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Exam 12: Planning for Capital Investments

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Question 71

True/False

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Using the internal rate of return method, a project is rejected when the rate of return is greater than or equal to the required rate of return.

A) True
B) False

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Question 72

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The first step in the capital budgeting evaluation process is to

A) request proposals for projects.
B) screen proposals by a capital budgeting committee.
C) determine which projects are worthy of funding.
D) approve the capital budget.

E) A) and B)
F) None of the above

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Question 73

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Use the following table, $\text { Present Value of an Annuity of } 1$ $\begin{array}{rrrr}\text { Periods } & 8 \% & 9 \% & 10\%\\1 & .926 & .917 & 909 \\2 & 1.783 & 1.759 & 1.736 \\3 & 2.577 & 2.531 & 2.487\end{array}$ A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $379,650 and is expected to generate cash inflows of $150,000 each year for three years. The approximate internal rate of return on this project is

To avoid rejecting projects that actually should be accepted, 1. intangible benefits should be ignored. 2. conservative estimates of the intangible benefits' value should be incorporated into the NPV calculation. 3. calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV.

The internal rate of return is the interest rate that results in a

If a project costing $40,000 has a profitability index of 1.00 and the discount rate was 8%, then the project's internal rate of return was

The internal rate of return method is, like the NPV method, a discounted cash flow technique.

If a company's required rate of return is 9%, and in using the profitability index method, a project's index is greater than 1, this indicates that the project's rate of return is

A project that cost $75,000 has a useful life of 5 years and a salvage value of $3,000. The internal rate of return is 12% and the annual rate of return is 18%. The amount of the annual net income was

Use the following table for questions 109-111. $\text { Present Value of an Annuity of } 1$ $\begin{array}{rrrr}\text { Periods } & 8 \% & 9 \% & 10\%\\1 & .926 & .917 & .909 \\2 & 1.783 & 1.759 & 1.736 \\3 & 2.577 & 2.531 & 2.487\end{array}$ -A company has a minimum required rate of return of 9%. It is considering investing in a project that costs $210,000 and is expected to generate cash inflows of $84,000 at the end of each year for three years. The net present value of this project is

A project with an initial investment of $70,000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is

The profitability index is computed by dividing the

The profitability index is calculated by dividing the total cash flows by the initial investment.

The rate that a company must pay to obtain funds from creditors and stockholders is known as the

All of the following statements about intangible benefits in capital budgeting are correct except that they

If a project has a negative net present value, the internal rate of return will be

A project with a profitability index of 1.156 also has net cash flows with a present value of $69,360. The project's internal rate of return was 10%. The initial investment was

A project has an annual rate of return of 15%. The project cost $120,000, has a 5-year useful life, and no salvage value. Straight-line depreciation is used. The annual net income, exclusive of depreciation, was

The annual rate of return method is based on

A company is considering purchasing a machine that costs $400,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. The cash payback period on the machine is