Capital Budgeting QUIZ 3-TEST
BS accountancy
QUIZ 3 PRELIM
1.
An investment opportunity costing $150,000 is expected to yield net
cash flows of $45,000 annually for five years. The cost of capital is
10%. The book rate of return would be
a. 10%.
c. 30%.
d. 33.3%.
2.
An investment opportunity costing $150,000 is expected to yield net
cash flows of $36,000 annually for six years. The NPV of the investment
at a cutoff rate of 12% would be
b. $2,004.
c. $150,000.
d. $147,996.
3. An investment opportunity costing $100,000 is expected to yield net cash
flows of $22,000 annually for seven years. The payback period of the
investment is
a. 0.22 years.
b. 3.08 years.
d. some other number.
4. An investment opportunity costing $200,000 is expected to yield net cash
flows of $39,000 annually for eight years. The IRR of the investment is
between
b. 12 and 14%.
c. 14 and 16%.
d. 16 and 18%.
5.
An investment opportunity costing $80,000 is expected to yield net cash
flows of $25,000 annually for four years. The cost of capital is 10%.
The book rate of return would be
a. 10.0%.
c. 21.3%.
d. 32.0%.
True-False
6.
7.
8. Cost of capital is the interest rate that a company expects to pay to
finance a particular capital investment project.
9. The higher the cost of capital, the higher the present value of future
0
0
cash inflows.
10. If the IRR on a capital project is positive, its NPV will be positive.
11. S
12. IRR can be computed for even cash flows, but not for uneven cash flows.
13. I
14. IF NPV is negative, IRR is equal to the cost of capital.
15. P
Problems (NO
A
An investment opportunity costing
flows of
annually for
is expected to yield net cash
16. Find the NPV of the investment at a cutoff rate of 12%.
3.605 x 60,000 - 180,000 = 36,300
17. Find the payback period of the investment.
180,000/60,000= 3yrs
18. Find the IRR on the investment (use percentage range).
B
Tofte is considering the purchase of a machine. Data are as follows:
Cost
Useful life
Annual straight-line depreciation
Expected annual savings in cash
operation costs
$100,000
10 years
$ 10,000
$ 18,000
Tofte's cutoff rate is 12% and its tax rate is 40%.
19. Compute the annual net cash flows for the investment.
18,000 -40% x (18,000 - 10,000) = 14,800
20. Compute the NPV of the project.
14,800 x 5.650 - 100,000= 16,380
C
Willow Company is considering the purchase of a machine with the following
characteristics.
Cost
Estimated useful life
Expected annual cash cost savings
$150,000
10 years
$35,000
Marquette's tax rate is 40%, its cost of capital is 12%, and it will use
straight-line depreciation for the new machine.
21. Compute the annual after-tax cash flows for this project.
35,000-40% x(35,000-15,000)= 27,000
0
0
22. Find the payback period for this project.
150,000/27,000= 5.56 yrs
D
Bilt-Rite Co. has the opportunity to introduce a new product. Bilt-Rite
expects the product to sell for $60 and to have per-unit variable costs of
$40 and annual cash fixed costs of $3,000,000. Expected annual sales
volume is 250,000 units. The equipment needed to bring out the new
product costs $5,000,000, has a four-year life and no salvage value, and
would be depreciated on a straight-line basis. Bilt-Rite's cost of
capital is 10% and its income tax rate is 40%.
23. Find the increase in annual after-tax cash flows for this opportunity.
24. Find the payback period on this project.
25. Find the NPV for this project.
0
0