1.
Which of the following capital budgeting techniques takes into account the
incremental accounting income rather than cash flows:
o Net present value
o Internal rate of return
o Accounting/Simple rate of return
o Cash payback period
2. Which of the following techniques does not take into account the time value of
money?
o Internal rate of return method
o Simple cash payback method
o Net present value method
o Discounted cash payback method
3. The current worth of a sum of money to be received at a future date is called:
o real value
o future value
o present value
o salvage value
4. The difference between the present value of cash inflows and the present value
of cash outflows associated with a project is known as:
o net present value of the project
o net future value of the project
o net historical value of the project
o net salvage value of the project
5. If present value of total cash outflow is $15,000 and present value of total cash
inflow is $14,000, what is the net present value of the project?
o $1,000
o -$1,000
o 0
o 2,000
6. If present value of cash outflow is equal to present value of cash inflow, the net
present value will be:
o positive
o negative
o zero
o infinite
7. Generally, a project is considered acceptable if its net present value is:
o negative or zero
o negative or positive
o positive or zero
o negative
8. A company is considering the following three investment proposals:
A). Investment required: $80,000, present value of future cash inflows: $96,000
B). Investment required: $75,000, present value of future cash inflows: $120,000
C). Investment required: $100,000, present value of future cash inflows:
$150,000
How would you rank the above investment proposals using profitability index
method?
o B, A, C
o C, A, B
o A, B, C
o B, C, A
Computation:
o A: $96,000/$80,000 = 1.2
o B: $120,000/$75,000 = 1.6
o C: $150,000/$100,000 = 1.5
The project with the highest profitability index is the most desirable project.
Therefore, the ranking of three projects using profitability index is B, C, A.
Consider the following data on a proposed investment:
o Investment required: $160,000
o Annual cash inflows: $40,000
o Life of the investment: 6 years
o Salvage value: 0
o Discount rate: 10%
Based on the above data, what is the payback period of the proposed investment
project?
o 0.25 years
o 3 years
o 4 years
o 5 years
Computation:
Payback period = Investment required/Annual cash inflows
= $160,000/$40,000
= 4 years
An increase in the discount rate will:
o reduce the present value of future cash flows.
o increase the present value of future cash flows.
o have no effect on net present value.
o compensate for reduced risk.
Using profitability index, the preference rule for ranking projects is:
o the lower the profitability index, the more desirable the project.
o the higher the profitability index, the more desirable the project.
o the lower the sunk cost, the more desirable the project.
o the higher the sunk cost, the more desirable the project.
The net present value of four projects is given below:
o Project A: $25,000
o Project B: $10,000
o Project C: $22,000
o Project D: $15,000
The four projects given above require the same amount of investment. How
would you rank them using net present value (NPV) method?
o B, D, C, A
o A, B, C, D
o A, C, D, B
o B, C, D, A
If the profitability index of a project is 0.75, it means:
o the NPV of the project is greater than zero
o the project's cost is less than the present value of its cash flows
o the NPV of the project is greater than 1
o the project returns 75 cents in present value for each dollar invested
in it
The comparison of actual costs and benefits of a project with original
estimates is formally known as:
o cost-benefit analysis
o post-completion audit
o business scorecard report
o feedback audit
A project whose acceptance prevents the acceptance of another project is
known as:
o a dependent
o an independent project
o a mutually exclusive project
o a rational project
A project whose acceptance requires the acceptance of another project is
known as:
o an independent project
o a dependent project
o an essential project
o a contingent project
The XYZ purchases a new equipment. The selected data is given below:
o Cost of equipment: $25,000
o Useful life of equipment: 5 years
o Tax rate: 30%
If equipment is depreciated using straight line method, what is the depreciation
tax shield associated with the new equipment?
o $5,000
o $35,000
o $1,500
o $7,500
Computation:
Annual depreciation tax shield = $5,000* × 0.3
= $1,500
*Annual depreciation expense = $25,000/5 years
= $5,000
If interest expense of a company is $300,000 and tax rate is 40%, the
after-tax cost of interest is:
o $120,000
o $300,000
o $180,000
o $75,000
Computation:
After-tax cost of interest = (1 – 0.4) × $300,000
= $180,000
If two alternative investments are compared using incremental cost
approach, the difference between the net present values of two
alternatives will be:
o greater than the difference obtained using total cost approach
o less than the difference obtained using total cost approach
o the same as the difference obtained using total cost approach
o indeterminable
The Washington Company has gathered the following data on a proposed
investment:
o Initial investment required: $800,000
o Annual incremental revenue: $180,000
o Annual incremental expenses: $60,000
o Discount rate: 12%
o Salvage value: $0
Based on the above information, the accounting/simple rate of return is:
o 22.5%
o 12%
o 15%
o 10.5%
Computation:
Accounting/simple rate of return = (incremental revenue – incremental expenses)/
Initial cost
= ($180,000 – $60,000)/$800,000
= 15%
