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| 1 | |
An increase in the discount rate: |
| | A) | is one method of compensating for reduced risk. |
| | B) | will have no effect on net present value. |
| | C) | will increase the present value of future cash flows. |
| | D) | will reduce the present value of future cash flows. |
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| 2 | |
The net present value method takes into account: |
| | A) | the cash flow over the life of the project and the time value of money. |
| | B) | the cash flow over the life of the project but not the time value of money. |
| | C) | the time value of money but not the cash flow over the life of the project. |
| | D) | neither the cash flow over the life of the project nor the time value of money. |
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| 3 | |
The following data pertain to an investment that is being considered by the management of Campin Company.
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The net present value of the proposed investment is: |
| | A) | ($6,860). |
| | B) | $-0-. |
| | C) | $1,242. |
| | D) | $6,710. |
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| 4 | |
In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total-cost approach will be: |
| | A) | Less than the net present value obtained using the incremental cost approach. |
| | B) | The same as the net present value obtained using the incremental cost approach. |
| | C) | Greater than the net present value obtained using the incremental cost approach. |
| | D) | Indeterminable. |
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| 5 | |
The preference rule for ranking projects by the profitability index is: |
| | A) | The higher the profitability index, the more desirable the project. |
| | B) | The lower the profitability index, the more desirable the project. |
| | C) | The higher the sunk cost, the more desirable the project. |
| | D) | The lower the sunk cost, the more desirable the project. |
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| 6 | |
Katerina Company is considering the following investment proposals:
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How should management rank the proposals in terms of preference using the profitability index? |
| | A) | D, B, C, A |
| | B) | B, D, C, A |
| | C) | B, D, A, C |
| | D) | A, C, B, D |
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| 7 | |
Which of the following statements is true? |
| | A) | The payback period is the length of time it takes for an investment to recoup its own initial cost out of the cash receipts it generates. |
| | B) | Projects with shorter payback periods are always more profitable than projects with longer payback periods. |
| | C) | The payback method of making capital budgeting decisions gives full consideration to the time value of money. |
| | D) | If new equipment is replacing old equipment, any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment. |
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| 8 | |
Delfino Company has gathered the following data on a proposed investment project:
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The net present value on the proposed investment is closest to: |
| | A) | $(96,720). |
| | B) | $80,000. |
| | C) | $91,600. |
| | D) | $491,600. |
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| 9 | |
Delfino Company has gathered the following data on a proposed investment project:
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The payback period for the proposed investment is closest to: |
| | A) | 0.2 years. |
| | B) | 1.0 years. |
| | C) | 3.0 years. |
| | D) | 5.0 years. |
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| 10 | |
Delfino Company has gathered the following data on a proposed investment project:
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Assume that excess of incremental revenues over the incremental expenses (including depreciation) equal the annual cash inflows. The simple rate of return on the proposed investment is closest to: |
| | A) | 10%. |
| | B) | 20%. |
| | C) | 30%. |
| | D) | 40%. |
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