usually the 'est choice for performing a postaudit postaudit of a capital investment. investment.
1). The difference difference 'etween the present value of the cash inflows and outflows associated associated with a project is is the internal rate of return model. 1*. The minimum minimum accepta' accepta'le le rate of return return for for a project project is the reuired reuired rate rate of return. return. 2+. !n practice, practice, managers managers often choose choose a discount discount rate rate that is higher higher than the cost cost of capital. capital. 21. uppose that the actual cost of capital is 1+ percent, 'ut the firm chooses a discount discount rate of 1) percent. anagers of that company will 'e more li"ely to choose relatively short term investments. 22. !f the net net present value of an investment is is #ero, the the investment earns less than the minimum reuired reuired rate of return. 23. The interest rate that sets the present value value of a projects cash cash inflows eual to the present value of the projects cost is called called the internal rate of return. return. 2. The internal internal rate of return return is the least least widely used used of the capital capital investment investment techni techniues ues.. 2$. ne draw'ac" to the internal rate of return model model is that that cash inflows must must occur evenly evenly over the life of the investment. 2%. The internal internal rate of return is the most widely widely used of the capital investment techniues. 2(. 0 postaudit evaluates evaluates the overall outcome outcome of the investment and and proposes corrective action action if needed. needed. 2). !n general, it is 'est 'est if postaudits postaudits are are done 'y company management, management, since they they understand understand the actual actual operating conditions. 2*. 0 disadvantage of postaudits is that they are costly. 3+. 0 postaud postaudit it is an analysis analysis of of a capital capital project project 'efore 'efore it is implement implemented. ed. 31. 0 "ey "ey element element in the capital capital investme investment nt process process is called called a postaudit postaudit.. 32. /ompanies /ompanies that that perform perform postaudits postaudits of capital capital projects projects experien experience ce a num'er of 'enefits. 'enefits. 33. Postaudit Postauditss ensure that resource resourcess are used wisely 'y evaluati evaluating ng profita'il profita'ility ity.. 3. &ecause of the postaudit, postaudit, managers are are more li"ely li"ely to ma"e capital investment investment decisions decisions in the the 'est interests of the firm. 3$. Postaudit Postauditss supply feed'ac" feed'ac" to managers managers that should should help improve improve future decisio decision n ma"ing. 3%. ess o'jective o'jective results are o'taina'le o'taina'le if an independent party performs the postaudit postaudit of a capital investment. 3(. The internal audit staff staff is usually usually the 'est choice for performing a postaudit postaudit of a capital investment. investment.
3). 0n o'vious pro'lem with postaudits is that the assumptions assumptions driving driving the original original analysis analysis may often often 'e invalidated 'y changes in the actual operating environment. 3*. 4et present present value analysis and internal internal rate of return analysis can sometimes sometimes produce erroneous choices 'ecause they ignore the time value of money. money. +. 5or independent independent projects, net present value analysis analysis and internal rate of return analysis analysis yield yield the same same decision. 1. 1. The inte interna rnall rate rate of return return model model does does not consistently consistently result in choices that maximi#e firm wealth.
MATCI!"
Match each item with the the correct statement statement below. below.
a. '. c. d. e. f. g. h.
Pay' Pay'ac ac" " perio eriod d 0ccounting rate of return return 4et 4et pre prese sen nt val value ue !nte !ntern rnal al rate rate of retu return rn 6iscount ra rate 0nnuity Post-audit /omp /ompou ound ndin ing g of of inte intere rest st
1. can 'e 'e used used as a rough measure measure of ris" ris" and and liuid liuidity ity 2. can 'e used used to determine determine whether or not an an investment will negatively negatively affect "ey financial financial ratios 3. interest interest rate rate used used to to discoun discountt future future cash cash flows flows . assumes assumes that that all future future cash cash inflows inflows earn earn the minimu minimum m rate of return return $. assumes assumes that all all future future cash inflows inflows earn the the same rate rate of return as as the project project itself itself %. a serie seriess of eua euall futur futuree cash cash flows flows (. comparison comparison of actual actual 'enefits 'enefits and costs costs of a project project with the expected expected 'enefit 'enefitss and costs ). is the 'est method method discoun discounting ting model model to use for mutually mutually exclusi exclusive ve competing competing projects projects *. earnin earning g of intere interest st on on inter interest est C#M$LETI#!
1. 77777777777777777777777 77777777777777777777777 are concerned with the process of of planning, planning, setting goals and priorities, priorities, arranging financing, and using certain criteria to select long-term assets. 2. The process of ma"ing capital investment investment decisions decisions often is referred to as 7777777777777777. 7777777777777777. 3. The two types of capital 'udgeting 'udgeting projects are 7777777777777777 7777777777777777 and 777777777777777. 777777777777777. . 7777777777777777777777 7777777777777777777777 are projects that, if accepted accepted or rejected, rejected, do not affect the cash flows of other projects.
$. 777777777777777777777 explicitly consider the time value of money. %. 77777777777777777777777 ignore the time value of money. (. The 77777777777777 is the time reuired for a firm to recover its original investment. ). The 7777777777777777777777777 measures the return on a project in terms of income. *. 77777777777777777777777 are the future cash flows expressed in terms of their present value. 1+. The difference 'etween the present value of the cash inflows and the outflows associated with a project is "nown as the 7777777777777777777. 11. The 7777777777777777777 is the minimum accepta'le rate of return. 12. The 77777777777777777777777 is defined as the interest rate that sets the present value of a project8s cash inflows eual to the present value of the project8s cost. 13. !f the internal rate of return 9!::; is greater than the reuired rate, the project is deemed 77777777777. 1. !f the internal rate of return 9!::; is less than the reuired rate of return, the project is 7777777777. 1$. 0 "ey element in the capital investment process is a follow-up analysis of a capital project once it is implemented< this analysis is a called a 7777777777777. 1%. The major disadvantage of a postaudit is that it is 777777777777. 1(. =hen choosing among competing projects, the 7777777777777777777 model correctly identifies the 'est investment alternative. 1). =hen choosing among competing alternatives the 7777777777777777 model may choose an inferior project. 1*. The amount that must 'e invested now to produce a future value is "nown as the 777777777777 of the future amount. 2+. The value of an investment at the end of its life is called its 7777777777777777.
MULTI$LE C#ICE
1.
=hich of the following is true of capital investment decision ma"ing>
a. !t is used only for independent projects. '. !t is used only for mutually exclusive projects. c. !t reuires that funding for a project must come from sources with the same opportunity
cost of funds. d. !t is used to determine whether or not a firm should accept a special order. e% 4one of these. 2. a. '. c. d. e% 3. a. '. c. d. e%
!n general terms, a sound capital investment will earn 'ac" its original capital outlay. a return greater than existing capital investments. 'ac" its original capital outlay and provide a reasona'le return on the original investment. 'ac" its original capital outlay 'y the midpoint of its useful life. none of these. To ma"e a capital investment decision, a manager must estimate the uantity of cash flows. timing of cash flows. ris" of the investment. impact of the investment on the firms profita'ility. all of these.
. !f the cash flows of a project are received evenly over the life of the project, the formula for the calculating the pay'ac" period is a. '. c. d. e.
$. a. '. c. d. e%
%. a. '. c. d. e.
(.
original investment?annual cash flow. original investment ´ annual cash flow. original investment @ annual cash flow. original investment - annual cash flow. 9original investment @ annual cash flow;?annual cash flow.
The pay'ac" period provides information to managers that can 'e used to help control the ris"s associated with the uncertainty of future cash flows. minimi#e the impact of an investment on a firms liuidity pro'lems. control the ris" of o'solescence. control the effect of the investment on performance measures. all of these.
=hich of the following is a draw'ac" of the pay'ac" period> !t ignores a projects total profita'ility. !t uses a set discount rate. !t considers total profita'ility, reuiring the forecasting of all future cash flows. !t uses 'efore-tax cash flows rather than after-tax cash flows. !t uses operating income rather than cash flows.
0 formula for the accounting rate of return is
a. average income?initial investment. '. initial investment?annual cash flow. c. annual cash flow?initial investment.
d. initial investment?average income. e. 9average income @ initial investment;?initial investment. ). anagers may use the accounting rate of return to evaluate potential investment projects 'ecause a. de't contracts reuire that a firm maintain certain ratios that are affected 'y income and long-term asset levels. '. it serves as a screening measure to insure that new investments do not affect "ey financial ratios. c. 'onuses to managers may 'e 'ased on accounting income and?or return on assets. d. it can 'e tied to the managers personal income. e% all of these.
*.
The time reuired for a firm to recover its original investment is the
a. '. c. d. e.
internal rate of return. net present value. life of the project. accounting rate of return. pay'ac" period.
1+. a. '. c. &% e%
=hen the ris" of o'solescence is high, managers will want a shorter pay'ac" period. a longer pay'ac" period. a pay'ac" period eual to the life of the investment. all of these. none of these.
11.
ne disadvantage of the pay'ac" period is that
a. it is sometimes used as a crude measure of ris". '. managers may choose investments with uic" pay'ac" periods to maximi#e short term criteria on which their own 'onuses, etc. may 'e 'ased. c. it cannot 'e used for investments with uneual cash inflows. d. it cannot 'e used if the entire cost of the investment does not occur immediately. e% all of these.
12. 0 division manager was considering a project that reuired a significant initial investment. !f accepted, the project could have a negative impact on certain financial ratios that the firm was reuired to maintain to satisfy de't contracts. To ensure that the ratios would not 'e adversely affected 'y the investment, the manager would use which of the following capital investment models> a. '. c. d. e%
Pay'ac" period 0ccounting rate of return 4et present value !nternal rate of return 4one of these
13. Areg oss has just invested B12+,+++ in a coffee shop. Ce expects to receive cash income of B1$,+++ a year. =hat is the pay'ac" period> a. '. c. d. e.
$ years (.( years .$ years %.$ years ) years
1. /arol Carrison is considering an investment in a retail shopping mall. The initial investment is B++,+++. he expects to receive cash income of B)+,+++ a year. =hat is the pay'ac" period> a. '. c. d. e.
year 3.$ years $ years 2.$ years % years
1$. Dlena =allace invested B1$+,+++ in a project that pays her an even amount per year for 1+ years. The pay'ac" period is % years. =hat are Dlenas yearly cash inflows from the project> a. '. c. d. e%
B1$+,+++ B1$,+++ B2$,+++ B*+,+++ cannot 'e determined from this information
1%. Tessa =ilson invested in a project with a pay'ac" period of % years. The project 'rings B1),+++ per year for a period of * years. =hat was the initial investment> a. '. c. d. e%
B1+),+++ B1+(,$++ B1%2,+++ B2+,+++ cannot 'e determined from this information
1(. 4eil orrison has just invested B13+,+++ in a restaurant. Ce expects to receive income of B2,+++ a year, and to have the investment for ) years. =hat is the accounting rate of return> a. '. c. d. e.
$.%+E 1).%E 1.$2E 12.1E .$+E
1). 0n investment of B$,+++ provides an average net cash flows of B32+ with #ero salvage value. 6epreciation is B3$ per year. The accounting rate of return using the original investment is a. '. c. d. e.
.+E $.1E $.(E 3.2E 2.E
1*. &uster Dvans is considering investing B2+,+++ in a project with the following annual cash revenues and expensesF
Gear 1 Gear 2 Gear 3 Gear Gear $
/ash :evenues B ),+++ B12,+++ B1$,+++ B2+,+++ B2+,+++
/ash Dxpenses B ),+++ B ),+++ B *,+++ B1+,+++ B1+,+++
6epreciation will 'e B,+++ per year. =hat is the accounting rate of return on the investment> a. '. c. d. e%
1$E 3$E (+E ($E none of these
1*. /oriander /ompany is considering a project with an initial investment of B2%,)++ in new euipment that will yield annual net cash flows of B)+,+++, and will 'e depreciated at B$3,3$+ per year over its eight year life. =hat is the accounting rate of return> a. '. c. d. e.
32+E 1).(E %.2E 31.2(E $+.+E
21. =hen comparing the pay'ac" method and the accounting rate of return methods, which of the following is true>
i ii iii
Profita'ility !gnored 'y 'oth methods !gnored 'y 'oth methods
/onsidered 'y accounting method, not 'y pay'ac" iv /onsidered 'y accounting method, not 'y
Time Halue of oney !gnored 'y 'oth methods Ised in accounting rate of return< ignored 'y pay'ac" method !gnored 'y 'oth methods /onsidered 'y 'oth methods
pay'ac" a% '% c% &%
i ii iii iv
22. a"land hop is considering the purchase of a used printing press costing B*,%++. The printing press would generate a net cash inflow of B,+++ per year for three years. 0t the end of three years, the press would have no salvage value. The companys cost of capital is 1+ percent. The company uses straightline depreciation with no mid-year convention. =hat is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid> a. '. c. d.
1.%(E ).33E ($.++E 1+.++E
40::&DA!4F 5igure 1-1 Fi()re 14*1% 0 company is considering two projects.
!nitial investment /ash inflow Gear 1 /ash inflow Gear 2 /ash inflow Gear 3 /ash inflow Gear /ash inflow Gear $
Project ! Project !! B12+,+++ B12+,+++ B+,+++ B2+,+++ B+,+++ B2+,+++ B+,+++ B32,+++ B+,+++ B),+++ B+,+++ B$+,+++
40::D46 23. :efer to 5igure 1-1. =hat is the pay'ac" period for Project !> a. '. c. d. e.
1 year 3 years 2.$ years 3.$ years $ years
2. :efer to 5igure 1-1. =hat is the pay'ac" period for Project !!> a. '. c. d. e.
1 year 2 years 3.$ years years $ years
40::&DA!4F 5igure 1-2 Fi()re 14*+% 0 company is considering two projects.
!nitial investment /ash inflow Gear 1 /ash inflow Gear 2 /ash inflow Gear 3 /ash inflow Gear /ash inflow Gear $
Project 0 Project & B2++,+++ B2++,+++ B$+,+++ B*+,+++ B$+,+++ B*+,+++ B$+,+++ B+,+++ B$+,+++ B3+,+++ B$+,+++ B3+,+++
40::D46 2$. :efer to 5igure 1-2. =hat is the pay'ac" period for Project 0> a. '. c. d. e.
.$ year 2.$ years $ years 3.$ years years
2%. :efer to 5igure 1-2. =hat is the pay'ac" period for Project &> a. '. c. d. e.
2 years .$ years 3.$ years 2.$ years 3 years
40::&DA!4F 5igure 1-3 Fi()re 14*,% 6avis /ompany is considering the purchase of a new piece of euipment that will cost B1,%++,+++ and have a life of five years with no expected salvage value. The expected cash flows associated with the project are as followsF
Gear 1 2 3 $
/ash :evenues B1,$++,+++ B1,$++,+++ B1,$++,+++ B1,$++,+++ B1,$++,+++
/ash Dxpenses J 6epreciation B*++,+++ B*++,+++ B*++,+++ B*++,+++ B*++,+++
40::D46 2(. :efer to 5igure 1-3. =hat is the average annual income for this project>
a. '. c. d. e.
B*++,+++ B1,$++,+++ B%++,+++ B(++,+++ B3++,+++
2). :efer to 5igure 1-3. =hat is the accounting rate of return for the project> a. '. c. d. e.
)3.33E 31.2$E (.++E 3(.$+E 3.($E
40::&DA!4F 5igure 1- Fi()re 14*4% ony avery is considering investing B$,+++ in a project with the following cash revenues and expensesF
Gear Gear 1 Gear 2 Gear 3 Gear Gear $ Gear % Gear ( Gear )
:evenues B1),+++ B22,+++ B22,+++ B2,+++ B2%,+++ B2),+++ B2),+++ B2),+++
/ash Dxpenses J 6epreciation B),+++ B1+,+++ B*,+++ B*,+++ B*,+++ B12,+++ B11,+++ B12,+++
40::D46 2*. :efer to 5igure 1-. =hat is the average income for the project> a. '. c. d. e.
B1*,2$+ B3+,+++ B2+,+++ B1,$++ B1),+++
3+. :efer to 5igure 1-. =hat is the accounting rate of return for the project> a. '. c. d. e.
32E 1E 2+E 2%E 3$E
31. :efer to 5igure 1-. 0ssuming straight-line depreciation over eight years, what is the pay'ac" period for the project> a. '. c. d. e.
'etween and $ years 'etween 2 and 3 years 'etween $ and % years 'etween ( and ) years 'etween % and ( years
40::&DA!4F 5igure 1-$ Fi()re 14*-% ara Turner is considering investing B%+,+++ in a project with the following cash revenues and expensesF
Gear Gear 1 Gear 2 Gear 3 Gear Gear $
:evenues B1%,+++ B1),+++ B1(,+++ B2%,+++ B2%,+++
/ash Dxpenses J 6epreciation B1%,+++ B1%,+++ B1(,+++ B1,+++ B1,+++
40::D46 32. :efer to 5igure 1-$. 0ssuming straight-line depreciation over five years, what is the pay'ac" period for this investment> a. '. c. d. e.
'etween 3 and years 'etween 2 and 3 years 'etween 3 and years 'etween and $ years 'etween 1 and 2 years
33. :efer to 5igure 1-$. =hat is the accounting rate of return for the project> a. '. c. d. e.
).%(E 1$.%+E (.$+E 3.1+E /annot 'e calculated with this information
40::&DA!4F 5igure 1-( Fi()re 14*.% sler /ompany is considering an investment with the following dataF !nitial cost 0nnual net cash inflows Dxpected life alvage value
B2++,+++ B 2$,+++ 1+ years none
6epreciation will 'e ta"en on a straight-line 'asis over the expected life of the investment. 40::D46 3. :efer to 5igure 1-(. =hat is the accounting rate of return for the investment> a. '. c. d. e.
1+E 12.$E 2$E 2.$E 2+E
3$. :efer to 5igure 1-(. The company reuires a minimum rate of return of E. =hat is the net present value of the investment> Period E a. '. c. d.
1 +.*%2
2 1.))%
3 2.(($
3.%3+
$ .$2
% $.22
( %.++2
) %.((3
* (.3$
1+ ).111
B2,(($ B2+2,(($ B11),1(+ 9B)1,)3+;
3%. =hich of the following provides an a'solute dollar measure> a. '. c. d. e%
!nternal rate of return 4et present value Pay'ac" period 0ccounting rate of return 4one of these
3(. The reuired rate of return used in the net present value model can also 'e called the a. '. c. d. e%
hurdle rate. minimum accepta'le rate of return. cost of capital. discount rate. all of these.
3). !f net present value is negative, it means that the return on the investment is a. '. c. d. e.
less than the discount rate. more than the discount rate. eual to the discount rate. accepta'le. meaningless since the return on the investment 'ears no relationship to the discount rate.
3*. 0 division manager is considering a project that reuires a significant initial investment. The companys top management will not approve any project that does not return at least 12E. The manager will most li"ely use which of the following capital investment models>
a. '. c. d. e%
pay'ac" period accounting rate of return net present value internal rate of return none of these
+. 0 firm is evaluating a project that has a net present value of B+ when a discount rate of ) percent is used. 0 discount rate of % percent will result in a a. '. c. &%
negative net present value. positive net present value. net present value of B+. The uestion cannot 'e answered 'ased upon the information provided.
1. Kac"son /ompany invests in a new piece of euipment costing B+,+++. The euipment is expected to yield the following amounts per year for the euipments four-year useful lifeF /ash revenues /ash expenses 6epreciation expenses 9straight-line; !ncome provided from euipment /ost of capital
B %+,+++ 932,+++; 91+,+++; B 1),+++ 1E
=hat is the net present value of this investment in euipment> a. '. c. d.
B)1,$*2 B1,$*2 B9,)+; B$2,$2
2. The following information pertains to an investmentF !nvestment 0nnual revenues 0nnual varia'le costs 0nnual fixed out-of-poc"et costs 6iscount rate Dxpected life of project The present value of the annual cash flow 9rounded; is a. '. c. d.
B13%,)22. B1$2,$3). B2+,)). B21),$*2.
B1+,+++ B *%,+++ B 32,+++ B 2+,+++ 12E ) years
3. 0 firm is considering a project with an annual cash flow of B2++,+++. The project would have a seven year life, and the company uses a discount rate of 1+ percent. =hat is the maximum amount the company could invest in the project and have the project still 'e accepta'le> a. '. c. d.
B(1),2++ B1,++,+++ B*(3,%++ B2++,+++
. 0 firm is considering a project with an annual cash flow of B)+,+++. The project would have a 1+-year life, and the company uses a discount rate of ) percent. =hat is the maximum amount the company could invest in the project and have the project still 'e accepta'le 9rounded;> a. '. c. d.
B)++,+++ B$3%,)++ B+%,2+ B(2(,2+)
40::&DA!4F 5igure 1-% Fi()re 14*% $resent val)e o0 1
Periods 1 2 3 $ % ( ) * 1+
4% +.*%2 +.*2$ +.))* +.)$$ +.)22 +.(*+ +.(%+ +.(31 +.(+3 +.%(%
6% +.*3 +.)*+ +.)+ +.(*2 +.(( +.(+$ +.%%$ +.%2( +.$*2 +.$$)
8% +.*2% +.)$( +.(* +.(3$ +.%)1 +.%3+ +.$)3 +.$+ +.$++ +.%3
10% +.*+* +.)2% +.($1 +.%)3 +.%21 +.$% +.$13 +.%( +.2 +.3)%
12% +.)*3 +.(*( +.(12 +.%3% +.$%( +.$+( +.$2 +.+ +.3%1 +.322
14% +.)(( +.(%* +.%($ +.$*2 +.$1* +.$% +.++ +.3$1 +.3+) +.2(+
8% +.*2% 1.()3 2.$(( 3.312 3.**3 .%23 $.2+% $.(( %.2( %.(1+
10% +.*+* 1.(3% 2.)( 3.1(+ 3.(*1 .3$$ .)%) $.33$ $.($* %.1$
12% +.)*3 1.%*+ 2.+2 3.+3( 3.%+$ .111 .$% .*%) $.32) $.%$+
14% +.)(( 1.%( 2.322 2.*1 3.33 3.))* .2)) .%3* .*% $.21%
$resent val)e o0 an Ann)it2 o0 1
Periods 1 2 3 $ % ( ) * 1+
40::D46
4% +.*%2 1.))% 2.(($ 3.%3+ .$2 $.22 %.++2 %.(33 (.3$ ).111
6% +.*3 1.)33 2.%(3 3.%$ .212 .*1( $.$)2 %.21+ %.)+2 (.3%+
$. :efer to 5igure 1-%. organ /linical Practice is considering an investment in new imaging euipment that will cost B++,+++. The euipment is expected to yield cash inflows of B)+,+++ per year for a six year period. organ set a reuired rate of return at 1+ percent. =hat is the net present value of the investment> 9 !ote3 there may 'e a rounding error depending on the ta'le you use to compute your answer. /hoose the answer closest to the one you calculate.; a. '. c. d. e.
B$1,%++ 9B$1,%++; B3),++ 9B3),%++; B$1,%++
%. :efer to 5igure 1-%. organ /linical Practice is considering an investment in new imaging euipment that will cost B++,+++. The euipment is expected to yield cash inflows of B)+,+++ per year for a six year period. 0t the end of the sixth year, the firm expects to recover B1$+,+++ from the sale of the euipment. organ set a reuired rate of return at 1+ percent. =hat is the net present value of the investment> 9 !ote3 there may 'e a rounding error depending on the ta'le you use to compute your answer. /hoose the answer closest to the one you calculate.; a. '. c. d. e.
9B33,+++; B$,2++ B33,+++ B33,+++ 9B1((,2)+;
(. :efer to 5igure 1-%. :oman Lno#e is considering two investments. Dach will cost B2+,+++ initially. Project 1 will return annual cash flows of B1+,+++ in each of three years. Project 2 will return B$,+++ in year 1, B1+,+++ in year 2, and B1$,+++ in year 3. :oman reuires a minimum rate of return of 1+ percent. =hat is the net present value of Project 1> 9 !ote3 there may 'e a rounding error depending on the ta'le you use to compute your answer. /hoose the answer closest to the one you calculate.; a. '. c. d. e.
B2+,+++ B2$,%(+ B,)%+ B22,$3+ B2,$3+
). :efer to 5igure 1-%. :oman Lno#e is considering two investments. Dach will cost B2+,+++ initially. Project 1 will return annual cash flows of B1+,+++ in each of three years. Project 2 will return B$,+++ in year 1, B1+,+++ in year 2, and B1$,+++ in year 3. :oman reuires a minimum rate of return of 1+ percent. =hat is the net present value of Project 2> a. '. c. d. e.
B$,%(+ B2+,+++ B2,$3+ B2,+(+ B,+(+
*. :efer to 5igure 1-%. Kan :ig'y is considering an investment that will cost B2+,+++ initially, and return annual cash flows of B1+,+++ in each of three years. Kan reuires a minimum rate of return of ) percent. =hat is the present value of the cash inflows> 9 !ote3 there may 'e a rounding error depending on the ta'le you use to compute your answer. /hoose the answer closest to the one you calculate.; a. '. c. d. e.
B2$,((+ B2+,+++ B$,((+ B$,((+ B1+,+++
$+. The interest rate that sets the present value of a projects cash inflows eual to the present value of the projects cost is called the 7777. a. '. c. d. e.
present value discount rate company cost of capital pay'ac" period internal rate of return
$1. =hich of the following is true regarding the internal rate of return for a project> a. !f the internal rate of return is less than the reuired rate of return, the project will 'e rejected. '. !f the internal rate of return is eual to the reuired rate of return, the net present value of the project is #ero. c. !f the internal rate of return is more than the reuired rate of return, the project will 'e accepted. d. anagers may 'elieve 9in most cases, incorrectly; that the internal rate of return is the compounded rate of return earned 'y the initial investment. e% all of these $2. Dli#a'eth yers invested in a project that reuired an initial amount of B1,$%+, and returned one cash inflow of B12,+++ at the end of the 1)th year. 0 partial ta'le of the present value of an annuity of B1 in arrears is as followsF Gear 1)
2E +.(++
E +.*
%E +.3$+
)E +.2$+
1+E +.1)+
12E +.13+
1E +.+*$
1%E +.+%*
=hat is the internal rate of return for this investment> a. '. c. d. e.
)E 1+E 12E 1E 1%E
$3. Kerry Call invested in a project that reuired an initial amount of B$2,1%+, and returned cash inflows of B1+,+++ per year for 1+ years. 0 partial ta'le of the present value of an annuity of B1 in arrears is as followsF
Gear 1+
2E (.*)3
E ).111
%E (.3%+
)E %.(1+
1+E %.1$
12E $.%$+
1E $.21%
1%E .)33
=hat is the internal rate of return for this investment> a. '. c. d. e.
)E 1+E 12E 1E 1%E
$. 0matra !nc., has the opportunity to invest in new euipment that will cost B113,+++. The net cash inflows for ten years eual B2+,+++ per year. =hat is the internal rate of return for the investment> 0 partial ta'le of the present value of an annuity of B1 in arrears is as followsF Gear 1+ a. '. c. d. e.
2E (.*)3
E ).111
%E (.3%+
)E %.(1+
1+E %.1$
12E $.%$+
1E $.21%
1%E .)33
)E 1+E 12E 1E 1%E
$$. horing /ompany is considering a project with an internal rate of return of 1.$ percent. horing reuires a minimum rate of return of 12 percent. The net present value of the project is a. '. c. d. e%
negative. infinite. eual to #ero. positive. none of these.
$%. The internal rate of return is defined as a. a 'lend of the costs of capital from all sources. '. the minimal accepta'le interest rate on investments. c. the difference 'etween the present value of the cash inflows and outflows associated with a project. d. the interest rate that sets the present value of a projects cash inflows eual to the present value of a projects cost.
$(. Kones /ompany is considering the purchase of a new machine for B$(,+++. The machine would generate an annual cash flow of B1(,11 for five years. 0t the end of five years, the machine would have no salvage value. The companys cost of capital is 12 percent. The company uses straight-line depreciation.
=hat is the internal rate of return for the machine rounded to the nearest percent> a. '. c. d.
12E 1)E 1E 1%E
$). 0 firm is considering a project reuiring an investment of B2(,+++. The project would generate an annual cash flow of B%,2*% for the next seven years. The company uses the straight-line method of depreciation. The approximate internal rate of return for the project is a. '. c. d.
%E. )E. 12E. 1E.
$*. /ooper !ndustries is considering a project that would reuire an initial investment of B1+1,+++. The project would result in cost savings of B%2,+++ in year 1 and B(+,+++ in year two. The internal rate of return is a. '. c. &%
'etween 1%E and 1(E. 'etween 1)E and 2+E. under 1$E. none of these.
40::&DA!4F 5igure 1-) Fi()re 14*% $resent val)e o0 an Ann)it2 o0 1 in Arrears
Periods 1 2 3 $ % ( ) * 1+
4% +.*%2 1.))% 2.(($ 3.%3+ .$2 $.22 %.++2 %.(33 (.3$ ).111
6% +.*3 1.)33 2.%(3 3.%$ .212 .*1( $.$)2 %.21+ %.)+2 (.3%+
8% +.*2% 1.()3 2.$(( 3.312 3.**3 .%23 $.2+% $.(( %.2( %.(1+
10% +.*+* 1.(3% 2.)( 3.1(+ 3.(*1 .3$$ .)%) $.33$ $.($* %.1$
12% +.)*3 1.%*+ 2.+2 3.+3( 3.%+$ .111 .$% .*%) $.32) $.%$+
14% +.)(( 1.%( 2.322 2.*1 .33 3.))* .2)) .%3* .*% $.21%
40::D46 %+. :efer to 5igure 1-). ucas /ompany is considering a project with an initial investment of B$3+,2$+ in new euipment that will yield annual net cash flows of B*$,+++, and will 'e depreciated at B($,($+ per year over its seven year life. =hat is the internal rate of return> a.
)E
'. c. d. e.
%E 12E 1+E 1E
%1. :efer to 5igure 1-). awyer /ompany is considering a project with an initial investment of B22%,+++ that will yield annual net cash flows of B+,+++, and will 'e depreciated at B22,%++ per year over its ten year life. =hat is the internal rate of return> a. '. c. d. e.
%E )E 1+E 12E 1E
40::&DA!4F 5igure 1-* Fi()re 14*5% Lenner /ompany is considering two projects.
!nitial investment 0nnual cash flows ife of the project 6epreciation per year
Project 0 B)$,+++ B2+,%(% % years B1,1%(
Project & B2,+++ B%,+11 $ years B,)++
$resent val)e o0 an Ann)it2 o0 1 in Arrears
Periods 1 2 3 $ % ( ) * 1+
8% +.*2% 1.()3 2.$(( 3.312 3.**3 .%23 $.2+% $.(( %.2( %.(1+
10% +.*+* 1.(3% 2.)( 3.1(+ 3.(*1 .3$$ .)%) $.33$ $.($* %.1$
12% +.)*3 1.%*+ 2.+2 3.+3( 3.%+$ .111 .$% .*%) $.32) $.%$+
14% +.)(( 1.%( 2.322 2.*1 .33 3.))* .2)) .%3* .*% $.21%
40::D46 %2. :efer to 5igure 1-*. =hich of the two projects, 0 or &, is 'etter in terms of internal rate of return> a. '. c. d. e.
Project 0 with an !:: of 12E Project & with an !:: of 1E Project 0 with an !:: of 1+E Project & with an !:: of 1+E &oth projects have the same !::
%3. :efer to 5igure 1-*. uppose that Lenner /ompany reuires a minimum rate of return of ) percent. =hich project is 'etter in terms of net present value> a. '. c. d. e.
Project 0 with 4PH of B1+,$)$ Project & with 4PH of B(,($% Project 0 with 4PH of B,21+ Project & with 4PH of B1,212 &oth projects have the same 4PH
%. =hich of the following compares the actual 'enefits from an investment with the estimated 'enefits, and the actual operating costs of the investment with estimated operating costs> a. '. c. d. e.
internal rate of return discounted returns postaudit opportunity cost capital investment decision ma"ing
%$. =hich of the following is a disadvantage of postaudits> a. '. c. d.
They evaluate profita'ility rather than cash flows. They may point to the need for additional funding for the project. They tend to hold managers accounta'le for capital investment decision ma"ing. The assumptions driving the original analysis may 'e invalidated 'y changes in the actual operating environment. e% 0ll of these.
%%. =hich of the following is not a 'enefit of postaudits of capital investments> a. '. c. d. e%
/onsiders changes in the actual operating environment. Auides managers to ma"e capital investment in the 'est interests of the firm. Dnsures that resources are used wisely 'y evaluating profita'ility. upplies feed'ac" to managers that should help improve decision ma"ing. 0ll of these are 'enefits.
%(. 0 follow-up analysis of a capital investment after it is implemented is called a a. '. c. d.
capital investment review. profita'ility analysis. postaudit. peer review.
%). The 'est person?group in a firm to perform a postaudit of a capital investment is usually a. the manager of that investment. '. the /D.
c. the 'oard of directors. d. the internal audit staff. e. an external auditor.
%*. The capital investment decision ma"ing model that assumes that each cash inflow is reinvested at the reuired rate of return is a. '. c. d. e%
net present value. internal rate of return. pay'ac" period. accounting rate of return. none of these.
(+. The capital investment decision ma"ing model that assumes that each cash inflow is reinvested at the projects own rate of return is a. '. c. d. e%
net present value. accounting rate of return. pay'ac" period. internal rate of return. none of these.
(1. The 'est model for choosing the 'est of several competing projects is a. '. c. d. e%
net present value. internal rate of return. pay'ac" period. accounting rate of return. none of these.
(2. =hen investing in automated systems, which of the following intangi'le or indirect 'enefits may 'e important> a. '. c. d. e%
!mproved customer satisfaction !mproved mar"et share :educed support la'or cost :educed lead time 0ll of these
(3. =hich of the following is true regarding the measurement and use of indirect and intangi'le 'enefits in capital investment decision ma"ing> a. 0&/ has made identifying indirect 'enefits easier. '. !ntangi'le 'enefits cannot 'e measured. c. !ndirect and intangi'le 'enefits should not 'e considered, only direct costs and 'enefits are considered. d. 0ctions 'y competitors are not considered. e% 4one of these
(. 0 division manager is choosing 'etween two mutually exclusive projects. Project 0 B23$,+++ 13E
4et present value !nternal rate of return
Project & B21+,+++ 1$E
The company reuires any project to earn at least 12 percent. The manager 'elieves that cash inflows from the project can 'e reinvested at the rate of 12 percent. =hich project will the manager li"ely choose> a% '% c% &%
Project & Project 0 'oth Projects 0 and & neither Project 0 nor &
($. Cow do 4PH and !:: differ> a. 4PH measures profita'ility in a'solute terms, whereas the !:: method measures profita'ility in relative terms. '. !:: should 'e used for choosing among competing, mutually exclusive projects. c. 4PH considers the time value of money and !:: does not. d. &oth 4PH and !:: will generate the same decisions. (%. 5ive mutually exclusive projects had the following informationF
4PH !::
H B9%,+++; )E
= B+,+++ 11E
=hich project is preferred> a. '. c. d.
Project H Project = Project M Project G
((. The earning of interest on interest is a. present value. '. future value. c. discount rate. d. compounding of interest. e. interest earned. (). 0 series of eual future cash flows is a9n; 7777. a. '. c. d.
future amount future earnings annuity earnings to 'e discounted
M B3+,+++ 13E
G B1+,+++ 1+E
N B2+,+++ 12E
e.
insurance
(*. The reason that a discount factor in year 3 is less than a discount factor in year 2 is that a. '. c. d. e.
cash flows are uneven. compounding does not occur. cash flows are even. present value is positive. a dollar received in three years is worth less than a dollar received in two years.
$R#6LEM
1. istral anufacturing is considering an investment in a new, high-efficient machine. The new machine reuires an initial investment of B1,($+,+++. The new system cash flows of eitherF a. Dven cash flows of B3$+,+++ per year or '. The following expected annual cash flowsF B2($,+++, B2+,+++, B)2+,+++, B(+,+++, and B1$+,+++ Re7)ire&3 /alculate the pay'ac" period for each case.
2. &renning /ompany invested B3,+++,+++ in a new computer system. The following is the net income streamF Gear 1 2 3 $ %
4et income stream B($,+++ B3($,+++ B%$+,+++ B*++,+++ B*2+,+++ B)++,+++
Re7)ire&3 /alculate the accounting rate of return.
3. &illings ffice ervices is considering the purchase of a new computer system to replace the one in operation. 6ata on the new computer system areF /ost alvage value at the end of five years Iseful life, in years 0nnual operating cost
B12,+++ B 1,+++ $ B ,+++
!f the existing computer system is "ept and used, it would reuire the purchase of additional hardware a year from now costing B2,+++. 0fter using the system for five years, the salvage value would 'e B3++. 0dditional information on the existing system isF 0dditional years of use
$
0nnual operating costs :emaining 'oo" value /urrent salvage value /ost of capital
B *,+++ B12,+++ B 3,+++ 12E
The company uses the straight-line method of depreciation. Re7)ire&3 hould the new system 'e purchased> =hy or why not>
. 6ale 6avis /ompany is evaluating a proposal to purchase a new machine that would cost B1++,+++ and have a salvage value of B1+,+++ in four years. !t would provide annual operating cash savings of B1+,+++, as followsF ld achine 4ew achine B+,+++ B3%,+++ (,+++ $,+++ *,+++ $,+++ B$%,+++ B%,+++
alaries upplies aintenance Total
!f the new machine is purchased, the old machine will 'e sold for its current salvage value of B2+,+++. !f the new machine is not purchased, the old machine will 'e disposed of in four years at a predicted salvage value of B2,+++. The old machines present 'oo" value is B+,+++. !f "ept, in one year the old machine will reuire repairs predicted to cost B3$,+++. 6ale 6aviss cost of capital is 1 percent. Re7)ire&3 hould the new machine 'e purchased> =hy or why not>
$. 5ill in the lettered 'lan"s in the following ta'leF
0mount of investment Dconomic life in years 0nnual cash flow Pay'ac" period in years Present value of cash flows 4et present value
!nvestment 0 B+,+++ 1+ B $,+++ 9/; 9D; B $,$++
!nvestment & 90; $ 9&; B33,+++ B 3,+++
!nvestment / B2+,+++ ) B 2,$++ 96; 95; 9B1,+++;
%. &ar"er Production /ompany is considering the purchase of a flexi'le manufacturing system. The annual cash 'enefits?savings associated with the system areF 6ecreased waste !ncreased uality 6ecrease in operating costs !ncrease in on-time deliveries
B ($,+++ 1++,+++ %2,$++ 12,$++
The system will cost B($+,+++ and will last ten years. The companys cost of capital is 1+ percent.
Re7)ire&3
0. &.
=hat is the pay'ac" period for the flexi'le manufacturing system> =hat is the 4PH for the flexi'le manufacturing system>
40::&DA!4F 5igure 1-1+ Fi()re 14*18% $resent val)e o0 1
Periods 1 2 3 $ % ( ) * 1+
4% +.*%2 +.*2$ +.))* +.)$$ +.)22 +.(*+ +.(%+ +.(31 +.(+3 +.%(%
6% +.*3 +.)*+ +.)+ +.(*2 +.(( +.(+$ +.%%$ +.%2( +.$*2 +.$$)
8% +.*2% +.)$( +.(* +.(3$ +.%)1 +.%3+ +.$)3 +.$+ +.$++ +.%3
10% +.*+* +.)2% +.($1 +.%)3 +.%21 +.$% +.$13 +.%( +.2 +.3)%
12% +.)*3 +.(*( +.(12 +.%3% +.$%( +.$+( +.$2 +.+ +.3%1 +.322
14% +.)(( +.(%* +.%($ +.$*2 +.$1* +.$% +.++ +.3$1 +.3+) +.2(+
8% +.*2% 1.()3 2.$(( 3.312 3.**3 .%23 $.2+% $.(( %.2( %.(1+
10% +.*+* 1.(3% 2.)( 3.1(+ 3.(*1 .3$$ .)%) $.33$ $.($* %.1$
12% +.)*3 1.%*+ 2.+2 3.+3( 3.%+$ .111 .$% .*%) $.32) $.%$+
14% +.)(( 1.%( 2.322 2.*1 3.33 3.))* .2)) .%3* .*% $.21%
$resent val)e o0 an Ann)it2 o0 1
Periods 1 2 3 $ % ( ) * 1+
4% +.*%2 1.))% 2.(($ 3.%3+ .$2 $.22 %.++2 %.(33 (.3$ ).111
6% +.*3 1.)33 2.%(3 3.%$ .212 .*1( $.$)2 %.21+ %.)+2 (.3%+
40::D46 (. :efer to 5igure 1-1+. Kimmy :eynolds is considering investing B12,+++ in a project with the following cash revenues and expensesF
Gear 1 Gear 2 Gear 3 Gear Gear $
:evenues B2+,+++ B22,+++ B22,+++ B22,+++ B2$,+++
Dxpenses B1),+++ B1*,+++ B2+,+++ B1(,+++ B1(,+++
Kimmy reuires a minimum rate of return of ) percent.
0. &. /.
/alculate the net cash inflows in each of the five years. =hat is the pay'ac" period> =hat is the net present value of the investment>
). :efer to 5igure 1-1+. Kasmine /ompany is considering an investment costing B2+,+++. The investment would return B),+++ per year in each of three years. Kasmine reuires a minimum rate of return of % percent. 0. &. /.
=hat is the pay'ac" period for the investment> =hat is the net present value of the investment> The internal rate of return is greater than 999999999999999999 E and less than 999999999999999999 E.
*. :efer to 5igure 1-1+. Aeary /ompany is considering an investment costing B11+,+++. The investment would return B+,+++ per year in each of three years. Aeary reuires a minimum rate of return of 1+E. 0. &. /. 6.
=hat is the pay'ac" period for the investment> Ising the Present Halue of an 0nnuity of B1 ta'le, calculate the net present value of the investment. The internal rate of return is greater than 999999999999999999 E and less than 999999999999999999 E. 4ow assume that the investment includes euipment that can 'e sold at the end of the third year for B1+,+++. =hat is the present value of this investment>
1+. :efer to 5igure 1-1+. Coward-Parr /ompany is considering an investment that will have an initial cost of B$++,+++ and yield annual net cash inflows of B13+,+++. Gearly depreciation will 'e B1++,+++. The euipment is expected to 'e useful for five years, at which point it will 'e scrapped with no salvage value. Coward-Parr reuires a minimum rate of return of 1+ percent. 0. &. /. 6.
=hat is the accounting rate of return> =hat is the net present value> !s the investment accepta'le> 4ow suppose that Coward-Parr 'elieves it can sell the euipment at the end of $ years for B$+,+++. =hat is the net present value> !s the investment accepta'le> =hat can you say a'out the !:: in the first case 9no salvage value; versus the !:: in the second case 9B$+,+++ salvage value;>
11. :efer to 5igure 1-1+. 0 company is considering two modifications to its current manufacturing process. The after-tax cash flows associated with the two investments areF Gear + 1 2
Project ! B93(,$++; --B$+,%+
Project !! B91$+,+++; *1,+($ *1,+($
The companys cost of capital is 12 percent. 0. &.
/ompute the net present value for each investment. /omputer the internal rate of return for each investment.
/.
=hich project is 'etter> Dxplain your reasoning.
12. :efer to 5igure 1-1+. :ay /orporation is loo"ing to invest in a new piece of euipment. Two manufacturers of this type of euipment are 'eing considered. 0fter-tax inflows for the two competing projects areF Gear 1 2 3 $
5allon Duipment !nc. 2($,+++ 22$,+++ 1)$,+++ 1+,+++ %$,+++
Toller Duipment !nc. (+,+++ (+,+++ 2)$,+++ 33+,+++ 3*+,+++
&oth projects reuire an initial investment of B++,+++. !n 'oth cases, assume that the euipment has a life of five years with no salvage value. Re7)ire&3
0. 0ssuming a discount rate of ) percent, compute the net present value of each piece of euipment. &. 0 third option is now availa'le for a supplier outside of the country. The cost is also B++,+++, 'ut it will produce even cash flows over its five-year life. =hat must the annual cash flow 'e for this euipment to 'e selected over the other two> 0ssume an ) percent discount rate. 13. :efer to 5igure 1-1+. 6urrel /ompany is considering two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments are as followsF Gear + 1 2 3
Project 0 922+,+++; 2)$,+++
Project & 922+,+++; )),$++ )),$++ )),$++
6urrels cost of capital is % percent. Re7)ire&3
0. /ompute the 4PH for each investment and state which project should 'e chosen 'ased on the 4PH. &. /ompute the !:: for each investment and state which project should 'e chosen 'ased on the !::.
40::&DA!4F 5igure 1-11 Fi()re 14*11% $resent val)e o0 an Ann)it2 o0 1 in Arrears
Periods 1
4% +.*%2
6% +.*3
8% +.*2%
10% +.*+*
12% +.)*3
14% +.)((
2 3 $ % ( ) * 1+
1.))% 2.(($ 3.%3+ .$2 $.22 %.++2 %.(33 (.3$ ).111
1.)33 2.%(3 3.%$ .212 .*1( $.$)2 %.21+ %.)+2 (.3%+
1.()3 2.$(( 3.312 3.**3 .%23 $.2+% $.(( %.2( %.(1+
1.(3% 2.)( 3.1(+ 3.(*1 .3$$ .)%) $.33$ $.($* %.1$
1.%*+ 2.+2 3.+3( 3.%+$ .111 .$% .*%) $.32) $.%$+
1.%( 2.322 2.*1 .33 3.))* .2)) .%3* .*% $.21%
40::D46 1. :efer to 5igure 1-11. 0ragon /ompany is considering an investment in euipment that will have an initial cost of B$%+,2*+ and yield annual net cash inflows of B*+,+++. Gearly depreciation will 'e B$%,+++. The euipment is expected to 'e useful for 1+ years and then it will 'e scrapped. 0ragon reuires a minimum rate of return of 1+ percent. 0. &. /. 6.
=hat is the pay'ac" period> =hat is the accounting rate of return> =hat is the net present value> =hat is the approximate internal rate of return>
1$. :efer to 5igure 1-11. /leves /ompany is considering two projects. Project M B$++,+++ B )),$++ 1+ years B $+,+++
!nitial investment 0nnual cash flows ife of the project 6epreciation per year
Project G B1++,+++ B 3,32+ years B 2$,+++
/leves reuires a minimum rate of return of ) percent. 0. &. /. 6.
=hat is the accounting rate of return for each project> =hat is the net present value for each project> =hat is the internal rate of return for each project> Aiven that only one project can 'e selected, which project should 'e chosen> Dxplain your reasoning.
1%. :efer to 5igure 1-11. yster /ompany wants to 'uy a new machine that will 'e a'le to perform many of the steps in the manufacturing process that they currently have to do manually. The hope is that it will reduce the amount of time it ta"es to create one unit and reduce the num'er of defective units. The machine reuires an investment of B($+,+++. The machine will last six years with no expected salvage value. The expected after-tax cash flows associated with the project are as followsF Gear 1 2 3
/ash revenues )2$,+++ )2$,+++ )2$,+++ )2$,+++
/ash expenses $1+,+++ $1+,+++ $1+,+++ $1+,+++
