25 the term net present value means the difference between a the total net income of 4352173

25) The term net present value means the difference between:

A) the total net income of the project and the initial investment.

B) the initial investment and  the residual value.

C) the future value of the cash flows and the present value of the cash flows.

D) present value of the net inflows and the investment's cost.

Answer:  D

Diff: 2

LO:  21-4

EOC Ref:  E21-22

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

26) Which of the following most accurately describes the discount rate used in NPV and IRR analyses?

A) The rate of inflation

B) The rate of interest earned on a savings account

C) The required rate of return, also known as the “hurdle rate”

D) The rate of interest charged for debt financing of an investment

Answer:  C

Diff: 1

LO:  21-4

EOC Ref:  Accounting Vocabulary

AACSB:  Content/Knowledge

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

27) When a company is evaluating an investment with discounted cash flows, if the investment has a higher risk, the company will use a lower discount rate, and vice versa.

Answer:  FALSE

Diff: 1

LO:  21-4

EOC Ref:  E21-22

AACSB:  Content/Knowledge

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

28) Alpha Company is considering an investment of $1,000,000 in a land development project.  It will yield cash flows of $300,000 for 5 years.  Alpha uses a discount rate of 7%.  What is the net present value of the investment?

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

A) $230,000

B) $312,000

C) $330,000

D) $444,000

Answer:  A

Explanation:  A) Calculations: $1,000,000 – (4.100 × $300,000) = $230,000

Diff: 2

LO:  21-4

EOC Ref:  E21-22

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

29) Beta Company is considering an investment in a new storage facility that would require an initial outlay of $250,000, and would yield yearly cash flows of $48,000 for 8 years.   Beta uses a discount rate of 7%  What is the NPV of the investment?

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

A) $36,608

B) $24,177

C) $13,184

D) $44,000

Answer:  A

Explanation:  A) Calculations: $250,000 – (5.971 × $48,000) = $36,608

Diff: 2

LO:  21-4

EOC Ref:  E21-22

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

30) Centurion Company is considering a mineral extraction project which requires an initial investment of $2,000,000 and will yield annual cash flows of  $300,000 for 8 years.  Centurion has an 8% hurdle rate.  What is the NPV of the project?

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

A) Positive $275,900

B) Negative $275,900

C) Positive $103,184

D) Negative $240,000

Answer:  B

Explanation:  B) Calculations: $2,000,000 – (5.747 × $300,000) = ($275,900)

Diff: 2

LO:  21-4

EOC Ref:  E21-22

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

31) Which of the following would be the best basis on which to accept an investment opportunity?

A) If it has positive net cash flows

B) If it has a payback period in less than 10 years

C) If the investment's  rate of return is higher than the company's current year rate of return

D) If the net present value of all cash flows is positive

Answer:  D

Diff: 1

LO:  21-4

EOC Ref:  E21-22

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

32) Please refer to the following data about an investment opportunity:

Initial investment

$500,000

Discount rate

10%

Yearly cash flows

   Year 1

$100,000

   Year  2

$200,000

   Year 3

$200,000

   Year 4

$200,000

   Year 5

$100,000

Refer to the following table for PV factors:

Present Value of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

6

0.746

0.705

0.666

0.630

0.596

0.564

7

0.711

0.665

0.623

0.583

0.547

0.513

8

0.677

0.627

0.582

0.540

0.502

0.467

9

0.645

0.592

0.544

0.500

0.460

0.424

10

0.614

0.558

0.508

0.463

0.422

0.386

How much is the NPV of the project?

A) $9,500 negative

B) $94,220 positive

C) $105,000 positive

D) $240,000 positive

33) Please refer to the following data about an investment opportunity:

Initial investment

$1,000,000

Discount rate

7%

Yearly cash flows

    Year 1

$250,000

    Year  2

$350,000

    Year 3

$400,000

    Year 4

$150,000

Refer to the following PV factors:

Present Value of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

6

0.746

0.705

0.666

0.630

0.596

0.564

7

0.711

0.665

0.623

0.583

0.547

0.513

8

0.677

0.627

0.582

0.540

0.502

0.467

9

0.645

0.592

0.544

0.500

0.460

0.424

10

0.614

0.558

0.508

0.463

0.422

0.386

What is the NPV of the project?

A) $150,000 negative

B) $19,000 positive

C) $21,455 positive

D) $19,850 negative

34) Farragut Company is evaluating an opportunity to invest $45,000 in new manufacturing equipment.  It will have a useful life of 3 years, and will generate $20,000 cash flows at the end of Year 1, $30,000 of cash flows at the end of Year 2, and $10,000 of cash flows at the end of Year 3.  If Farragut uses a discount rate of 5%, what is the NPV of the project?

Present Value of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

6

0.746

0.705

0.666

0.630

0.596

0.564

7

0.711

0.665

0.623

0.583

0.547

0.513

8

0.677

0.627

0.582

0.540

0.502

0.467

9

0.645

0.592

0.544

0.500

0.460

0.424

10

0.614

0.558

0.508

0.463

0.422

0.386

A) $944 negative

B) $1,008 positive

C) $4,100 positive

D) $9,890 positive

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