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Advanced Multiple Choice Quiz
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1Greenwich plc is considering adding two new products at a subsidiary to improve its overall competitiveness. The new products are enthusiastically supported by the managers responsible and an immediate decision is required. It is normal for the managers to calculate the net present value (NPV) for the projects before it is accepted or rejected. Details of the proposals:
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The cost of capital for the group is 12% Calculate the Net Present Value of the cash flows for Project A
(Learning Objective 1 Ch 10)
A)£24,050.
B)£24,000.
C)£25,000.
D)£31,000


2If the internal rate of return is used as the discount rate in computing net present value, the net present value will be
(Learning Objective 2 Ch 10)
A)positive.
B)negative.
C)zero.
D)unknown.
(Ignore income taxes in this problem.)



3Cause Company is planning to invest in a machine with a useful life of five years and no salvage value. The machine is expected to produce cash flow from operations of £20,000 in each of the five years. Cause's required rate of return is 10%. The maximum price that the company would pay for the machine would be
(Learning Objective 3 Ch 10)
A)£32,220.
B)£62,100.
C)£75,820.
D)£122,100.


4The next 3 questions are based on the following information:
(Ignore income taxes in this problem.) Allen College has a telephone system that is in poor condition. The system can be either overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:
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Allen College uses a 12% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The net present value of the overhaul alternative is Refer To: [Allen College]
(Learning Objective 4 Ch 10)
A)£(108,000).
B)£(228,232).
C)£(232,272).
D)£(238,232).


5The net present value of the new system alternative is
(Learning Objective 4 Ch 10)
A)£(233,300).
B)£(283,300).
C)£(263,100).
D)£(273,100).


6The new system is a better alternative financially than the overhaul of the old system
(Learning Objective 5 Ch 10)
A)True
B)False


7If investment A has a payback period of 3 years and investment B has a payback period of 4 years, then :
(Learning Objective 6 Ch 10)
A)A is more profitable than B.
B)A is less profitable than B.
C)A and B are equally profitable.
D)the relative profitability of A and B cannot be determined using only the payback periods.


8One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached
(Learning Objective 6 Ch 10)
A)True
B)False


9The simple rate of return focuses on accounting net operating income rather than on cash flows
(Learning Objective 7 Ch 10)
A)True
B)False


10The calculation of the net present value of an investment project requires that the depreciation tax shield be included at:
(Learning Objective 8 Ch 10)
A)the amount of the depreciation with no adjustment for taxes.
B)the amount of the depreciation times one minus the tax rate.
C)the amount of the depreciation times the tax rate.
D)zero, since depreciation is not relevant to the calculation of net present value.


11What is the expected value of the probability distribution for the following product:
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(Learning Objective 9 Ch 10)
A)£600
B)£700.
C)£800.
D)£900.





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