Jerkins Company is considering an investment project which will generate a level after-tax cash flow of $500,000 a

year in the next 5 years. Returns on comparable risk investment opportunities are 14%. The investment requires a

cash outlay of $1.5 million. What is the net present value of this project? (E)

A. ($43,150) C. $216,500

B. $108,250 D. $444,350 Gleim

74

. R. D. Inc. purchased a machine for $240,000. The machine has a useful life of six years, no salvage value, and

straight-line depreciation is to be used. The machine is expected to generate cash flows from operations, net of

income tax, of $70,000 in each of the six years. R. D. Inc’s cost of capital is 12%. The net present value is:

A. $180,000 D. $121,680

B. $35,490 E. $123,330

C. $47,770 C & U

Even Cash Flows, With WACC Computation, No Present Value Table

- The MM Corp. is planning construction of a new warehouse for its single manufacturing plant. The initial cost of the

investment is $1 million. Efficiencies from the new facility are expected to reduce after-tax costs by $100,000 for

each of the next 15 years. The corporation has a total value of $60 million and has outstanding debt of $40 million.

What is the NPV of the project if the firm has an after-tax cost of debt of 3% and a cost equity of 9%? (M)

A. $37,970 C. $69,901

B. $60,401 D. None of the above B & M - A firm is proposing to undertake a scale expansion. It would cost $40 million and produce an expected cash flow of

$8 million a year in perpetuity before tax. The tax rate is 35%. The firm is financed 40% by debt. The expected

return on the firm’s equity is 20%, and the interest rate on its debt is 12%. What is the NPV of the project using the

weighted average cost of capital?

A. -$21.48 million C. -$9.05 million

B. $12.91 million D. -$5.61 million B & M

NPV Given Before Tax Cash Flow

Even Cash Flow, No Present Value Table

75

. Jackson Corporation uses net present value techniques in evaluating its capital investment projects. The company

is considering a new equipment acquisition that will cost $100,000, fully installed, and have a zero salvage value at

the end of its five-year productive life. Jackson will depreciate the equipment on a straight-line basis for both

financial and tax purposes. Jackson estimates $70,000 in annual recurring operating cash income and $20,000 in

annual recurring operating cash expenses. Jackson’s cost of capital is 12% and its effective income tax rate is 40%.

What is the net present value of this investment on an after-tax basis?(E)

a. $28,840 c. $36,990

b. $8,150 d. $80,250 CMA Samp Q4-4

76

. Drillers Inc. is evaluating a project to produce a high-tech deep-sea oil exploration device. The investment required

is $80 million for a plant with a capacity of 15,000 units a year for 5 years. The device will be sold for a price of

$12,000 per unit. Sales are expected to be 12,000 units per year. The variable cost is $7,000 and fixed costs,

excluding depreciation, are $25 million per year. Assume Drillers employs straight-line depreciation on all

depreciable assets, and assume that they are taxed at a rate of 36%. If the required rate of return is 12%, what is

the approximate NPV of the project? (M)

A. $17,225,000 C. $26,780,000

B. $21,511,000 D. $56,117,000 Gleim

77

. Sparrow Corporation is considering an investment in equipment for $30,000. Sparrow uses the straight-line method

of depreciation with no mid-year convention. In addition, their tax rate is 40 percent, and the life of the equipment is

five years with no salvage value. The expected income before depreciation and taxes is projected to be $15,000 per

year. The cost of capital is 18 percent.

What is the net present value of the investment?

a. $5,648 c. $35,648

b. $(1,857) d. $28,143 H & M

Even Cash Flow, With Present Value Table

*. On January 1, Studley Company purchased a new machine for $100,000 to be depreciated over 5 years. It will

have no salvage value at the end of 5 years. For book and tax purposes, depreciation will be $20,000 per year.

The machine is expected to produce annual cash flow from operations, before income taxes, of $40,000. Assume

that Studley uses a discount rate of 12% and that its income tax rate will be 40% for all years. The present value of

$1 at 12% for 5 periods is 0.57, and the present value of an ordinary annuity of $1 at 12% for five periods is 3.61.

The NPV of the machine should be (E)

a. $15,520 positive. c. $60,000 positive.

b. $15,520 negative. d. $25,000 negative. AICPA 0582 I-37

*. The General Manager of Tela Mills Inc. is considering the purchase of some new machines. The machines would

cost P4,000,000 with an economic life of 8 years without any salvage value. Once set up, they would generate

P12,500,000 additional revenues but yearly expenses for additional labor and materials would also increase by

P11,500,000. Assume the company uses straight-line depreciation for taxes and that the appropriate tax rate is

35%. The required after-tax rate of return is 14%.

The following data are for an interest rate of 15% and 8 periods.

Present value of P1 0.3506

Future value of P1 2.8526

Present value of annuity of P1 4.6389

Future value of annuity of P1 13.2328

The company should (M)

a. Purchase the machines due to positive NPV of P638,900.

b. Not purchase the machines due to negative NPV of P984,715.

c. Not purchase the machines due to negative NPV of P172,907.50. RPCPA 0595

d. Be indifferent as to the option does not bring about any advantage nor disadvantage.

Even Cash Flow, Uneven Depreciation, Salvage Value, With Present Value Table

*. JJ Corp. is considering the purchase of a new machine that will cost P320,000. It has an estimated useful life of 3

years. Assume that 30% of the depreciable base will be depreciated in the first year, 40% in the second year, and

30% in the third year. It has a resale value of P20,000 at the end of its economic life. Savings are expected from

the use of machine estimated at P170,000 annually. The company has an effective tax rate of 40%. It uses 16% as

hurdle rate in evaluating capital projects. Should the company proceed with the P320,000 capital investment? (D)

Year Present Value of P1 Present Value of an Ordinary Annuity of P1

1 0.862 0.862

2 0.743 1.605

3 0.641 2.246

a. Yes, due to NPV of P6,556. c. Yes, due to NPV of P61,820. RPCPA 0596

b. Yes, due to NPV of P11,684. d. No, due to negative NPV of P1,136

Even Cash Flow, SL & SYD Depreciation Method, With Present Value Table

Numbers 14 and 15 are based on the following information: RPCPA 0589

MENUDO CORP. is evaluating an investment of P480,000 in equipment with a useful life of 3 years and no salvage

value. An estimate indicates that the cash flow before income tax from the investment will amount to P240,000 a year

and is expected to yield a discounted rate of return of 12%. Normally, straight-line method of depreciation is used, but

the President was informed that investment would be more favorable if the sum-of-the-years digit method of depreciation

is used. You were using the two methods of depreciation for purposes of comparison. Income tax rate is 35%.

The present value of P1.00 at 12% for

1 year 0.893

2 years 0.797

3 years 0.712

The present value of an annuity for 3 years at 12% is 2.402.

*. The net present value of the investment using the straight-line method of depreciation is

a. P5,068 c. P38,032

b. P36,480 d. P29,224

*. The net present value of the investment using the sum-of-years digit method is

a. P34,292 c. P36,480

b. P38,032 d. P43,116

Uneven Cash Flow - Goldsmith labs recover gold from printed circuit boards. It has developed a new equipment for the purpose. The

following data is given.

1) Equipment costs $250,000

2) It will cost 100,000 per year to run

3) It has an economic life of 5 years and is depreciated using straight-line method

4) It will recover 1000 ounces of gold per year

5) The current price of gold is $300 per ounce and it expected to increase at a rate 4% per year for the

foreseeable future

6) The tax rate is 30%

7) The cost of capital is 8%

What is NPV of the equipment?

A. $580,400 C. $470,400

B. $520,510 D. None of the above B & M

With Pessimistic, Expected and Optimistic Outcome

78

. The following forecasts have been prepared for a new investment by Oxford Industries of $20 million with an 8-year

life:

Pessimistic Expected Optimistic

Market size 60,000 90,000 140,000

Market share, % 25 30 35

Unit price $750 $800 $875

Unit variable cost $500 $400 $350

Fixed cost, millions $7 $4 $3.5

Assume that Oxford employs straight-line depreciation, and that they are taxed at 35%. Assuming an opportunity

cost of capital of 14%, what is the NPV of this project, based on expected outcomes?

A. $2,626,415 C. $6,722,109

B. $4,563,505 D. $8,055,722 Gleim - A project has an initial investment of 100. You have come up with the following estimates of the projects with cash

flows.

NPV Pessimistic Most Likely Optimistic

Revenues 15 20 25

Costs -10 -8 -5

If the cash flows are perpetuities and the cost of capital is 10%. What does a sensitivity analysis of NPV (no taxes)

show? B & M

NPV Pessimistic Most Likely Optimistic

A. -50 20 +100

B. -100 -50 +80

C. -50 +50 +70

D. None of the above - A project has an initial investment of $150. You have come up with the following estimates of revenues and costs.

Pessimistic Most Likely Optimistic

Total revenues +30 +50 65

Total costs -25 -20 -15

If the cash flows are perpetuities and the cost of capital is 10%. What does a sensitivity analysis of NPV (no taxes)

show? B & M

NPV Pessimistic Most Likely Optimistic

A. -100 +150 +350

B. -50 +300 +500

C. +50 -100 +400

D. None of the above - You have come up with the following estimates of project cash flows:

Pessimistic Most Likely Optimistic

Investments -100 -80 -60

Total Revenues +30 +40 +50

Total Costs -20 -15 -10

The cash flows are perpetuities and the cost of capital is 10%. What does a sensitivity analysis of NPV (without

taxes) show? B & M

NPV Pessimistic Most Likely Optimistic

A. 0 +170 +340

B. 0 +500 +800

C. -90 -55 – 20

D. None of the above

Sensitivity Analysis

Change in Revenues & Costs - A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount

rate changes from 12% to 15%, what would the NPV of the project if the revenues were higher by 10% and the

costs were 65% of the revenues? (D)

A. $5566 C. $5611

B. $964 D. None of the above B & M

Change in Fixed Costs

79

. What happens to the NPV of a 1-year project if fixed costs are increased from $500 to $600, the firm is profitable,

has a 35% tax rate and employs a 12% cost of capital? (E)

A. NPV decreases by $100.00. C. NPV decreases by $65.00.

B. NPV decreases by $89.29. D. NPV decreases by $58.04. Gleim

Change in Discount Rate - A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount

rate changes from 12% to 15%, what is the change in the NPV of the project (approximately)? (M)

A. 12,750 decrease C. 122,650 increase

B. 12,750 increase D. 135,400 decrease B & M - A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount

rate changes from 12% to 15%, what would be the NPV of the project if the discount rate were higher by 10%?

A. $5648 C. –$2735

B. $3840 D. None of the above B & M

Leases

Present Value

80

. For the next 2 years, a lease is estimated to have an operating net cash inflow of $7,500 per annum, before

adjusting for $5,000 per annum tax basis lease amortization, and a 40% tax rate. The present value of an ordinary

annuity of $1 per year at 10% for 2 years is 1.74. What is the lease’s after-tax present value using a 10% discount

factor? (E)

a. $2,610 c. $9,570

b. $4,350 d. $11,310 Gleim, RPCPA 1001

Discount Rate

81

. Stone Co. is considering the acquisition of equipment. To buy the equipment, the cost is $15,192. To lease the

equipment, Stone must sign a non-cancelable lease and make five payments of $4,000 each. The first payment will

be paid on the first day of the lease. At the time of the last payment, Stone will receive title to the equipment. The

present value of an ordinary annuity of $1 is as follows:

Present Value

No. of Periods 10% 12% 16%

1 0.909 0.893 0.862

2 1.736 1.690 1.605

3 2.487 2.402 2.246

4 3.170 3.037 2.798

5 3.791 3.605 3.274

The interest rate implicit in this lease is approximately

a. 10% c. Between 10% and 12%

b. 12% d. 16% AICPA 1178 I-39

PROFITABILITY INDEX

Given Net Present Value

*. Friendly Corp.’s Project Sky has a net investment of P1.2 million. The net present value of all future net cash

inflows is P2.4 million. The company’s tax rate is 40%. The profitability index is (E)

a. 0.50 c. 0.83

b. 1.20 d. 2.00 RPCPA 0597

Given Internal Rate of Return with Present Value Table - Sulu Company is considering to acquire a machine in order to reduce its direct labor costs. This machine shall last

for 4 years with no salvage value. Currently, the cash expenses amounted to P120,000 per year. The initial

analysis indicated that the time-adjusted rate of return is 15%. At 12% (cost of capital to finance the purchase of the

machine), the company expects net present value of P5,470.80.

The present value of 1 for four period at 12% is 3.03735 and at 15% is 2.85499. Ignoring income tax

considerations, the profitability index is (D)

A. 1.064 C. 1.047

B. 1.183 D. 1.250 Pol Bobadilla

Even Cash Flows, Ignore Income Taxes, No Present Value Table

82

. Mesa Company is considering an investment to open a new banana processing division. The project in question

would entail an initial investment of $45,000, and as a result of the project cash inflows of $20,000 can be expected

in each of the next 3 years. The hurdle rate is 10%. What is the profitability index for the project? (E)

A. 1.0784 C. 1.1379

B. 1.1053 D. 1.1771 Gleim - An investment opportunity costing $150,000 is expected to yield net cash flows of $50,000 annually for five years.

The profitability index of the investment at a cutoff rate of 14% would be (E)

a. 3.0 c. 0.33

b. 1.14 d. 14% D, L & H 9e - An investment opportunity costing $300,000 is expected to yield net cash flows of $100,000 annually for five years.

The profitability index of the investment at a cutoff rate of 14% would be

a. 3.0. c. 0.33.

b. 1.14. d. 14%. L & H 10e - A project has a NPV of $30,000 when the cutoff rate is 10%. The annual cash flows are $41,010 on an investment

of $100,000. The profitability index for this project is

a. 1.367 c. 2.438

b. 3.3333 d. 1.300 D, L & H 9e - A project has an initial cost of $100,000 and generates a present value of net cash inflows of $120,000. What is the

project’s profitability index? (E)

a. .20 c. .80

b. 1.20 d. 5.00 Barfield

Given Present Value of After Tax Cash Flows

Questions 33 and 34 are based on the following information. RPCPA 0593

Pertinent data for two (2) alternatives which are being considered by the Blue Nun Co. are:

1 2

Present values of annual cash flows P546,480 P306,495

Present values of the net investment 500,000 312,500

Excess (deficiency) present value P 46,480 (P 6,005)

*. The profitability index is a measure of the desirability of investments which are not of the same size. Given the

above data, the profitability indices for alternatives 1 and 2 are

a. b. c. d.

Alternative 1 1.09 1.21 1.09 0.98

Alternative 2 0.69 1.15 0.98 1.11

*. In evaluating the alternatives for the above Blue Nun Co., the following statements are true except:

a. Alternative 1 is better because there is an excess present value of the cash flow.

b. The profitability index of Alternative 1 means that it will earn less than the lowest acceptable rate of return.

c. Alternative 2 is not acceptable because its profitability index is less than 1.

d. The deficiency present value for Alternative 2 means it does not meet the minimum rate of return requirement.

INTERNAL RATE OF RETURN

IRR Formula

*. Two projects have an initial outlay of $497 and each has an income stream lasting 3 years. Project A returns $200

per year for 3 years. Project B returns $200 for the first 2 years and $248 for the third year.

n 8% 10% 12% 14%

1 .9259 .9091 .8929 .8772

2 .8573 .8264 .7972 .7695

3 .7938 .7513 .7118 .6750

The appropriate internal rate of return valuation for Project B is

a. $200(.8772) + $200(.7695) + $248(.6750) = $496.74

b. $200(.8929) + $200(.7972) + $248(.7118) = $514.41

c. $200(.9091) + $200(.8264) + $248(.7513) = $533.42

d. $200(.9259) + $200(.8573) + $248(.7938) = $553.50 CIA 1185 IV-31

Required Investment

Given Present Value of Cash Inflow, Ignore Income Taxes - (Ignore income taxes in this problem.) A planned factory expansion project has an estimated initial cost of $800,000.

Using a discount rate of 20%, the present value of future cost savings from the expansion is $843,000. To yield

exactly a 20% internal rate of return, the actual investment cost cannot exceed the $800,000 estimate by more than:

(m)

a. $160,000. c. $43,000.

b. $20,000. d. $1,075. AICPA adapted

Even Cash Flow, Ignore Income Taxes No Present Value Table - Ann recently invested in a project that promised an internal rate of return of 15 percent. If the project has an

expected annual cash inflow of $12,000 for six years, with no salvage value, how much did Ann pay for the project?

a. $35,000 c. $72,000

b. $45,414 d. $31,708 Barfield

83

. A firm is considering a project with annual cash flows of $100,000. The project would have a 7-year life, and the

company uses a discount rate of 10%. Ignoring income taxes, what is the maximum amount the company could

invest in the project and the project still be acceptable?

a. $359,100 c. $486,800

b. $700,000 d. $100,000 H & M

84

. A firm is considering a project with annual cash flows of $40,000. The project would have a 10-year life, and the

company uses a discount rate of 8%. Ignoring income taxes, what is the maximum amount the company could

invest in the project and the project still be acceptable (rounded)?

a. $400,000 c. $203,210

b. $268,400 d. $363,604 H & M

85

. A firm is considering a project with annual cash flows of $120,000. The project would have an 8-year life, and the

company uses a discount rate of 12 percent. Ignoring income taxes, what is the maximum amount the company

could invest in the project and the project still be acceptable (rounded)?

a. $488,740 c. $580,291

b. $562,614 d. $596,160 H & M - (Ignore income taxes in this problem.) Kipling Company has invested in a project that has an eight-year life. It is

expected that the annual cash inflow from the project will be $20,000. Assuming that the project has a internal rate

of return of 12%, how much was the initial investment in the project? (M)

a. $160,000 c. $80,800

b. $99,360 d. $64,640 AICPA adapted - (Ignore income taxes in this problem.) White Company’s required rate of return on capital budgeting projects is 12%.

The company is considering an investment opportunity which would yield a cash flow of $10,000 in five years. What

is the most that the company should be willing to invest in this project? (M)

a. $36,050. c. $17,637.

b. $2,774. d. $5,670. G & N 9e

Even Cash Flow, Salvage Value, Ignore Income Taxes, No Present Value Table - Tiger Inc. bought a piece of machinery with the following data:

Useful life 6 years

Yearly net cash inflow $45,000

Salvage value – 0 –

Internal rate of return 18%

Cost of capital 14%

The initial cost of the machinery was

a. $157,392.

b. $174,992.

c. $165,812.

d. impossible to determine from the information given. Barfield - (Ignore income taxes in this problem.) The Baker Company purchased a piece of equipment with the following

expected results:

Useful life 7 years

Yearly net cash inflow $50,000

Salvage value -0-

Internal rate of return 20%

Discount rate 16%

The initial cost of the equipment was: (M)

a. $300,100.

b. $180,250

c. $190,600.

d. Cannot be determined from the information given. G & N 9e

Uneven Even Cash Flow, Ignore Income Taxes, No Present Value Table. - (Ignore income taxes in this problem.) Arthur operates a part-time auto repair service. He estimates that a new

diagnostic computer system will result in increased cash inflows of $2,100 in Year 1, $3,200 in Year 2, and $4,000 in

Year 3. If Arthur’s discount rate is 10%, then the most he would be willing to pay for the new computer system would

be: (M)

a. $6,652. c. $7,747.

b. $6,984. d. $7,556. G & N 9e - (Ignore income taxes in this problem.) In order to receive $12,000 at the end of three years and $10,000 at the end

of five years, how much must be invested now if you can earn 14% rate of return? (M)

a. $12,978. c. $13,290.

b. $8,100. d. $32,054. G & N 9e

Even After-tax Annual Cash Flow, No Present Value Table

86

. Conte Inc. invested in a machine with a useful life of six years and no salvage value. The machine is expected to

produce annual cash flows from operations, net of income tax, of $2,000. If the estimated internal rate of return is

10%, the amount of the original investment was: (M)

A. $9,000 D. $5,640

B. $11,280 E. $8,710

C. $12,000 C & U

Even After-tax Annual Cash Flow, Salvage Value No Present Value Table

87

. The Hopkins Company has estimated that a proposed project’s 10-year annual net cash benefit, received each year

end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the 10th year. Assuming that these

cash inflows satisfy exactly Hopkins’ required rate of return of 8%, calculate the initial cash outlay. (E)

A. $16,775 C. $25,000

B. $19,090 D. $30,000 Gleim

Even After-tax Cash Flow, with Present Value Table

. Cause 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, net of income taxes, of P20,000 in each of the five

years. Cause’s expected rate of return is 10%. Information on present value and future amount factors is as

follows:

Period

1 2 3 4 5

PV of P1 at 10% .900 .826 .751 .683 .621

PVA of P1 at 10% .909 1.736 2.487 3.170 1.611

FV of P1 at 10% 1.000 1.210 1.330 1.464 1.611

FVA of P1 at 10% 1.000 2.100 3.310 4.641 6.105

How much will the machine cost?

A. P32,220 C. P75,820

B. P62,100 D. P122,100 Pol Bobadilla

Uneven After-tax Cash Flow, Salvage Value, with Present Value Table.

88

. Kern Co. is planning to invest in a 2-year project that is expected to yield cash flows from operations, net of income

taxes, of $50,000 in the first year and $80,000 in the second year. Kern requires an internal rate of return of 15%.

The present value of $1 for one period at 15% is 0.870 and for two periods at 15% is 0.756. The future value of $1

for one period at 15% is 1.150 and for two periods at 15% is 1.323. The maximum that Kern should invest

immediately is (E)

a. $81,670 c. $130,000

b. $103,980 d. $163,340 AICPA 1189 II-36

89

. Orab Co. has the chance to invest in a 2-year project expected to produce cash flows from operations, net of

income taxes, of $100,000 in the first year and $200,000 in the second year. Orab requires an internal rate of return

of 20%. The present value of $1 for one period at 20% is 0.833; for two periods at 20% is 0.694. For this project,

Orab should be willing to invest immediately a maximum of: (E)

A. $222,100 C. $283,300

B. $208,200 D. $249,900 AICPA adapted

Required Life

Even Cash Flow, Ignore Income Taxes, No Present Value Table - (Ignore income taxes in this problem.) The following information is available on a new piece of equipment:

Cost of the equipment $21,720

Annual cash inflows $5,000

Internal rate of return 16%

Required rate of return 10%

The life of the equipment is approximately: (M)

a. 6 years.

b. 4.3 years.

c. 8 years.

d. it is impossible to determine from the data given. G & N 9e

Required Increase in Cash Flows

*. The following data pertain to Sunlight Corp., whose management is planning to purchase an automated tanning

equipment. - Economic life of equipment – 8 years.
- Disposal value after 8 years – nil.
- Estimated net annual cash inflows for each of the 8 years – P81,000.
- Time-adjusted internal rate of return – 14%
- Cost of capital of Sunlight Corp – 16%
- The table of present values of P1 received annually for 8 years has these factors: at 14% = 4.639, at 16%

= 4.344 - Depreciation is approximately P46,970 annually.

Find the required increase in annual cash inflows in order to have the time-adjusted rate of return approximately

equal the cost of capital. (M)

a. P5,501 c. P4,344

b. P6,501 d. P5,871 RPCPA 0594

Required Annual Before Tax Cash Flow

Even Cash Flow

90

. Payback Company is considering the purchase of a copier machine for P42,825. The copier machine will be

expected to be economically productive for 4 years. The salvage value at the end of 4 years is negligible. The

machine is expected to provide 15% internal rate of return. The company is subject to 40% income tax rate. The

present value of an ordinary annuity of 1 for 4 periods is 2.85498. In order to realize the IRR of 15%, how much is

the estimated before-tax cash inflow to be provided by the machine?(M)

A. P17,860 C. P25,000

B. P15,000 D. P35,700

91

. Scott Corporation’s new project calls for an investment of $10,000. It has an estimated life of 10 years. The IRR

has been calculated to be 15 percent. If cash flows are evenly distributed and the tax rate is 40 percent, what is the

annual before-tax cash flow each year? (Assume depreciation is a negligible amount.) (M)

a. $1,993 d. $4,983

b. $3,321 e. $5,019

c. $1,500 Brigham

Required Annual After-tax Cash Flow

Even Cash Flow, Salvage Value

92

. Para Co. is reviewing the following data relating to an energy saving investment proposal:

Cost $50,000

Residual value at the end of 5 years 10,000

Present value of an annuity of 1 at 12% for 5 years 3.60

Present value of 1 due in 5 years at 12% 0.57

What would be the annual savings needed to make the investment realize a 12% yield?(M)

a. $8,189 c. $12,306

b. $11,111 d. $13,889

Required Cash Flow for a Certain Year

Even Cash Flow, Ignore Income Taxes, No Present Value Table - (Ignore income taxes in this problem.) Hilltop Company invested $100,000 in a two-year project. The cash flow was

$40,000 for the first year. Assuming that the internal rate of return was exactly 12%, what was the cash flow for the

second year of the project? (M)

a. $51,247. c. $64,284.

b. $60,000. d. $80,652. AICPA adapted

Required Investment & Annual Cash Flow

Questions 85 & 86 are based on the following information. G & N 9e

(Ignore income taxes in this problem.) The Finney Company is reviewing the possibility of remodeling one of its

showrooms and buying some new equipment to improve sales operations. The remodeling would cost $120,000 now

and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be

$30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and

other materials used in the project would have a salvage value of $10,000 in 10 years. Finney’s discount rate is 16%. - The immediate cash outflow required for this project would be: (E)

a. $(120,000). c. $(90,000).

b. $(150,000). d. $(130,000). - What would the annual net cash inflows from this project have to be in order to justify investing in remodeling? (M)

a. $14,495 c. $16,147

b. $35,842 d. $29,158

Required Break-even Sales

Peso Sales - Calculator Company proposes to invest $6 million in a new calculator making plant. Fixed costs are $1 million a

year. A calculator costs $4 million to manufacture and can be sold for $19. If the plant lasts for 3 years and the cost

of capital is10%, what is the approximate break-even level of annual sales? (Assume no taxes.) (M)

A. $227,550 C. $67,000

B. $160,900 D. None of the above B & M

Unit Sales - Financial Calculator Company proposes to invest $9 million in a new calculator making plant. Fixed costs are $2

million a year. A financial calculator costs $8 per unit to manufacture and can be sold for $24 per unit. If the plant

lasts for 4 years and the cost of capital is 20%, what is the break-even level of annual rates? (Assume no taxes.)

(M)

A. 342,500 units C. 125,000 units

B. 217,500 units D. None of the above B & M - Taj Mahal Tour company proposes to invest $3 million in a new tour package. Fixed costs are $1 million per year.

The tour package costs $500 and can be sold at $1500 per package to tourists. This tour package is expected to

be attractive for the next five years. If the cost of capital is 20%, what is the break-even number of tourists per

year? (Ignore taxes, give an approximation.)

A. 2000 C. 15000

B. 1000 D. None of the above B & M - Hammer Company proposes to invest $6 million in a new type of hammer-making equipment. The fixed costs are

$0.5 million per year. The equipment is expected to last for 5 years. The manufacturing costs per hammer is $1.

Calculate the break-even volume per year. (Ignore taxes.)

A. 400,000 C. 250,000

B. 500,000 D. None of the above B & M

Required Unit Sales & Selling Price

Questions 55 and 56 are based on the following information. Pol Bobadilla

Moorman Products Company is considering a new product that will sell for P100 and have a variable cost of P60.

Expected volume is 20,000 units. New equipment costing P1,500,000 and having a five-year useful life and no salvage

value is needed, and will be depreciated using the straight-line method. The machine has cash operating costs of

P20,000 per year. The firm is in the 40% tax bracket and has cost of capital of 12%. The present value of 1, end of five

periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478. - How many units per year must the firm sell for the investment to earn 12% internal rate of return?

A. 12,838 C. 8,225

B. 10,403 D. 7,625 - Suppose the 20,000 estimated volume is sound, but the price is in doubt, What is the selling price (rounded to

nearest peso) needed to earn a 12% internal rate of return?

A. P81 C. P70

B. P85 D. P90

IRR Given Payback Period

93

. Smoot Automotive has implemented a new project that has an initial cost, and then generates inflows of $10,000 a

year for the next seven (7) years. The project has a payback period of 4.0 years. What is the project’s internal rate

of return (IRR)?

A. 14.79% C. 18.54%

B. 16.33% D. 15.61% Gleim

IRR Given Cash Flows, Ignore Income Taxes

Even Cash Flows, No Present Value Table

94

. What is the approximate IRR for a project that costs $50,000 and provides cash inflows of $20,000 for 3 years?

A. 10% C. 22%

B. 12% D. 27% Gleim

95

. Pena Company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows

from the project are $7,791 for each of 10 years. What is the IRR of the project?

A. 6% C. 8%

B. 7% D. 9% Gleim

96

. Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year

for 5 years?

A. NPV = $36,274. C. IRR = 1.4%.

B. NPV = $20,000. D. IRR is greater than 10%. Gleim - An investment opportunity costing $150,000 is expected to yield net cash flows of $45,000 annually for five years.

The IRR of the investment is between

a. 10 and 12%. c. 14 and 16%.

b. 12 and 14%. d. 16 and 18%. D, L & H 9e

45 An investment opportunity costing $180,000 is expected to yield net cash flows of $53,000 annually for five years.

The IRR of the investment is between

a. 10 and 12% c. 14 and 16%.

b. 12 and 14%. d. 16 and 18%. L & H 10e - An investment opportunity costing $400,000 is expected to yield net cash flows of $75,000 annually for eight years.

The IRR of the investment is between

a. 10 and 12%. c. 14 and 16%.

b. 12 and 14%. d. 16 and 18%. D, L & H 9e - An investment opportunity costing $200,000 is expected to yield net cash flows of $39,000 annually for eight years.

The IRR of the investment is between

a. 10 and 12%. c. 14 and 16%.

b. 12 and 14%. d. 16 and 18%. L & H 10e

*. MLF Corporation is evaluating the purchase of a P500,000 die attach machine. The cash inflows expected from the

investment is P145,000 per year for five years with no equipment salvage value. The cost of capital is 12%. The

net present value factor for five (5) years at 12% is 3.6048 and at 14% is 3.4331. The internal rate of return for this

investment is (M)

a. 3.45% c. 13.8%

b. 2.04% d. 15.48% RPCPA 1097 - (Ignore income taxes in this problem.) Sue Falls is the president of Sports, Inc. She is considering buying a new

machine that would cost $14,125. Sue has determined that the new machine promises a internal rate of return of

12%, but Sue has misplaced the paper which tells the annual cost savings promised by the new machine. She does

remember that the machine has a projected life of 10 years. Based on these data, the annual cost savings are: (M)

a. it is impossible to determine from the data given.

b. $1,412.50.

c. $2,500.00.

d. $1,695.00. G & N 9e - (Ignore income taxes in this problem.) Joe Flubup is the president of Flubup, Inc. He is considering buying a new

machine that would cost $25,470. Joe has determined that the new machine promises a internal rate of return of

14%, but Joe has misplaced the paper which tells the annual cost savings promised by the new machine. He does

remember that the machine has a projected life of 12 years. Based on these data, the annual cost savings are: (M)

a. impossible to determine from the data given.

b. $2,122.50.

c. $4,500.00.

d. $4,650.00. G & N 9e

97

. A firm is considering a project requiring an investment of $13,500. The project would generate annual cash inflows

of $3,148 per year for the next 7 years. The company uses the straight-line method of depreciation with no mid-year

convention. Ignore income taxes. The approximate internal rate of return for the project is

a. 6% d. 14%

b. 8% e. 18%.

c. 12% H & M

98

. A firm is considering a project requiring an investment of $100,000. The project would generate annual cash inflows

of $27,739 per year for the next 5 years. The company uses the straight-line method of depreciation with no midyear convention. Ignore income taxes. The approximate internal rate of return for the project is

a. 9% d. 16%

b. 10% e. 28%

c. 12% H & M

99

. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end

of each year for 20 years. Find the internal rate of return to the nearest whole percentage point. (E)

a. 9% d. 3%

b. 7% e. 11%

c. 5% Brigham

100

. Foster Company is considering the purchase of a new machine for $38,000. The machine would generate a net

cash inflow of $11,607 per year for five years. At the end of five years, the machine would have no salvage value.

The company’s cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year

convention.

What is the internal rate of return for the machine rounded to the nearest percent, assuming no taxes are paid?

a. 12% c. 14%

b. 18% d. 16% H & M

101

. Brown Corporation recently purchased a new machine for $339,013.20 with a ten-year life. The old equipment has a

remaining life of ten years and no disposal value at the time of replacement. Net cash flows will be $60,000 per

year. What is the internal rate of return? (E)

a. 12% c. 20%

b. 16% d. 24% Horngren

102

. Soda Manufacturing Company provides vending machines for soft-drink manufacturers. The company has been

investigating a new piece of machinery for its production department. The old equipment has a remaining life of

three years and the new equipment has a value of $52,650 with a three-year life. The expected additional cash

inflows are $25,000 per year. What is the internal rate of return? (E)

a. 20% c. 10%

b. 16% d. 8% Horngren

103

. The Zeron Corporation recently purchased a new machine for its factory operations at a cost of $921,250. The

investment is expected to generate $250,000 in annual cash flows for a period of six years. The required rate of

return is 14%. The old machine has a remaining life of six years. The new machine is expected to have zero value

at the end of the six-year period. The disposal value of the old machine at the time of replacement is zero. What is

the internal rate of return? (M)

a. 15% c. 17%

b. 16% d. 18% Horngren - (Ignore income taxes in this problem.) The following data pertain to an investment proposal:

Present investment required $26,500

Annual cost savings $ 5,000

Projected life of the investment 10 years

Projected salvage value $ -0-

The internal rate of return, interpolated to the nearest tenth of a percent, would be: (M)

a. 11.6%. c. 13.6%.

b. 12.8%. d. 12.4%. G & N 9e - (Ignore income taxes in this problem.) The following data are available on a proposed investment project:

Initial investment $142,500

Annual cash inflows $30,000

Life of the investment 8 years

Required rate of return 10%

The internal rate of return, interpolated to the nearest tenth of a percent, would be: (M)

a. 13.3%. c. 15.3%.

b. 12.1%. d. 12.7%. G & N 9e - (Ignore income taxes in this problem.) The following data pertain to an investment proposal:

Present investment required $14,000

Annual cost savings $ 2,500

Projected life of the investment 8 years

Projected salvage value $ -0-

Required rate of return 6%

The internal rate of return, interpolated to the nearest tenth of a percent, would be: (M)

a. 6.7%. c. 8.7%.

b. 9.3%. d. 7.3%. G & N 9e - (Ignore income taxes in this problem.) Overland Company has gathered the following data on a proposed

investment project:

Investment in depreciable equipment $150,000

Annual cash flows $ 40,000

Life of the equipment 10 years

Salvage value -0-

Discount rate 10%

The internal rate of return on this investment is closest to: (D)

a. 23.4%. c. 22.7%

b. 25.4%. d. 22.1% G & N 9e - (Ignore income taxes in this problem.) The following information concerns a proposed investment:

Investment required $14,150

Annual savings $ 2,500

Life of the project 12 years

The internal rate of return is (do not interpolate): (M)

a. 14%. c. 10%.

b. 12%. d. 5%. G & N 9e

104

. Whitney Crane Inc. has the following independent investment opportunities for the coming year:

Project Cost Annual Cash Inflows Life (Years) IRR

A $10,000 $11,800 1

B 5,000 3,075 2 15

C 12,000 5,696 3

D 3,000 1,009 4 13

The IRRs for Projects A and C, respectively, are: (M)

a. 16% and 14% d. 18% and 13%

b. 18% and 10% e. 16% and 13%

c. 18% and 20% Brigham

105

. Genuine Products Inc. requires a new machine. Two companies have submitted bids, and you have been assigned

the task of choosing one of the machines. Cash flow analysis indicates the following:

Year Machine A Cash Flow Machine B Cash Flow

0 -$2,000 -$2,000

1 0 832

2 0 832

3 0 832

4 3,877 832

What is the internal rate of return for each machine? (M)

a. IRRA = 16%; IRRB = 20% d. IRRA = 18%; IRRB = 24%

b. IRRA = 24%; IRRB = 20% e. IRRA = 24%; IRRB = 26%

c. IRRA = 18%; IRRB = 16% Brigham

Even Cash Flow, With Present Value Table

*. What is the discounted rate of return, to the nearest percent of an investment of P100,000 that gives an annual

income of P12,000 over a 15-year period? (E)

Abridged table of present value of P1.00 received annually for N years

N 6% 8% 10% 12%

15 9.712 8.559 7.606 6.811

a. 6% c. 10%

b. 8% d. none of these RPCPA 1087

*. Mr. Castillo is thinking to buy a lathe machine for P10,000. This machine will result in annual cash inflow of P2,000

a year for ten-year period. Below is an abridged table showing the present value of annuity of P1.00 for N periods.

Years 14% 15% 16%

9 4.946 4.772 4.607

10 5.216 5.019 4.833

11 5.453 5.234 5.029

Using the short-cut method, the discounted rate of return on the project is (E)

a. 13% c. 15% (15.098%)

b. 14% d. 16% RPCPA 0581