1. The net initial investment for a piece of construction equipment is $1,000,000. Annual cash inflows are expected to increase by $200,000 per year. The equipment has a 8-year useful life. What is the payback period?
a. 8 years
b. 7 years
c. 6 years
d. 5 years
2. Shirt Company wants to purchase a new cutting machine for its sewing plant. The investment is expected to generate annual cash inflows of $300,000. The required rate of return is 12% and the current machine is expected to last for 4 years. What is the maximum dollar amount Shirt Company would be willing to spend for the machine, assuming its life is also four years?
a. $507,000
b. $720,000
c. $791,740
d. $911,100
3. Which of the following is not an appropriate term for the required rate of return?
a. discount rate
b. hurdle rate
c. cost of capital
d. all of the above are appropriate terms for the required rate of return.
4. You have just learned you are a beneficiary in the will of your late Aunt Susan. The executrix of her estate has given you three options as to how you may receive your inheritance:
Option 1: You may receive $50,000 immediately.
Option 2: You may receive $75,000 at the end of six years.
Option 3: You may receive $11,000 at the end of each year for six years.
If your desired rate of return is 8%, which option would you prefer?
a. Option 1 because the present value is higher by $2,750.
b. Option 3 because the present value is higher by $853.
c. Option 1 because the future value is higher by $4,350.
d. Option 2 because you will receive $25,000 more than Option 1.
5. Assume your goal in life is to retire with 1.5 million dollars. How much would you need to save at the end of each year if you earn an average interest of 8% on your investments (compounded annually) and you have a 40 year work life? HINT: You will need to use the FVA table to calculate the payment amount.
a. $6,900.00
b. $5,790.23
c. $69,044.87
d. $153,389.91
6. 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?
a. 15%
b. 16%
c. 17%
d. 18%
7. Ann Terrell invests $14,973.80 now for a series of $2,000 annual returns beginning one year from now. Ann will earn 9% on the initial investment. How many annual payments will Ann receive?
a. 7
b. 9
c. 11
d. 13
8. In a make or buy decision related to a component part, what costs are normally considered to be relevant to the decision?
a. direct labor costs incurred to make the component internally.
b. the amount paid for equipment used to make the component internally.
c. the total cost that the outside supplier incurs in producing the component.
d. the selling price of the completed product which uses the component.
9. A company can sell all the units it can produce of either Product A or Product B
but not both. Product A has a unit contribution margin of $16 and takes two machine hrs to make and product B has a unit contribution margin of $30 and takes three machine hrs to make. If there are 1,000 machine hours available to manufacture a product, income will be
a. $2,000 more if Product A is made.
b. $2,000 less if Product B is made.
c. $2,000 less if Product A is made.
d. the same if either product is made.
10. Adler Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88. Fixed manufacturing costs were $240,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 2,000 units at $70 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows:
a. Income would decrease by $8,000
b. Income would increase by $8,000
c. Income would increase by $140,000
d. Income would increase by $40,000