15 Multiple Questions Accounting DUE SOON!

1. Which of the following statements regarding the profitability index is true?

a.. A profitability index greater than 1.0 means that the investment will take longer than one year to pay for itself.

b. A profitability index greater than 1.0 means that the investment should not be made.

c. When comparing projects, the one with the highest profitability index will have a longer payback period.

d. When comparing projects, the one with the highest profitability index is preferred.

2. Which of the following is not a typical cash outflow associated with a capital investment?

a.. Repairs and maintenance needed for purchased equipment

b. Additional operating costs resulting from the capital investment

c. Salvage value received when the newly purchased equipment is sold

d. Purchase price of new equipment

3. NC Products Inc. is considering investing in one of two projects. Both projects have a net present value of $25,000; however, Project #1 requires an initial investment of $300,000 while Project #2 requires an initial investment of $700,000. Based on this information, which of the following statements is true

a. Project #2 will have a higher profitability index.

b. Project #1 will have a higher profitability index.

c. Both projects will have the same profitability index.

d. There is not enough information to determine the profitability index of either project.

4. Which of the following statements is false regarding the interest rate used in NPV calculations?

a. Some companies use their cost of capital as the discount rate.

b. The interest rate used may be adjusted for uncertainty.

c. It should be equal to the maximum required rate of return needed to make the investment profitable.

d. The interest rate used may be higher or lower than the investment's actual internal rate of return.

5. If the net present value of an investment is negative, then:

a. the actual rate of return is less than the discount rate.

b. the actual rate of return is more than the discount rate.

c. the actual rate of return is negative.

d. the discount rate is negative.

6. The IRR method assumes that cash flows are reinvested at:

a. the internal rate of return of the original investment.

b. the company's discount rate.

c. the lower of the company's discount rate or internal rate of return.

d. an average of the internal rate of return and the discount rate.

7. Blossoms Inc., a local florist, is considering replacing its current refrigerator used for storing flowers with a larger one. The estimated cost of the new refrigerator will be $30,000. Using a discount rate of 15%, the company calculates a net present value for the new refrigerator of $6,000. Based on this information, which of the following statements is true

a. If the actual cost of the new refrigerator ends up being greater than $36,000, the net present value will become negative.

b. If the actual cost of the new refrigerator ends up being less than $36,000, the net present value will become negative.

c. If the actual cost of the new refrigerator ends up being $30,000, the actual rate of return is equal to 15%.

d. If the actual cost of the new refrigerator ends up being less than $30,000, the company should not make the

8. Woody Manufacturing Inc. is considering the purchase of a new machine. They have narrowed their choices down to two machines, Machine #1 and Machine #2, each having a cost of $35,000. The following information is available regarding the expected cash inflows from each machine:

Year	Machine #1	Machine #2
1	$14,000	$42,000
2	14,000	0
3	14,000	0

When using net present value analysis, Woody uses the same cost of capital for both machines and both machines have a positive net present value.

Select one:

a. Machine #1 will have a higher net present value than Machine #2.

b. Machine #1 will have a lower net present value than Machine #2.

c. Machines #1 and #2 will have the same net present values.

d. Machines #1 and #2 will have the same internal rates of return.

9. Which of the following is classified as a capital investment decision?

a. Purchase of a building

b. Purchase of inventory

c. Paying interest on bonds issued

d. Purchase of a 6-month treasury bill

10. The NPV method assumes that cash flows are reinvested at:

a. the government's prime rate.

b. the internal rate of return.

c. the company's discount rate.

d. an average of the internal rate of return and the discount rate.

11. If the net present value (NPV) of an investment is zero, then the internal rate of return (IRR) is:

a. less than the discount rate.

b. more than the discount rate.

c. equal to the discount rate.

d. negative.

12. Deciding whether or not an investment meets a predetermined company standard is called a:

a. preference decision.

b. payback decision.

c. screening decision.

d. profitability decision.

13. Which of the following does not consider the time value of money?

a. Net present value

b. Profitability index

c. Payback period

d. Internal rate of return

14. Floyd Manufacturing purchased an asset costing $65,000. Annual operating cash inflows are expected to be $12,000 each year for ten years. No salvage value is expected at the end of the asset's life. Assuming Floyd's cost of capital is 11 percent,

a. $4,443

b. $5,670

c. $4,560

d. $17,670

15. Trenton Inc. is considering an equipment purchase that has a cost of $15,000. The equipment is expected to have a salvage value of $2,000 at the end of three years. In addition, the equipment is expected to generate cash flows over the next three years as follows:

Year	Annual cash flow
1	$8,000
2	$6,000
3	$3,000

a. $(1,340).

b. $10.

c. $(357).

d. $993.