ACCOUNTING AND FINANCE FOR BUSINESS QUIZ 8 INVESTMENT DECISIONS

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____ 1. The preferred technique for evaluating most capital investments is

a. the payback period.  
b. the discount payback period.  
c. the internal rate of return.  
d. the net present value.


____ 2. Gamma Electronics is considering the purchase of testing equipment that will cost $500 000 to replace old equipment. Assume the new machine will generate after-tax savings of $250 000 per year over the next four years.

                  What is the payback period for the investment?

a. 1.8 years  
b. 2.0 years  
c. 2.5 years  
d. 2.8 years

____ 3. Future Semiconductors is evaluating a new etching tool. The equipment costs $1.0 million and will generate after-tax cash inflows of $0.4 million per year for six years. Assume the company has a 15% cost of capital. What is the NPV of the investment?

a. $0.51 million  
b. $0.45 million  
c. $1.51 million  
d. $1.69 million

____ 4. Should a company invest in projects with an NPV of $0?

a. Yes, it should.  
b. No, it should not.  
c. The company is indifferent between accepting or rejecting projects with zero NPVs.  
d. The company should look at the PI and IRR of the projects.

____ 5. As the discount rate increases, the NPV of a project

a. increases.  
b. decreases.  
c. is unaffected.  
d. This cannot be determined without the discount rate.

____ 6. Swerling Company is considering a project with the following cash flows:


Year CF  
0           –$20 000  
1 $   3000  
2 $   4000  
3 $   5000  
4 $   6000  
5 $   7000  


                  What is the net present value of the proposed Swerling Company project if the discount rate is 6%?

a. $572  
b. $1572  
c. $10 572  
d. $100 572


____ 7. Louis is considering a new litter box factory with the following cash flows. If the discount rate is 10%, what is the NPV?


Year CF  
0  –$150 000.00  
1         30 000.00  
2         15 000.00  
3         25 000.00  
4         50 000.00  
5         50 000.00  
6         50 000.00
 
a. $1872.73  
b. $4494.70  
c. $9942.54  
d. $8278.92



____ 8. The profitability index is most useful

a. when the NPV method and the IRR method give conflicting signals on mutually exclusive projects.  
b. in capital rationing situations and managers have to decide which project is most profitable to undertake.  
c. when the cash flow pattern is unusual.  
d. when project scales are of concern.

____ 9. When the IRR is equal to the discount rate, the NPV is

a. positive.  
b. equal to zero.  
c. negative.  
d. This cannot be determined without the discount rate.

____ 10. The NPV method focuses on

a. sales.  
b. accounting returns.  
c. profits.  
d. cash flows.

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