5) Centurion Company is considering a mineral extraction project which requires an initial investment of $2,000,000 and will yield annual cash flows of $300,000 for 8 years. Centurion has an 8% hurdle rate. If Centurion uses the NPV method of evaluation investments, this would be considered a good investment opportunity.
Present Value of an Annuity of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
1.859
|
1.833
|
1.808
|
1.783
|
1.759
|
1.736
|
3
|
2.723
|
2.673
|
2.624
|
2.577
|
2.531
|
2.487
|
4
|
3.546
|
3.465
|
3.387
|
3.312
|
3.240
|
3.170
|
5
|
4.329
|
4.212
|
4.100
|
3.993
|
3.890
|
3.791
|
6
|
5.076
|
4.917
|
4.767
|
4.623
|
4.486
|
4.355
|
7
|
5.786
|
5.582
|
5.389
|
5.206
|
5.033
|
4.868
|
8
|
6.463
|
6.210
|
5.971
|
5.747
|
5.535
|
5.335
|
9
|
7.108
|
6.802
|
6.515
|
6.247
|
5.995
|
5.759
|
10
|
7.722
|
7.360
|
7.024
|
6.710
|
6.418
|
6.145
|
Answer: FALSE
Explanation: Calculations: $2,000,000 - (5.747 × $300,000) = ($275,900)
Diff: 2
LO: 21-4
EOC Ref: E21-22
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
6) Using the NPV method of evaluating investments, a company should consider a project a good investment opportunity as long as the NPV of the total cash flows is positive.
Answer: TRUE
Diff: 1
LO: 21-4
EOC Ref: E21-22
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
7) La Grange Company is evaluating an opportunity to invest $50,000 in new manufacturing equipment. It will have a useful life of 3 years, and will generate $10,000 cash flows at the end of Year 1; $20,000 of cash flows at the end of Year 2; and $30,000 of cash flows at the end of Year 3. If La Grange uses a discount rate of 10% to calculate NPV, they will accept the opportunity as a good investment.
Present Value of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
0.907
|
0.890
|
0.873
|
0.857
|
0.842
|
0.826
|
3
|
0.864
|
0.840
|
0.816
|
0.794
|
0.772
|
0.751
|
4
|
0.823
|
0.792
|
0.763
|
0.735
|
0.708
|
0.683
|
5
|
0.784
|
0.747
|
0.713
|
0.681
|
0.650
|
0.621
|
6
|
0.746
|
0.705
|
0.666
|
0.630
|
0.596
|
0.564
|
7
|
0.711
|
0.665
|
0.623
|
0.583
|
0.547
|
0.513
|
8
|
0.677
|
0.627
|
0.582
|
0.540
|
0.502
|
0.467
|
9
|
0.645
|
0.592
|
0.544
|
0.500
|
0.460
|
0.424
|
10
|
0.614
|
0.558
|
0.508
|
0.463
|
0.422
|
0.386
|
8) When calculating the net present value of future cash streams, dollars that are received sooner are worth more than dollars received later.
Answer: TRUE
Diff: 1
LO: 21-4
EOC Ref: E21-22
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
9) A company has policy to invest in new opportunities if the investment has a positive NPV. See data below:
Initial investment
|
$105,000
|
Yearly cash flows
|
$30,000
|
Number of years
|
4
|
Residual value
|
$10,000
|
|
|
Present Value of an Annuity of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
1.859
|
1.833
|
1.808
|
1.783
|
1.759
|
1.736
|
3
|
2.723
|
2.673
|
2.624
|
2.577
|
2.531
|
2.487
|
4
|
3.546
|
3.465
|
3.387
|
3.312
|
3.240
|
3.170
|
5
|
4.329
|
4.212
|
4.100
|
3.993
|
3.890
|
3.791
|
Present Value of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
0.907
|
0.890
|
0.873
|
0.857
|
0.842
|
0.826
|
3
|
0.864
|
0.840
|
0.816
|
0.794
|
0.772
|
0.751
|
4
|
0.823
|
0.792
|
0.763
|
0.735
|
0.708
|
0.683
|
5
|
0.784
|
0.747
|
0.713
|
0.681
|
0.650
|
0.621
|
If the company has a hurdle rate of 9%, this investment will yield a positive NPV and should be accepted.
10) A company has policy to invest in new opportunities if the investment has a positive NPV. See data below:
Initial investment
|
$105,000
|
Yearly cash flows
|
$30,000
|
Number. of years
|
4
|
Residual value
|
$10,000
|
Present Value of an Annuity of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
1.859
|
1.833
|
1.808
|
1.783
|
1.759
|
1.736
|
3
|
2.723
|
2.673
|
2.624
|
2.577
|
2.531
|
2.487
|
4
|
3.546
|
3.465
|
3.387
|
3.312
|
3.240
|
3.170
|
5
|
4.329
|
4.212
|
4.100
|
3.993
|
3.890
|
3.791
|
Present Value of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
0.907
|
0.890
|
0.873
|
0.857
|
0.842
|
0.826
|
3
|
0.864
|
0.840
|
0.816
|
0.794
|
0.772
|
0.751
|
4
|
0.823
|
0.792
|
0.763
|
0.735
|
0.708
|
0.683
|
5
|
0.784
|
0.747
|
0.713
|
0.681
|
0.650
|
0.621
|
If the company has a hurdle rate of 6%, this investment will yield a positive NPV and should be accepted.
11) The internal rate of return (IRR) is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset.
Answer: TRUE
Diff: 1
LO: 21-4
EOC Ref: Accounting Vocabulary
AACSB: Content/Knowledge
AICPA Business: Critical Thinking
AICPA Functional: Measurement
12) Considering the four common methods of evaluating investments?payback, rate of return, net present value, and internal rate of return?the discounted cash flow methods are superior because they consider both the time value of money and the profitability of the investment.
Answer: TRUE
Diff: 1
LO: 21-4
EOC Ref: E21-24
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
13) When a company invests in lean manufacturing processes or "green" technologies, the efficiencies and elimination of waste are factors that should NOT be included when conducting a discounted cash flow analysis of the investment.
Answer: FALSE
Diff: 1
LO: 21-4
EOC Ref: E21-24
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
14) When evaluating a potential investment, managers should use more than one measure for making a sound investment decision.
Answer: TRUE
Diff: 1
LO: 21-4
EOC Ref: E21-24
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement