Create an Account

Already have account?

Forgot Your Password ?

Home / Questions / Please refer to the following data concerning 4 investment alternatives

Please refer to the following data concerning 4 investment alternatives

Please refer to the following data concerning 4 investment alternatives:

 

 

Project A

Project B

Project C

Project D

Initial investment

$210,000

$400,000

$550,000

$1,000,000

PV of cash inflows

$285,000

$490,000

$800,000

$990,000

Payback period (years)

7.2

6.0

9.5

2.0

NPV of project

$75,000

$90,000

$250,000

($10,000)

 

Which project has the highest profitability index?

A) Project A

B) Project B

C) Project C

D) Project D

 

46) Which of the following best describes the term opportunity cost?

A) The cost incurred to qualify for an investment opportunity

B) The benefit that is given up when choosing one out of a series of options

C) The benefits of an investment which has come available suddenly

D) The opportunity to invest in certain cash flows and returns

Answer:  B

Diff: 1

LO:  21-4

EOC Ref:  Accounting Vocabulary

AACSB:  Content/Knowledge

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

 

47) Marsh Products is evaluating an investment in new production machinery.  The initial investment is $250,000 and will yield cash flows of $60,000 per year for a 5 year period.  At the end of 5 years, the machinery will be sold and has expected residual value of $40,000.  Marsh uses a discount rate of 7%.  What is the net present value of the investment?

 

Present Value of an Annuity of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

 

Present Value of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

A) $13,460

B) $90,000

C) $2,990

D) $24,520

 

48) Natick Products is evaluating an investment in new production machinery.  The initial investment is $700,000 and will yield cash flows of $120,000 per year for an 8 year period.  At the end of 8 years, the machinery will be sold and has expected residual value of $90,000.  Natick uses a discount rate of 6%.  What is the net present value of the investment?

 

Present Value of an Annuity of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

 

Present Value of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

6

0.746

0.705

0.666

0.630

0.596

0.564

7

0.711

0.665

0.623

0.583

0.547

0.513

8

0.677

0.627

0.582

0.540

0.502

0.467

9

0.645

0.592

0.544

0.500

0.460

0.424

10

0.614

0.558

0.508

0.463

0.422

0.386

A) $93,460

B) $98,700

C) $101,630

D) $204,520

 

49) Which of the following best describes the term sensitivity analysis?

A) Evaluating the risk level of an investment

B) Analyzing the effect of an investment on workers' morale

C) Evaluating several different investment options

D) Testing the results of an investment under varying different assumptions

Answer:  D

Diff: 1

LO:  21-4

EOC Ref:  Accounting Vocabulary

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

50) Which of the following is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset?

A) Rate of return

B) Net present value (NPV)

C) Internal rate of return  (IRR)

D) Payback period

Answer:  C

Diff: 1

LO:  21-4

EOC Ref:  Accounting Vocabulary

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

 

51) Which of the following best describes the internal rate of return?

A) The discount rate that makes the cost of the investment equal to the present value of the cash flows

B) The discount rate that is used to borrow funds from a lender

C) The ratio of average annual income to average amount invested

D) The rate at which an investment pays back

Answer:  A

Diff: 1

LO:  21-4

EOC Ref:  Accounting Vocabulary

AACSB:  Content/Knowledge

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

52) Carte Blanco Company is evaluating an investment of $1,000,000 which will yield cash flows of $257,000 per year for 5 years with no residual value.  What is the internal rate of return?  (Please choose the rate that is closest to the actual solution.)

 

Present Value of an Annuity of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

 

A) 7%

B) 8%

C) 9%

D) 10%

Answer:  C

Explanation:  C) Calculations:  $1,000,000/$257,000 = 3.891

Diff: 2

LO:  21-4

EOC Ref:  E21-24

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

53) Osterwitz Company is evaluating an investment of $1,000,000 which will yield cash flows of $142,400 per year for 10 years with no residual value.  What is the internal rate of return?  (Please choose the rate that is closest to the actual solution.)

 

Present Value of an Annuity of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

 

A) 6%

B) 7%

C) 8%

D) 9%

Answer:  B

Explanation:  B) Calculations:  $1,000,000/$142,400 = 7.022

Diff: 2

LO:  21-4

EOC Ref:  E21-24

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

 

54) MacNamara Development Company is evaluating a possible investment in a construction project.  The cost will be $100,000, and it will generate cash flows as follows:

 

  Year 1

$10,000

  Year 2

$20,000

  Year 3

$30,000

  Year 4

$40,000

  Year 5

$35,000

 

The VP for construction believes this project has an internal rate of return somewhere in the range of 7% to 10%, but has asked the Controller to crunch the numbers.  Using the trial and error method, and the PV factors shown here, determine what the IRR of this project is.

 

Present Value of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

 

Choose the rate below which comes closest to the actual IRR.

A) 7%

B) 8%

C) 9%

D) 10%

55) Petrus Company is looking at an energy-saving investment which will cost $500,000 and will save the company $300,000 in the first year, $200,000 in the second year, and $48,000 in the third year.  They have a hurdle rate of 7%, and they believe this project will have a return somewhere close to the hurdle rate.  Please refer to the tables below and calculate the IRR of the investment.

 

Present Value of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

 

Choose the option that comes closest to describing the actual IRR.

A) Less than 6%

B) Between 6% and 7%

C) Exactly 7%

D) More than 7%

56) Quasar Company is evaluating an investment that will cost $520,000  and will yield cash flows of $300,000 in the first year, $200,000 in the second year, and $100,000 in the third and final year.  Please use the tables below and determine the internal rate of return.

 

Present Value of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

 

Please choose the percentage below that comes closest to the actual IRR.

A) 7%

B) 8%

C) 9%

D) 10%

57) Cantrell Company is considering investing  $396,000 in high-tech communications equipment which would have an estimated life of 4 years and zero residual value.  The technology manager says that it will return cash flows as shown below:

 

  Year 1

$100,000

  Year 2

$200,000

  Year 3

$100,000

  Year 4

$50,000

 

The VP Finance points out that the project must pass the company's 7% hurdle rate, and asks one of the analysts to calculate the internal rate of return before they discuss the project further.  Using the tables below, please calculate the IRR for this project.

 

Present Value of $1

 

 

 

 

 

 

 

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

 

Please choose the percentage below that comes closest to the actual IRR.

A) 5%

B) 6%

C) 7%

Dec 25 2019 View more View Less

Answer (UnSolved)

question Get Solution

Related Questions