Question

question 7

a company is considering purchasing new equipment the equipment will allow the company to expand into a new product line. the equipment will be installed in the company existing facility which of the following cash flows would not be relevant to the decision to acquire the new equipment ?

1- annual maintenance cost on the new equipment

2-the salary of the manager hired to oversee the new product line

3-revenues from expanded production

4-labour costs to operate the new equipment

5-factory rent allocated to the new product line

question 9

when the present value of expected cash inflows from a project equals the present value of expected cash outflows of project the discount rate is the

1-universal rate

2-required rate

3-inflation rate

4-internal rate of return

5-net present value rate

question 12

which of the following statement about the net present value method is true ?

1-the origination of cash flows is not important in the analysis

2-projects with higher net present values are preferred when all other factors are equal

3-projects with negative NPV are acceptable if no positive NPV projects are available  

4- acceptable projects are those with the highest discount rate

5-it focuses on operating income

question 13

which of the following is not a relevant cash in capital budgeting ?

1-after tax cash flow from future disposal of asset at lifes end

2-after tax cash flow from current disposal of old asset

3-initial asset investment of the replacement machine

4-after tax annual cash flows relating to the new asset

5- after tax cash flow from accumulated depreciation

question 14

after-tax cash operating flows are equal to :

1-(one minus the tax rate)times (operating income ) plus CCA

2-(one minus the tax rate )times (sales less costs including CCA

3-(one minus the tax rate ) times (sales less cost excluding CCA )

4-sales less (one minus the tax rate ) times (cash costs)

5-(one minus the tax rate ) times (net income)

question 17

in selecting capital projects organization choose :

1-the alternative that matches the RRR

2-the alternative that has he longest time horizon but also exceeds the RRR

3-the alternative that provides benefits that exceed predicted costs by the greatest amount

4-the alternative that has the highest revenues

5-the alternative that has revenues that exceeds its costs

question 18

which of the following is false concerning the payback method of capital budgeting ?

1-its major strength is that it is easy to use

2-shorter payback periods give an organization more flexibiltiy

3-it does not consider cash flows after the recovery of the initial investment

4-it uses the accrual accounting rate of return

5-the payback method highlights liquidity

question 19

which of the following is not a major category of cash flows in capital budgeting ?

1-initial working capital investment

2-initial investment in machines

3-cash flows from dispositions of assets

4-management and labour allocation deductions

5-recurring operating cash flows

Answer 1

9) The right answer is Internal rate of return.

Internal rate of return is the discount rate at which the NPV( net present value) is equal to zero. NPV turns to zero when the present value of cash inflows equals to the present value of cash outflows.

NPV= Present value of cash inflows - Present value of cash outflows( Initial Investment)

When this NPV turns to zero, it means both the present values of cash inflows and outflows are same. The discount rate at which both the present values are same, that rate is thus considered as internal rate of return for the project.

Hence we can say that when the present value of expected cash inflows from a project is equal to the present value of the expected cash outflows, of the project, the discount rate is the internal rate of return.