1.

Calculate the net present value of a project which requires an initial investment of
$243,000 and it is expected to enerate a cash inflow of $!0,000 each month for 12
months. "ssume that the salvae value of the project is #ero. $he taret rate of return
is 12% per annum.
2. "n initial investment on plant and machiner& of $',320 thousand is expected to
enerate cash inflows of $3,411 thousand, $4,0(0 thousand, $!,'24 thousand and
$2,0)! thousand at the end of first, second, third and fourth &ear respectivel&. "t the
end of the fourth &ear, the machiner& will *e sold for $+00 thousand. Calculate the
present value of the investment if the discount rate is 1'%. ,ound &our answer to
nearest thousand dollars.
3. -resent .alue of /eries of $1 Cash 0lows 1annuit&23
" project will cost $!0,000 and the annual net cash inflows will *e $11,'(1 for the !4
&ear life of the project. $he compan& has an '% cost of acquirin investment capital.
5se the present value ta*le a*ove and calculate the internal rate of return 1IRR2.
a. 4%.
*. )%.
c. '%.
d. 10%.
e. 12%.
4. -resent .alue of /eries of $1 Cash 0lows 1annuit&23
" compan&6s initial cash outflow for an investment project is $)',000 and the
investment6s annual cash inflow for ! &ears is $1',000 per &ear. Calculate the net
present value of the investment project assumin the compan& has an '% hurdle rate.
a. 707
*. $3,'(4
c. $(,'1)
d. $22,000
e. 8one of the a*ove
!. 9hich of the followin is one of the potential advantaes of the net4present value
18-.2 method over the internal4rate4of4return 1:,,2 method;
a. :t is easier to compute a project6s 8-. than its :,,
*. " project6s 8-. does not have to *e adjusted for ris< considerations
c. " hurdle rate is not used in the 8-. method
d. 8-. method relies on a sinle discount rate
e. 8one of the a*ove
). -resent .alue of $1
Consider the followin information for two projects3
$he hurdle rate is 10%. 9hich of the followin is true?
a. $he present value of the operatin costs for =ear >ne, -roject ", is
$11),'1(2.
*. $he present value of the acquisition cost of -roject " is $1!4,!402.
c. $he present value of the cash outflow for =ear $wo, -roject ?, is
$112,3+02.
d. $he present value of the cash outflow for =ear $wo, -roject ?, is
$13(,(232
e. >nl& 1"2 and 1C2 are true.
(. -resent .alue of $1
" compan& is considerin the purchase of a new refrierated deliver& truc< for
$1(!,000. $he compan& has a desired rate of return of '% and plans to use the truc<
in operations for ! &ears, at which time it will *e replaced. @anaement *elieves that
the truc< will enerate annual incremental revenue, net of cost of oods sold, of
$'!,000. "nnual cash operatin costs are expected to increase *& $3!,000.
@anaement plans to depreciate the asset as a ! &ear asset under @"C,/ 120% &ear
1, 32% &ear 2, 1+.2% &ear 3, 11.!2% &ear 4 A &ear !, !.()% in &ear )2. "ssume a
30% tax rate. $he net present value 1ta<in income taxes into consideration2 of the
deliver& truc< purchase is closest to3
a. $(,34+
*. $13!,24!2
c. $4+,4()
d. $(,)!2
e. 8one of the a*ove
'. -resent .alue of $1
" compan& is considerin the purchase of a new refrierated deliver& truc< for
$1(!,000. $he compan& has a desired rate of return of '% and plans to use the truc<
in operations for ! &ears, at which time it will *e replaced. @anaement *elieves that
the truc< will enerate incremental annual net sales revenue of $'!,000 1after ta<in
in to account the increase in cost of oods sold2. "nnual cash expenses are expected to
increase *& $3!,000. @anaement plans to depreciate the asset as a ! &ear asset under
@"C,/ 120% &ear 1, 32% &ear 2, 1+.2% &ear 3 and 11.!2% &ear 4 A &ear !, !.()%
in &ear )2 and to sell it for its net *oo< value. "ssume a 30% tax rate. $a<in income
taxes into consideration, the lenth of the pa&4*ac< period for this particular
investment option is closest to3
a. 1 &ear
*. 2 &ears
c. 3 &ears
d. 4 &ears
e. ! &ears or more
+. " compan& purchased an asset for $120,000. $he second &ear depreciation expense is
$30,000. $he compan&6s tax rate is 3!%. 9hat is the depreciation tax shield for the
second &ear;
a. $10,!00
*. $30,000
c. $1+,!00
d. $',(!0
e. $10,(!0
10. 9hich of the followin is false a*out the use of @"C,/ for tax purposes;
a. " half4&ear convention is used.
*. /alvae value is not considered.
c. /traiht4line depreciation is optional to @"C,/.
d. Bver& asset is placed in one of six classes.
e. Cepreciation percentaes for each @"C,/ propert& class are in pu*lished :,/ ta*les.
11. " deprecia*le asset cost $40,000, has a $3,000 salvae value, and is in the !4&ear
@"C,/ propert& class life, which is depreciated under the dou*le4declinin *alance
1CC?2 method. 9hat is the amount of the first &ear depreciation expense under
@"C,/;
a. $12,'00
*. $1),000
c. $14,'00
d. $4,000
e. $',000
12. 9hich of the followin formulas will &ield the total cash flow from the sale of a
deprecia*le asset at a ain;
a. -roceeds from the sale 7 1Dain x $ax rate2
*. -roceeds from the sale x 11 7 $ax rate2
c. -roceeds from the sale E 1Dain x 11 7 $ax rate22
d. -roceeds from the sale E 1Dain x $ax rate2
e. -roceeds from the sale 7 1DainF$ax rate2
13. 9hich of the followin formulas will &ield the total cash flow from the sale of a
deprecia*le asset at a loss;
a. -roceeds from the sale E 1Goss x 11 E$ax rate22
*. -roceeds from the sale x 11 7 $ax rate2
c. -roceeds from the sale E 1Goss x 11 7 $ax rate22
d. -roceeds from the sale E 1Goss x $ax rate2
e. -roceeds from the sale 7 1Goss x 11E$ax rate22
14. -resent .alue of $1
Consider the followin for each of the 34&ear projects, usin a 10% discount rate3
9hich of the projects has the lowest net present value;
a. -roject "
*. -roject ?
c. -roject C
d. -roject C
e. Cannot *e determined from the information provided.
1!. Consider the followin3
9hich of the followin statements is true;
a. -roject " has the lowest profita*ilit& index.
*. -roject ? has the lowest profita*ilit& index.
c. -roject C has the lowest profita*ilit& index.
d. -roject ? would *e ran<ed num*er 1, usin the profita*ilit& index for ran<in
projects.
e. -rofita*ilit& rate cannot *e determined from the information provided.
1). 9hich of the followin is not one of the difficulties in appl&in the 8-. approach to
a C:@ investment decision;
a. Hurdle rates that are set too low.
*. $ime hori#ons are too short.
c. ?ias toward incremental projects.
d. Dreater uncertainties a*out operatin cash flows.
e. Bxclusion of *enefits which are difficult to quantif&.
DECISION MAKING/ RELEVANT COSTING
1. :n the decision to replace an old machine with a new machine, which of the followin
would *e considered a relevant cost;
a. $he *oo< value of the old equipment.
*. "morti#ation expense on the old equipment.
c. $he loss on the disposal of the old equipment.
d. $he current disposal price for the old equipment.
2. $he decision to drop a product line should *e *ased on3
a. the fact that the product line shows a net loss over several periods.
*. the a*ilit& of the firm to eliminate some fixed costs as a result of droppin
the product.
c. whether the fixed costs that can *e avoided *& droppin the product line are
less than the contri*ution marin that will *e lost.
d. whether the fixed costs that can *e avoided *& droppin the product line
are reater than the contri*ution marin lost.
3. $o maximi#e total contri*ution marin, a firm should3
a. promote those products havin the hihest unit contri*ution marins.
*. promote those products havin the hihest contri*ution marin ratios.
c. promote those products havin the hihest contri*ution marin per unit of a
constrained resource.
d. promote those products havin the hihest contri*ution marins and
contri*ution marin ratios.
4. $wo or more products produced from a common input are termed3
a. common costs.
*. joint products.
c. joint costs.
d. *&4products.
!. :n a decision to sell or process further *e&ond the split4off point, a manaer should
*ase the decision on3
a. the amount of joint product costs allocated.
*. the incremental revenue attaina*le *e&ond the split4off point.
c. the incremental cost incurred *e&ond the split4off point.
d. the incremental operatin income attaina*le *e&ond the split4off point.
). $he ,eal, :nc. ma<es 3!,000 motors to *e used in the production of its sewin
machines. $he cost per motor at this level of activit& would include3 Cirect materials,
$4.!0I Cirect la*our, $4.)0I .aria*le factor& overhead, $3.(!I 0ixed factor& overhead,
$3.4!. "n outside supplier recentl& *ean producin a compara*le motor for the
sewin machine. $he price to ,eal for this motor is $1!. :f ,eal decided not to
ma<e the motors, there would *e no other use for the production facilities. :f ,eal
decides to continue ma<in the motor, how much hiher or lower would net income
*e than if the motors are purchased from the outside supplier;
a. $(2,2!0 hiher.
*. $4!,!00 lower.
c. $311,!00 hiher.
d. $120,(!0 hiher.
(. $he 9orldCo has two divisions3 8orth and /outh. $he divisions have the followin
revenues and expenses3
8orth /outh
/ales $4!0,000 $400,000
.aria*le costs 22!,000 1!0,000
Cirect fixed costs 130,000 10!,000
"llocated corporate costs 120,000 +!,000
8et income 1loss2 12!,0002 !0,000
$he manaement of 9orldCo is considerin the elimination of the 8orth Civision. :f
the 8orth Civision were eliminated, the direct fixed costs associated with this division
could *e avoided. Diven these data, the elimination of the 8orth Civision would result
in an overall compan& net income 1loss2 of3
a. $!0,000.
*. 1$(0,0002.
c. $2!,000.
d. 1$(!,0002.
'. Jac<6s -ersonal Cevices ma<es and sells hand4held computers. Bach computer
reularl& sells for $200. $he followin cost data per computer are *ased on a full
capacit& of 12,000 computers produced each period3 Cirect materials. $(!I Cirect
la*our, $!!I 0actor& >verhead 1(!% varia*le, 2!% unavoida*le fixed2, $4'. " special
order has *een received *& Jac<6s for a sale of 2,!00 computers to an overseas
customer. $he onl& sellin costs that would *e incurred on this order would *e $10
per computer for shippin. Jac<6s is now sellin (,200 computers throuh reular
distri*utors each period. 9hat should *e the minimum sellin price per computer in
neotiatin a price for this special order;
a. $200.
*. $1)).
c. $1('.
d. $1().
+. Kuestions + 4 10 refer to the followin3 9elter, :nc. is considerin the addition of a
new line of product to its current product lines. $he expected cost and revenue data
for the new product are as follows3 "nnual sales, 2,!00 units. /ellin price per unit,
$304. .aria*le costs per unit3 -roduction, $12! and /ellin, $4+. "voida*le tracea*le
fixed costs per &ear3 -roduction, $!0,000 and /ellin, $(!,000. 5navoida*le allocated
corporate costs per &ear, $!!,000. :f the new product is added to the existin product
line, the contri*ution marin of the other existin product lines is expected to drop
$)!,000 per &ear. :f the new product line is added next &ear, the increase in net
income resultin from this decision would *e3
a. $32!,000.
*. $200,000.
c. $14!,000.
d. $13!,000.
10. 9hat is the lowest sellin price per unit that could *e chared for the new product line
and still ma<e it economicall& desira*le to add the new product line;
a. $24).
*. $224.
c. $232.
d. $2'2.
ANSWER KEY:
1. /olution
9e have,
:nitial :nvestment L $243,000
8et Cash :nflow per -eriod L $!0,000
8um*er of -eriods L 12
Ciscount ,ate per -eriod L 12% M 12 L 1%
8et -resent .alue
L $!0,000 N 11 O 11 E 1%2P4122 M 1% O $243,000
L $!0,000 N 11 O 1.01P4122 M 0.01 O $243,000
Q $!0,000 N 11 O 0.''(44+2 M 0.01 O $243,000
Q $!0,000 N 0.112!!1 M 0.01 O $243,000
Q $!0,000 N 11.2!!1 O $243,000
Q $!)2,(!4 O $243,000
Q $31+,(!4
OR
-resent .alue of cash inflow $!)2,(!!
1$!0,000 x 11.2!!12
Gess3 Cost of :nvestment 243,000
NET PRESENT VALUE 319,755 rounded-off
2. /olution
-. 0actors3
=ear 1 L 1 M 11 E 1'%2P1 Q 0.'4(!
=ear 2 L 1 M 11 E 1'%2P2 Q 0.(1'2
=ear 3 L 1 M 11 E 1'%2P3 Q 0.)0')
=ear 4 L 1 M 11 E 1'%2P4 Q 0.!1!'
$he rest of the pro*lem can *e solved more efficientl& in ta*le format as show *elow3
=ear 1 2 3 4
8et Cash :nflow $3,411 $4,0(0 $!,'24 $2,0)!
/alvae .alue +00
$otal Cash :nflow $3,411 $4,0(0 $!,'24 $2,+)!
N -resent .alue 0actor 0.'4(! 0.(1'2 0.)0') 0.!1!'
-resent .alue of Cash 0lows $2,'+0.)' $2,+23.01 $3,!44.)( $1,!2+.31
$otal -. of Cash :nflows $10,'''
O :nitial :nvestment O ',320
Net Pree!t V"#$e %&,5'( t)*$"!+
3. ,. )%
0eed*ac<3
9hen we have a series of equal pa&ments, the internal rate of return is determined in
two steps, as follows3
1. Civide the initial cash outflow *& the equivalent annual cash inflows to derive
the annuit& discount factor3 !0,000F11,'(1 L 4.211+4!0'
2. Goo< up the annuit& discount factor in the present value ta*le with nL!.
4. ,- $3,'(4
0eed*ac<3
$1',000 R 3.++3 L $(1,'(4
$(1,'(47$)',000 L $3,'(4
!. A- :t is easier to compute a project6s 8-. than its :,,
0eed*ac<3 $he two potential advantaes of the 8-. method over the :,, method are
112 it is easier to compute a project6s 8-. than its :,,, and 122 a project6s 8-. can *e
adjusted for ris< considerations. ?oth methods use a hurdle rate. $he :,, method
relies on a sinle discount rate.
). E- >nl& 1"2 and 1C2 are true.
0eed*ac<3
8et4present value anal&sis of -roject "3
$he present value of the cash outflow for =ear $wo, -roject ? L $11!,0002 x 0.'2) L
$112,3+02.
(. A- $(,34+
0eed*ac<3
$'!,000 R 11730%2 L $!+,!00
$3!,000 R 11730%2 L $24,!00
Cepreciation $ax /hield3
'. D- 4 &ears
0eed*ac<3
$he pa&*ac< period is approximatel& 3 &ears, 10 months.
$otal cash flow in the first three &ears is $142,3'0 L 14!,!00 E !1,'00 E 4!,0'02.
$1(!,000 7 $142,3'0 L $32,)20. $32,)20 M 41,04' L approx. +.! months.
+. A- $10,!00
0eed*ac<3
$he depreciation tax shield is the annual depreciation expense associated with an asset
that provides a reduction in income tax. Cepreciation tax shield L Cepreciation or
other noncash expense x $ax rate. $he depreciation tax shield is $10,!00 1L $30,000 x
3!%2.
10. D- Bver& asset is placed in one of six classes.
0eed*ac<3 @"C,/ depreciation ta*les provide for eiht 1'2 propert& classes that are
*ased on estimated useful lives, per :nternal ,evenue Code.
11. E- $',000
0eed*ac<3
$he half4&ear convention applies. $he depreciation for the first &ear, under @"C,/,
is $40,000 x 0.40 x S L $',000 1or $40,000 x 0.202. $he complete schedule is3
8ote that the total depreciation is $40,000 1L $',000 E $12,'00 E $(,)'0 E $4,)0' E
$4,)0' E $2,3042. Salvage value is ignored under MACRS.
12. A- -roceeds from the sale 7 1Dain x $ax rate2
0eed*ac<3 "s an example, assume proceeds of $3,000 on an asset with a *oo< value
of $1,000, and a tax rate on ains of 3!%. $he ain is $2,000. $he tax on the ain is
$(00 1$2,000 x 3!%2. $he total cash flow from the sale is $2,300 1L $3,000 4 $(002I
or -roceeds from the sale 7 1Dain x $ax rate2 L $3,000 7 1$2,000 x 3!%2 L $2,300.
13. D- -roceeds from the sale E 1Goss x $ax rate2
0eed*ac<3 "s an example, assume proceeds of $3,000 on an asset with a *oo< value
of $!,000, and a tax rate is 3!%. $he loss is $2,000. ,eduction in income tax due the
loss is $(00 1$2,000 x 3!%2. $he total cash flow from the sale is $3,(00 1L $3,000 E
$(002I or -roceeds from the sale E 1Goss x $ax rate2 L $3,000 7 1$2,000 x 3!%2 L
$2,300.
14. D- -roject C
0eed*ac<3
$he net present value of each project3
1!. C- -roject C has the lowest profita*ilit& index.
0eed*ac<3
$he profitability index is computed as3
-rofita*ilit& index, -roject "3 1$(+,'00F$)0,000 L 1.33.
-rofita*ilit& index, -roject ?3 1$)2,300F$!!,000 L 1.13
-rofita*ilit& index, -roject C3 1$!0,200F$4',000 L 1.0!.
1). A- Hurdle rates that are set too low.
ANSWER KEY:
1. D. $he current disposal price for the old equipment.
2. D. whether the fixed costs that can *e avoided *& droppin the product line are reater
than the contri*ution marin lost.
3. C- promote those products havin the hihest contri*ution marin per unit of a
constrained resource.
4. ,- joint products.
!. D- the incremental operatin income attaina*le *e&ond the split4off point.
). A- $(2,2!0 hiher.
(. ,- 1$(0,0002
'. D- $1()
+. D- $13!,000
10. ,- $224