BGN 5e Exam Questions - Chapter 12

1. The following data pertain to an investment that is being considered by the management
of McMillan Company:

Cost of the investment $37,910

Life of the project 5 years
Annual cost savings $ 10,000
Estimated salvage value $ 2,000
Discount rate 10%

The net present value of the proposed investment is:

A) ($6,860).
B) $-0-.
C) $1,242.
D) $6,710.

Feedback – The correct answer is C:

Learning Objective 1 – Determine the net present value of the proposed investment as
follows:
Cash 10% Present
Years Flows Factor Value
Investment in equipment Now $(37,910) x 1.000 = $(37,910)
Annual net cash inflows 1-5 10,000 x 3.791 = 37,910
Salvage value of equipment 5 2,000 x 0.621 = 1,242
Net present value $ 1,242

2. Custom Company has gathered the following data on a proposed investment project:

Investment required in equipment $400,00

0
Annual cash inflows $80,000
Salvage value $-0-
Life of the investment 10 years
Discount rate 10%

The net present value on the proposed investment is closest to:

A) $(96,720).
B) $80,000.
C) $91,600.
D) $491,600.

Feedback – The correct answer is C:

 Learning Objective 1 – Determine the net present value of the proposed investment as
follows:
Cash 10% Present
Years Flows Factor Value
Investment in equipment Now $(400,000) x 1.000 = $(400,000)
Annual net cash inflows 1-10 80,000 x 6.145 = 491,600
Net present value $ 91,600

3. Custom Company has gathered the following data on a proposed investment project.

Investment required in equipment $400,00

0
Annual cash inflows $80,000
Salvage value $-0-
Life of the investment 10 years
Discount rate 10%

The payback period for the proposed investment is closest to:

A) 0.2 years.
B) 1.0 years.
C) 3.0 years.
D) 5.0 years.

Feedback – The correct answer is D:

Learning Objective 3 – Determine the payback period for the proposed investment as
follows:
Payback period = Required investment ÷ Annual cash inflows
Payback period = $400,000 ÷ $80,000 = 5 years

4. Custom Company has gathered the following data on a proposed investment project.

Investment required in equipment $400,00

0
Annual cash inflows $80,000
Salvage value $-0-
Life of the investment 10 years
Discount rate 10%

(Note that this is the same data as that provided for the question above.) Assume that
excess of incremental revenues over the incremental expenses (including depreciation)
equal the annual cash inflows. The simple rate of return on the proposed investment is
closest to:
A) 10%.
B) 20%.
C) 30%.
D) 40%.

Feedback – The correct answer is B:

Learning Objective 4 – Determine the simple rate of return on the proposed investment
as follows:
Simple rate of return = Annual cash flows ÷ Investment required
Simple rate of return = $80,000 ÷ $400,000 = 20%