1.

Which of the following capital budgeting techniques takes into account the
incremental accounting income rather than cash flows:

o Net present value

o Internal rate of return

o Accounting/Simple rate of return

o Cash payback period

2. Which of the following techniques does not take into account the time value of
money?

o Internal rate of return method

o Simple cash payback method

o Net present value method

o Discounted cash payback method

3. The current worth of a sum of money to be received at a future date is called:

o real value

o future value

o present value

o salvage value
4. The difference between the present value of cash inflows and the present value
of cash outflows associated with a project is known as:

o net present value of the project

o net future value of the project

o net historical value of the project

o net salvage value of the project

5. If present value of total cash outflow is $15,000 and present value of total cash
inflow is $14,000, what is the net present value of the project?

o $1,000

o -$1,000

o 0

o 2,000
6. If present value of cash outflow is equal to present value of cash inflow, the net
present value will be:

o positive

o negative

o zero

o infinite
7. Generally, a project is considered acceptable if its net present value is:

o negative or zero

o negative or positive

o positive or zero

o negative
8. A company is considering the following three investment proposals:

A). Investment required: $80,000, present value of future cash inflows: $96,000

B). Investment required: $75,000, present value of future cash inflows: $120,000

C). Investment required: $100,000, present value of future cash inflows:

$150,000

How would you rank the above investment proposals using profitability index
method?

o B, A, C
 o C, A, B

o A, B, C

o B, C, A

Computation:

o A: $96,000/$80,000 = 1.2
o B: $120,000/$75,000 = 1.6
o C: $150,000/$100,000 = 1.5

The project with the highest profitability index is the most desirable project.
Therefore, the ranking of three projects using profitability index is B, C, A.

 Consider the following data on a proposed investment:

o Investment required: $160,000
o Annual cash inflows: $40,000
o Life of the investment: 6 years
o Salvage value: 0
o Discount rate: 10%

Based on the above data, what is the payback period of the proposed investment
project?

o 0.25 years

o 3 years

o 4 years

o 5 years

Computation:

Payback period = Investment required/Annual cash inflows

= $160,000/$40,000
= 4 years

 An increase in the discount rate will:

o reduce the present value of future cash flows.

 o increase the present value of future cash flows.

o have no effect on net present value.

o compensate for reduced risk.

 Using profitability index, the preference rule for ranking projects is:

o the lower the profitability index, the more desirable the project.

o the higher the profitability index, the more desirable the project.

o the lower the sunk cost, the more desirable the project.

o the higher the sunk cost, the more desirable the project.
 The net present value of four projects is given below:
o Project A: $25,000
o Project B: $10,000
o Project C: $22,000
o Project D: $15,000

The four projects given above require the same amount of investment. How
would you rank them using net present value (NPV) method?

o B, D, C, A

o A, B, C, D

o A, C, D, B

o B, C, D, A
 If the profitability index of a project is 0.75, it means:

o the NPV of the project is greater than zero

o the project's cost is less than the present value of its cash flows

o the NPV of the project is greater than 1

o the project returns 75 cents in present value for each dollar invested
in it
  The comparison of actual costs and benefits of a project with original
estimates is formally known as:

o cost-benefit analysis

o post-completion audit

o business scorecard report

o feedback audit
 A project whose acceptance prevents the acceptance of another project is
known as:

o a dependent

o an independent project

o a mutually exclusive project

o a rational project
 A project whose acceptance requires the acceptance of another project is
known as:

o an independent project

o a dependent project

o an essential project

o a contingent project
 The XYZ purchases a new equipment. The selected data is given below:
o Cost of equipment: $25,000
o Useful life of equipment: 5 years
o Tax rate: 30%

If equipment is depreciated using straight line method, what is the depreciation

tax shield associated with the new equipment?

o $5,000

o $35,000
 o $1,500

o $7,500

Computation:

Annual depreciation tax shield = $5,000* × 0.3

= $1,500

*Annual depreciation expense = $25,000/5 years

= $5,000

 If interest expense of a company is $300,000 and tax rate is 40%, the

after-tax cost of interest is:

o $120,000

o $300,000

o $180,000

o $75,000

Computation:

After-tax cost of interest = (1 – 0.4) × $300,000

= $180,000

 If two alternative investments are compared using incremental cost

approach, the difference between the net present values of two
alternatives will be:

o greater than the difference obtained using total cost approach

o less than the difference obtained using total cost approach

o the same as the difference obtained using total cost approach

o indeterminable
 The Washington Company has gathered the following data on a proposed
investment:
o Initial investment required: $800,000
o Annual incremental revenue: $180,000
 o Annual incremental expenses: $60,000
o Discount rate: 12%
o Salvage value: $0

Based on the above information, the accounting/simple rate of return is:

o 22.5%

o 12%

o 15%

o 10.5%

Computation:

Accounting/simple rate of return = (incremental revenue – incremental expenses)/

Initial cost
= ($180,000 – $60,000)/$800,000
= 15%