Question 1

A composite of the cost of various sources of funds comprising a firm's capital structure is its:

Accepted Answer

A)   Internal rate of return (IRR) .
B)   Weighted-average cost of capital (WAC
C)  .
C)   Book (accounting)  rate of return.
D)   Modified internal rate of return (MIRR) .
E)   Accounting rate of return (ARR) , after tax.

Question 2

Carmino Company is considering an investment in equipment that is expected to generate an after-tax income of $6,000 for each year of its four-year life. The asset has no salvage value. The firm is in the 40% tax bracket. The net book value (NBV)  of the investment at the beginning of each year is expected to be as follows:  Year 1 $30,000 Year 2 15,000 Year 3 7,500 Year 4 3,750\begin{array}{lr}	ext { Year 1 } & \$30,000 \	ext { Year 2 } & 15,000 \	ext { Year 3 } & 7,500 \	ext { Year 4 } & 3,750\end{array} Year 1  Year 2  Year 3  Year 4 ​$30,00015,0007,5003,750​ Calculate this asset's accounting (book)  rate of return (ARR)  on average investment (which is defined as a simple average of the average book value of the asset for each year of its four-year life) . Round the final answer to the nearest whole %.

Accepted Answer

A)   15%.
B)   27%.
C)   36%.
D)   43%.
E)   58%.

Question 3

Given two projects with the same total (i.e., project lifetime)  cash flow returns (CFRs) , the internal rate of return (IRR)  method of capital budgeting would favor a proposal having yearly CFRs that were:

Accepted Answer

A)   Even.
B)   Uneven.
C)   Heavier towards the end of a proposal's life.
D)   Heavier towards the beginning of a proposal's life.
E)   Heavier towards the middle of a proposal's life.

Question 4

Solich Company is evaluating a new tractor that costs $1,350,000 to replace the tractor purchased years earlier, which currently has no salvage value; the new tractor has an estimated useful life of five years with no disposal value or anticipated cost of disposal. For all its equipment, the company uses straight-line depreciation with no residual value. Solich is subject to a 40% income tax rate, t. The company uses a 12% hurdle rate for evaluating capital investment projects. The PV of an annuity of $1 at 12% for 5 years is 3.605, and the PV of $1 at 12% in 5 years is 0.567. 
Required:
1. Compute the amount of annual before-tax savings (rounded to nearest whole number) that must be generated by the new tractor to have a payback period of 3.0 years.
2. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an NPV of $500,000 at a discount rate of 12%. (Round your answer to the nearest whole dollar amount.)
3. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an IRR of 12%. (Round your answer to the nearest whole dollar.)

Accepted Answer

1. Annual depreciation = $1,350,000/5 ye...

Question 5

Which of the following statements regarding the determination of the weighted-average cost of capital (WACC)  is not true?

Accepted Answer

A)   The capital asset pricing model (CAPM)  cannot be used to estimate the cost of debt for a company.
B)   The capital asset pricing model (CAPM)  can be used to estimate the cost of equity for a non-public company.
C)   In estimating the cost of debt, the analyst typically estimates the current yield-to-maturity of the debt instruments in the company's capital structure.
D)   Market, not book, values of the components of capital are preferable in terms of determining weights for the weighted-average calculation.
E)   The cost of preferred stock is included in the estimation process.

Question 6

The profitability index (PI)  for a proposed project is calculated as:

Accepted Answer

A)   Net present value (NPV)  divided by average investment.
B)   Net present value (NPV)  divided by initial investment.
C)   Average investment divided by net present value (NPV) .
D)   Initial investment divided by net present value (NPV) .
E)   Average after-tax income divided by average investment.

Question 7

A profitable company pays $100,000 wages and has depreciation expense of $100,000. The company's income tax rate, t, is 40%. The after-tax cash flows from these two items are calculated as follows:

Accepted Answer

A)   An after-tax cash outflow of $40,000 for wages, and a cash inflow of $60,000 for depreciation expense.
B)   An after-tax cash outflow of $40,000 for wages, and a cash inflow of $40,000 for depreciation expense.
C)   An after-tax cash outflow of $60,000 for wages, and a cash inflow of $60,000 for depreciation expense.
D)   An after-tax cash outflow of $60,000 for wages, and a cash inflow of $40,000 for depreciation expense.
E)   An after-tax cash outflow of $40,000 for wages, and a cash inflow of $100,000 for depreciation expense.

Question 8

A capital budgeting model that accounts for an assumed rate of return on interim-period cash inflows from an investment is the:

Accepted Answer

A)   Internal rate of return (IRR)  model.
B)   Present-value payback period model.
C)   Net present value (NPV)  model.
D)   Accounting rate of return (ARR)  model.
E)   Modified internal rate of return (MIRR)  model.

Question 9

When employing the MACRS (modified accelerated cost recovery system)  method of depreciation in a capital budgeting decision, the use of MACRS as compared to the straight-line method of depreciation will, for an asset with zero estimated salvage value at the end of its useful life, result in

Accepted Answer

A)   Equal total depreciation deductions over the life of the asset.
B)   MACRS producing less total depreciation than the amount determined under the straight-line method.
C)   Equal total tax payments, after discounting for the time value of money.
D)   MACRS producing more total depreciation than deductions based on the straight-line method.
E)   MACRS producing lower annual depreciation deductions in the early years of the asset's life.

Question 10

Six years ago, Nebrow Inc. purchased a polishing machine for $600,000. The company expected to use the machine for 10 years with no residual value at the end of the tenth year. The machine has been generating annual cash revenue of $460,000 and incurring annual cash operating costs of $210,000. Nebrow is considering the purchase of a new digital polishing machine for $800,000, which will have annual cash revenues of $690,000 and annual cash operating costs of $180,000. The new machine is expected to have a useful life of four years. The company uses the straight-line depreciation method with no salvage value to depreciate all its assets. Assume, for purposes of analysis, that Nebrow is subject to a combined 40% tax rate.
Required:
What is the annual incremental after-tax cash flow from the new polishing machine, rounded to the nearest whole number?

Accepted Answer

The answer of Six years ago, Nebrow Inc. purchased a...

Question 11

GuSont Inc. was considering an investment in the following project:  Required initial investment $990,000 Net annual after-tax cash inflow $165,000 Annual depreciation expense ($990,000−$165,000) /15 years $55,000 Estimated salvage value $165,000 Life of the project in years 15\begin{array}{lrr}	ext { Required initial investment } & \$ 990,000 \	ext { Net annual after-tax cash inflow } & \$  165,000 \	ext { Annual depreciation expense }(\$ 990,000-\$ 165,000)  / 15 	ext { years } & \$  55,000 \	ext { Estimated salvage value } & \$  165,000 \	ext { Life of the project in years } &  15\end{array} Required initial investment  Net annual after-tax cash inflow  Annual depreciation expense ($990,000−$165,000) /15 years  Estimated salvage value  Life of the project in years ​$990,000$165,000$55,000$165,00015​ Assume that cash inflows occur evenly throughout the year. The estimated payback period in years (rounded to one decimal place)  for the proposed project is:

Accepted Answer

A)   3.7 years.
B)   4.6 years.
C)   5.8 years.
D)   6.0 years.
E)   7.9 years.

Question 12

The internal rate of return (IRR)  for an investment:

Accepted Answer

A)   Frequently results in positive net present values on attractive projects.
B)   Generally is greater than the company's desired rate of return.
C)   Ignores the time value of money.
D)   May produce different results than the net present value method (NPV)  in evaluating projects with different useful lives.
E)   Would tend to be reduced if a company used an accelerated method of depreciation for tax purposes.

Question 13

When the internal rate of return (IRR)  method and the net present value (NPV)  method do not yield the same recommendation for the same investment project, the project-selection decision should normally be based on:

Accepted Answer

A)   IRR, because all reinvestment of funds occurs at the rate of the cost of capital and because it takes into consideration the relative size of the initial investment.
B)   NPV, because it takes into consideration the relative size of the initial investment.
C)   IRR, because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.
D)   NPV, because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.
E)   IRR, because all reinvestment of funds occurs at the rate the project generates and because it takes into consideration the relative size of the initial investment.

Question 14

Jasper Company has a payback goal of three years on acquisitions of new equipment. A new piece of equipment that costs $450,000 and that has a five-year life is being considered. Straight-line (SL)  depreciation will be used, with zero salvage value. Jasper is subject to a 40% combined income tax rate, t. To meet the company's payback goal, the equipment must generate reductions in annual cash operating costs of at least:

Accepted Answer

A)   $60,000.
B)   $114,000.
C)   $150,000.
D)   $190,000.
E)   $285,000.

Question 15

For a capital investment project, a net present value (NPV)  of $500 indicates that the:

Accepted Answer

A)   Project's true or economic rate of return exceeds the hurdle (discount)  rate.
B)   Project's internal rate of return (IRR)  is likely unacceptable.
C)   Present value of cash outflows exceeds the present value of after-tax cash inflows.
D)   Total cash outflows for the project are expected to be $500.
E)   Internal rate of return (IRR)  exceeds the accounting rate of return (ARR)  on the project.

Question 16

Intolerance of uncertainty is a behavioral effect that often motivates managers to:

Accepted Answer

A)   Invest heavily in strategic-related investments.
B)   Choose projects with short payback periods.
C)   Invest in a few large, sequential investments.
D)   Invest in projects with relatively long payback periods.
E)   Favor projects that are mutually exclusive.

Question 17

Which one of the following is the estimated rate (i.e., percentage)  that makes the discounted present value of future after-tax cash inflows of a project equal to the initial investment outlay for the project?

Accepted Answer

A)   Weighted-average cost of capital (WAC
C)  .
B)   Payback period, in years.
C)   Book (accounting)  rate of return.
D)   Internal rate of return (IRR) .
E)   Accounting rate of return (ARR) , after tax.

Question 18

Without knowing its required rate of return (i.e., discount rate)  for use in the evaluation of capital investment projects, a company will be able to calculate a project's:

Accepted Answer

A)   Option A
B)   Option B
C)   Option C
D)   Option D
E)   Option E

Question 19

Which one of the following statements concerning capital budgeting is not true?

Accepted Answer

A)   A basic objective underlying capital budgeting is to select assets that will earn a satisfactory return.
B)   Capital budgeting is the process of identifying, evaluating, selecting, and controlling long-term investment projects.
C)   Because of the existence of advanced forecasting techniques, capital budgeting is based on precise estimates of future events.
D)   Capital budgeting involves estimating the revenues and costs of each proposed project, evaluating their merits, and choosing those worthy of investment.
E)   Capital budgeting uses after-tax cash flows in the analysis of proposed investments.

Question 20

On January 1, 2018, Crane Company will acquire a new asset that costs $400,000 and that is anticipated to have a salvage value of $30,000 at the end of four years. The new asset:
 ?	qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS)  
 ?	will replace an old asset that currently has a tax basis of $80,000 and that can be sold on this date for $60,000 
 ?	will continue to generate the same operating revenues as the old asset ($200,000 per year) . However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $120,000 in each of the first three years, and $90,000 in the fourth year. 
Crane is subject to a combined income tax rate, t, of 40% and rounds all computations to the nearest dollar. Crane's fiscal year coincides with the calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net present value (NPV)  method to analyze projects and the factors and rates presented below (based on a discount rate of 14%) :
  Year  PV of $1 at 14% PV of $1 Annuity at 14% MACRS 20180.8770.87733%20190.7691.64745%20200.6752.32115%20210.5922.9147%\begin{array}{rrrr}	ext { Year } & 	ext { PV of } \$ 1 	ext { at } 14 \% & 	ext { PV of } \$ 1 	ext { Annuity at } 14 \% & 	ext { MACRS } \2018 & 0.877 & 0.877 & 33 \% \2019 & 0.769 & 1.647 & 45 \% \2020 & 0.675 & 2.321 & 15 \% \2021 & 0.592 & 2.914 & 7 \%\end{array} Year 2018201920202021​ PV of $1 at 14%0.8770.7690.6750.592​ PV of $1 Annuity at 14%0.8771.6472.3212.914​ MACRS 33%45%15%7%​ The present value of the depreciation tax shield for the 2021 MACRS depreciation of the new asset (rounded to the nearest whole dollar)  is:

Accepted Answer

A)   $0.
B)   $6.112.
C)   $6,630.
D)   $11,200.
E)   $32,637.

Exam 12: Strategy and the Analysis of Capital Investments

Correct Answer
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The profitability index (PI) for a proposed project is calculated as:

Correct Answer
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Without knowing its required rate of return (i.e., discount rate) for use in the evaluation of capital investment projects, a company will be able to calculate a project's:

Correct Answer
verified

A profitable company pays $100,000 wages and has depreciation expense of $100,000. The company's income tax rate, t, is 40%. The after-tax cash flows from these two items are calculated as follows:

Correct Answer
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A capital budgeting model that accounts for an assumed rate of return on interim-period cash inflows from an investment is the:

Correct Answer
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Given two projects with the same total (i.e., project lifetime) cash flow returns (CFRs) , the internal rate of return (IRR) method of capital budgeting would favor a proposal having yearly CFRs that were:

Correct Answer
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Which one of the following is the estimated rate (i.e., percentage) that makes the discounted present value of future after-tax cash inflows of a project equal to the initial investment outlay for the project?

Correct Answer
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Correct Answer
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1. Annual depreciation = $1,350,000/5 ye...
View Answer

When the internal rate of return (IRR) method and the net present value (NPV) method do not yield the same recommendation for the same investment project, the project-selection decision should normally be based on:

Correct Answer
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Correct Answer
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The internal rate of return (IRR) for an investment:

Correct Answer
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Which one of the following statements concerning capital budgeting is not true?

Correct Answer
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When employing the MACRS (modified accelerated cost recovery system) method of depreciation in a capital budgeting decision, the use of MACRS as compared to the straight-line method of depreciation will, for an asset with zero estimated salvage value at the end of its useful life, result in

Correct Answer
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Which of the following statements regarding the determination of the weighted-average cost of capital (WACC) is not true?

Correct Answer
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For a capital investment project, a net present value (NPV) of $500 indicates that the:

Correct Answer
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Correct Answer
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A composite of the cost of various sources of funds comprising a firm's capital structure is its:

Correct Answer
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Intolerance of uncertainty is a behavioral effect that often motivates managers to:

Correct Answer
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Exam 12: Strategy and the Analysis of Capital Investments

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The profitability index (PI) for a proposed project is calculated as:

Correct AnswerverifiedShow Answer

Without knowing its required rate of return (i.e., discount rate) for use in the evaluation of capital investment projects, a company will be able to calculate a project's:

Correct AnswerverifiedShow Answer

A profitable company pays $100,000 wages and has depreciation expense of $100,000. The company's income tax rate, t, is 40%. The after-tax cash flows from these two items are calculated as follows:

Correct AnswerverifiedShow Answer

A capital budgeting model that accounts for an assumed rate of return on interim-period cash inflows from an investment is the:

Correct AnswerverifiedShow Answer

Given two projects with the same total (i.e., project lifetime) cash flow returns (CFRs) , the internal rate of return (IRR) method of capital budgeting would favor a proposal having yearly CFRs that were:

Correct AnswerverifiedShow Answer

Which one of the following is the estimated rate (i.e., percentage) that makes the discounted present value of future after-tax cash inflows of a project equal to the initial investment outlay for the project?

Correct AnswerverifiedShow Answer

Correct Answerverified1. Annual depreciation = $1,350,000/5 ye...View AnswerShow Answer

When the internal rate of return (IRR) method and the net present value (NPV) method do not yield the same recommendation for the same investment project, the project-selection decision should normally be based on:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The internal rate of return (IRR) for an investment:

Correct AnswerverifiedShow Answer

Which one of the following statements concerning capital budgeting is not true?

Correct AnswerverifiedShow Answer

When employing the MACRS (modified accelerated cost recovery system) method of depreciation in a capital budgeting decision, the use of MACRS as compared to the straight-line method of depreciation will, for an asset with zero estimated salvage value at the end of its useful life, result in

Correct AnswerverifiedShow Answer

Which of the following statements regarding the determination of the weighted-average cost of capital (WACC) is not true?

Correct AnswerverifiedShow Answer

For a capital investment project, a net present value (NPV) of $500 indicates that the:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A composite of the cost of various sources of funds comprising a firm's capital structure is its:

Correct AnswerverifiedShow Answer

Intolerance of uncertainty is a behavioral effect that often motivates managers to:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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1. Annual depreciation = $1,350,000/5 ye...
View Answer

Correct Answer
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