ACC-350 Topic 6 Quiz
1) Gamma Company is considering an investment proposal that would require an initial outlay of $800,000, and would yield yearly
... [Show More] cash flows of $200,000 for 9 years. The company uses a discount rate of 10%. What is the NPV of the investment?
Present value of annuity of $1:
8% 9% 10%
1 0.926 0.917 0.909
2 1.783 1.759 1.736
3 2.577 2.531 2.487
4 3.312 3.24 3.17
5 3.993 3.89 3.791
6 4.623 4.486 4.355
7 5.206 5.033 4.868
8 5.747 5.535 5.335
9 6.247 5.995 5.759
A. $250,000
B. $350,000
C. $351,800
D. $400,000
(Answer is C)
2) True or False: Net present value and internal rate of return consider the time value of money, so they are appropriate for longer term capital investments
(Answer is TRUE)
3) True or False: An annuity refers to a series of equal cash flows received or paid annually.
(Answer is TRUE)
4) A company is evaluating three possible investments. Following information is provided by the company.
Project A Project B Project C
Investment $200,000 $50,000 $200,000
Salvage value 0 5,000 10,000
Net cash flows:
Year 1 50,000 25,000 80,000
Year 2 50,000 16,000 50,000
Year 3 50,000 12,000 60,000
Year 4 50,000 25,000 20,000
Year 5 50,000 0 0
What is the payback period for Project A? Assume that company uses the straight line depreciation method.)
A. 4.0 years
B. 3.0 years
C. 2.0 years
D. 5.0 years
(Answer is A)
5) Which of the following best describes the profitability index?
A. an index of projects based on their net income
B. the ratio of total cash inflows to initial investment
C. the ratio of present value of net cash inflows to initial investment
D. an array of possible investment outcomes at different discount rates
(Answer is C)
6) Which of the following is true of discounted cash flow methods like NPV and IRR?
A. They use simple interest calculations.
B. They focus on the payback period.
C. They consider discounted cash flows.
D. They use net income amounts rather than cash flows.
(Answer is C)
7) Which capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations?
A. payback
B. net present value
C. internal rate of return
D. accounting rate of return
(Answer is D)
8) Canbera Company is considering investing $450,000 in telecommunications equipment which would have an estimated life of 5 years with zero residual value. The cash flows are shown below:
Year 1 $120,000
2 $235,000
3 $140,000
4 $98,000
The present value of $1 factors are given below:
10% 12% 13% 14%
1 0.909 0.893 0.885 0.877
2 0.826 0.797 0.783 0.769
3 0.751 0.712 0.693 0.675
4 0.683 0.636 0.613 0.592
5 0.621 0.543 0.543 0.519
The IRR of the project would be:
A. between 12% and 13%
B. less than 10%
C. between 8% and 10%
D. more than 13%
(Answer is A)
9) If $15,000 is invested annually in an account with 9% interest compounding yearly, what will the balance of the account be after five years? Refer to the following Future Value table:
Future value of annuity of $1:
7% 8% 9%
1 0.935 0.926 0.917
2 1.808 1.783 1.759
3 2.624 2.577 2.531
4 3.387 3.312 3.24
5 4.1 3.993 3.89
6 4.767 4.623 4.486
7 5.389 5.206 5.033
A. $58,350
B. $25,125
C. $26,211
D. $26,180
(Answer is C)
10) Which of the following two methods are typically used for initial screening of investments, rather than for detailed, in depth analysis?
A. accounting rate of return and net present value
B. payback and accounting rate of return
C. internal rate of return and net present value
D. net present value and payback
(Answer is B)
11) True or False: The payback method is the most thorough and comprehensive way to choose the best investment among alternatives, than any other capital budgeting methods.
(Answer is FALSE)
12) True or False: The NPV method of evaluating capital investments suggests that a project with positive net cash inflows that exceed the cost of the investment should be accepted.
(Answer is TRUE)
13) True or False: An operational asset used for a long period of time is known as a capital asset.
(Answer is TRUE)
14) Clapton Corporation is considering an investment in new equipment costing $900,000. The equipment will be depreciated on a straight line basis over a ten year life and is expected to have a salvage value of $90,000. The equipment is expected to generate net cash flows of $140,000 for each of the first five years and $100,000 for each of the last five years. What is the accounting rate of return associated with the equipment investment?
A. 8.52%
B. 7.88%
C. 9.23%
D. 8.89%
(Answer is B)
15) Zane has received a prize which entitles him to receive annual payments of $10,000 for the next 10 years. Which of the following is to be referred to in order to calculate the total value of the prize today?
A. Present Value of $1
B. Present Value of an Annuity of $1
C. Future Value of an Annuity of $1
D. Future Value of $1
(Answer is B)
16) True or False: The payback method and the accounting rate of return method are often used to perform an initial screening of investments, rather than a detailed, in depth analysis.
(Answer is TRUE)
17) True or False: Net cash inflows from a capital investment arise from an increase in revenues, a decrease in expenses, or both.
(Answer is TRUE)
18) True or False: When evaluating a potential investment, managers should use more than one measure for making a sound investment decision.
(Answer is TRUE)
19) Logy Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight line method of depreciation. The following information is available:
Investment A Investment B
Initial capital investment $100,000 $150,000
Estimated useful life 10 years 10 years
Estimated residual value 0 $20,000
Estimated annual net cash inflow for 10 years $20,000 $40,000
Required rate of return 10% 12%
Calculate the payback period of Investment A.
A. 5 years
B. 1 year
C. 4 years
D. 3 years
(Answer is A)
20) Paramount Company is considering purchasing new equipment costing $700,000. Company’s management has estimated that the equipment will generate cash flows as follows:
Year 1 $200,000
2 200,000
3 250,000
4 250,000
5 150,000
Present value of $1:
6% 7% 8% 9% 10%
1 0.943 0.935 0.926 0.917 0.909
2 0.89 0.873 0.857 0.842 0.826
3 0.84 0.816 0.794 0.772 0.751
4 0.792 0.763 0.735 0.708 0.683
5 0.747 0.713 0.681 0.65 0.621
The company’s required rate of return is 9%. Using the factors in the table, calculate the present value of the cash flows.
A. $852,000
B. $820,500
C. $819,300
D. $850,000
(Answer is C) [Show Less]