Question

1. If a manager were concerned with the time value of money, from which two capital budgeting methods should the manager choose?

Multiple Choice

• IRR or Payback.

• BET or IRR.

• BET or Payback.

• NPV or ARR.

• NPV or Payback.

2. Restating future cash flows in terms of present values and then determing the payback period using these present values is known as:

Multiple Choice

• Break-even time (BET)

• Internal rate of return method.

• Accounting rate of return method.

• Net present value method.

• Present value method.

3. Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected.

	Project X			Project Y
Cost of machine	$	77,000		$	55,000
Net cash flow:
Year 1		28,000			2,000
Year 2		28,000			25,000
Year 3		28,000			25,000
Year 4		0			20,000

If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

Multiple Choice

• Project Y.

• Project X.

• Both X and Y are acceptable projects.

• Neither X nor Y is an acceptable project.

• Project Y because it has a lower initial investment.

4. Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,000 and will produce cash flows as follows:

End of Year	Investment
	A			B
1	$	8,000		$	0
2		8,000			0
3		8,000			24,000

  
The present value factors of $1 each year at 15% are:

1	0.8696
2	0.7561
3	0.6575

  
The present value of an annuity of $1 for 3 years at 15% is 2.2832

The net present value of Investment A is:

Multiple Choice

• $18,266.

• $(15,000).

• $9,000.

• $(20,549).

• $3,266.

5. The net cash flow of a particular investment project:

Multiple Choice

• Does not take income taxes into consideration.

• Equals the total of the cash inflows of the project.

• Equals the total of the cash outflows of the project.

• Does not include depreciation.

• Is equal to operating income each period.

Answer 1

Answer:

If a manager were concerned with the time value of money, from which two capital budgeting methods should the manager choose?

• NPV or Payback. ( Answer)

2. Restating future cash flows in terms of present values and then determining the payback period using these present values is known as:

• Break-even time (BET) ( Answer)

3. Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected.

	Project X			Project Y
Cost of machine	$	77,000		$	55,000
Net cash flow:
Year 1		28,000			2,000
Year 2		28,000			25,000
Year 3		28,000			25,000
Year 4		0			20,000

If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

• Project X. ( Answer As, Project X - 3 years total cashflow = 84000 which is more than the Initial Investment cost and of project y is 52000 Less than the initial investment which means it is not going to be recovered in 3 years time period)

4. Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,000 and will produce cash flows as follows:

End of Year	Investment
	A			B
1	$	8,000		$	0
2		8,000			0
3		8,000			24,000

  
The present value factors of $1 each year at 15% are:

1	0.8696
2	0.7561
3	0.6575

  
The present value of an annuity of $1 for 3 years at 15% is 2.2832

The net present value of Investment A is:

• $3,266. ( Answer- 8000 * 2.2832 - 15000 ) = 3266

5. The net cash flow of a particular investment project:

• Equals the total of the cash inflows of the project.