CHAPTER 9: Capital Budgeting
I.
1. True
2. False
3. True
4. False
5. True
6. True
7. False
8. False
9. False
10. True
II.
1. A
2. B
3. D
4. C
5. B
6. A
7. C
8. A
9. C
10. B
True or False Statements
11. False
12. True
13. False
14. True
15. False
16. False
17. True
18. True
19. True
20. False
21. True
22. False
23. False
24. False
25. True
26. True
27. False
28. True
29. True
30. False
31. False
32. True
33. False
34. True
35. False
36. True
37. False
38. True
39. False
40. False
41. False
42. True
43. True
44. False
45. True
46. False
47. True
48. False
49. False
50. False
31. B
32. C
33. D
34. C
35. C
36. C
37. A
38. D
39. B
40. A
41. B
42. A
43. D
44. C
45. C
51. True
52. False
Multiple Choice Questions
11. D
12. D
13. C
14. C
15. B
16. B
17. D
18. C
19. D
20. D
21. B
22. D
23. D
24. C
25. B
26. D
27. D
28. A
29. D
30. B
III.
Multiple Choice Problems
1. C.
Year
Investment Recovered
0
1
50,000.00
2
45,000.00
3
10,000.00
2. B
Ave. Net Income
Accounting, % of Return
Unrecovered
105,000.00
55,000.00
10,000.00
-
95,000/5 years
19,000/105,000
Years Recovered
1
(50,000/50,000)
1
(45,000/45,000)
0.25
(10,000/40,000)
2.25
payback
19,000.00
18.095% or 18.10%
3. B
Year
PV Factor
Cash Flows
1
0.81
50,000.00
2
0.65
45,000.00
3
0.52
40,000.00
4
0.42
35,000.00
5
0.34
30,000.00
Total PV of Cash Flows
Initial Investment
Net Present Value
Present Value
40,500.00
29,250.00
20,800.00
14,700.00
10,200.00
115,450.00
105,000.00
10,450.00
4. D
141,736.00
140,000.00
1,736.00
Present Value (56,000*2.531)
Initial Investment
Net Present Value
5. C
Present Value (20,000*2.531)
Initial Investment
Profit Index (50,620/50,000)
50,620.00
50,000.00
1.01
6. B
PV Factor
= Investment/Annual Cash Flows
68,337/27,000
2.531
at 9%
7. B
PV
= 30,000*2.487
=
74,610.00
8. D
Payback Period
= 400,000/100,000
=4
9. D
Present Value (142,000*4.355)
Initial Investment
Net Present Value
618,410.00
600,000.00
18,410.00
10. B
Accounting % of Return
= 20,000 / (410,000/2)
= 20,000 / 205,000
10%
11. B
PV Factor
600,000/142,000
between 4.1111 & 4.3555
= 4.2254
approx. 11%
12. C
Revenues
Operating Costs
38,000.00
Depreciation
40,000.00
Annual N. I
Accounting % of Return = 12,000/ (320,000/2)
90,000.00
78,000.00
12,000.00
7.5%
13. C
Net Income
Depreciation Expense
Annual Cash Flow
Accounting % of Return = 320,000/52,000
12,000.00
40,000.00
52,000.00
6.2
14. B
Accounting % of Return
Net Income/Average Investment
60,000 / (300,000+100,000) / (2)
30%
15. C
Average Investment
(80,000+4,000)/2
42,000.00
16. B
Year
PV Factor at 15%
1
0.8700
2
0.7560
Total PV of Cash Flows
Cash Flows
100,000.00
160,000.00
Present Value
87,000.00
120,960.00
207,960.00
Year
PV Factor at 14%
1
0.8700
2
0.7700
3
0.6700
Total PV of Cash Flows
Cash Flows
15,000.00
15,000.00
10,000.00
Present Value
13,050.00
11,550.00
6,700.00
31,300.00
17. C
18. C
Payback
= 200,000/40,000
=5
19. B
PV of P1 at 12%
= 24,600*3.605
= 88,683.00
20. C
Payback
= 600,000/225,000
= 2.67
21. D
PV Factor = 30,000/7,300
between 4.231 & 4.111
4.1096
approx. 12%
22. B
Present Value (7,300*4.355 at 10%)
Initial Investment
Net Present Value
31,791.50
30,000.00
1,792
23. C
Profitability Index (31,792/30,000)
1.06
24. A
25. C
Savings on labor
Less: Increase in power costs
Net savings
PV of 12% for 10yrs
PV of savings
Less: Investment costs
Net Present Value
8,000.00
-1,000.00
7,000.00
5.65
(24) 39,550.00
30,000.00
(25) 9,550.00
26. D
Investment / Annual Cash Flow
84,900/15,000
5.660 for 12 years is 14%
= Factor of Time Adjusted Rate of Return
5.660
14%
27. B
Return in 5 years
factor for 12% for 5 years
PV (max. amount to invest)
10,000.00
0.567
5,670.00
28. C
Working capital
Cash inflow
Working capital released
Net Present Value
Year
present
1-6 years
6
Amount
-30,000.00
10,000.00
30,000.00
Factor at 18%
1.00
3.50
0.37
29. B
Payback Period
100,000/25,000 4
PV
-30,000.00
34,980.00
11,100.00
16,080.00
30. C
Year
(now) 1
2
3
4
5
Investment
-50,000.00
Expected Return
20,000.00
20,000.00
-50,000.00
20,000.00
20,000.00
payback is on the 5th year
Balance
-50,000.00
-30,000.00
-10,000.00
-20,000.00
-
31. B
Net Income
Accounting % of Return
[30,000- {(100,000-10,000)/5}]
30,000-18,000
12,000.00
12,000/ {(100,000+10,000)/2}
12,000/55,000
22%
32. A
Depreciation Deduction * Tax Rate
50,000*30%
Depreciation Tax Shield
15,000.00
33. B
PV of Cash Flow
Initial Investment
Profit Index (50,000/40,000)
50,000.00
40,000.00
1.25
34. C
Payback
= 30,000/6,000
5
35. B
Cash Flow
Less: Depreciation (30,000/15 years)
Net Savings
Machine Cost
Simple % of Return
6,000.00
2,000.00
4,000.00
30,000.00
13.3%
36. A
200,000 Working Capital is an investment, it does not need tax adjustment