1. Kramer Company paid $60,000 to purchase a depreciable asset. The asset is expected to produce annual cash inflows of $12,000 per year for ten years. Kramer's desired rate of return is 12%.
The internal rate of return for this investment is
a.equal to the desired rate of return.
b.greater than the desired rate of return.
c.less than the desired rate of return.
d.the answer cannot be determined from the information provided.
2.North State, Inc. (NSI) is trying to determine its cash inflows from an investment in new computer equipment. Which of the following would be treated as a cash inflow in determining the present value of the investment opportunity?
a.Cash revenues from existing operations.
b.Cash savings from reductions in labor costs resulting from using the equipment.
c.Cash collections from alternative investment opportunities.
d.All of the above are considered cash inflows.
3. Harrison, Inc. is considering two investment opportunities. Each investment costs $7,000 and will provide the same total future cash inflows. The schedule of estimated cash receipts for each investment follows (assume cash is received at year-end):
Investment I Investment II
Year 1 $3,000 $1,000
Year 2 2,500 2,000
Year 3 2,000 3,000
Year 4 1,500 3,000
Total $9,000 $9,000
Which investment should Harrison choose assuming all other features for the two investments are the same?
a. Harrison should be indifferent between the two investments because they provide the same total cash inflows.
b. Harrison should choose Investment I because of the time value of money.
c. Harrison should be indifferent between the two investments because the initial cash outflow is the same.
d. Harrison should choose Investment II because it generates larger cash inflows at the end of the investment's useful life.
4. KLM Company has the opportunity to purchase an asset that costs $50,000. The asset is expected to increase net income by $20,000 per year. The asset has a 5-year useful life. Depreciation expense used in computing net income amounted to $10,000 per year. Based on this information the payback period is
a. 3.5 years.
b. 5 years.
c. 1.67 years.
d. 2.5 years.
5. Marfa Company is evaluating two different investment alternatives, which are to be evaluated using the present value index.
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Alternative 1
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Alternative 2
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Initial investment
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$100,000
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$150,000
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Present value of cash inflows
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$108,000
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$160,000
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Estimated useful life
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5 years
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5 years
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Which of the following statements is true?
- Based on present value index, Alternative 2 is preferred.
- The present value index for Alternative 2 is 1.60.
- The present value index for Alternative 1 is 1.08.
- None of the above