Multiple Choice Questions
1. Calculations of the time value of money are based on the premise that:
a. A dollar received today is worth more than a dollar received in the future
b. A dollar received today is worth less than a dollar received in the future
c. A dollar of net income in the future is equal to cash flows paid today
d. Large cash outlays require cash flow projections to be successful
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. NPV calculations generally require which of the following simplifying assumptions?
a. All cash flows occur in the middle of the period.
b. All cash flows occur evenly during the period.
c. Cash flows occur equally at the beginning and end of the period.
d. All cash flows occur at the end of the period.
4. Under the IRR method, cash inflows are assumed to be reinvested at:
a. The average cost of capital
b. The company’s discount rate
c. The original internal rate of return
d. The prevailing market interest rate
5. The Unique Bookshelf Company is considering the purchase of a custom delivery van costing approximately $50,000. Using a discount rate of 20 percent, you estimate the present value of future cost savings at $51,200. To yield the 20 percent return, the actual cost of the van should not exceed the $50,000 estimate by more than:
6. Which of the following cash flows does not have to be “discounted” for use in NPV calculations?
a. Salvage value of newly purchased equipment to be received in 7 years
b. Additional investments of operating capital required in 3 years
c. Estimated additional cost savings over the 5 years of a project’s life
d. Cost of the initial investment in a project
7. Shumate Company is considering an investment with a cost of $55,000. Annual cash savings of $10,000, with a present value at 12 percent of $53,282, are expected for the next nine years. Given this information, which of the following statements is true?
a. This investment offers a 12 percent rate of return.
b. This investment offers more than a 12 percent rate of return.
c. This investment offers less than a 12 percent rate of return.
d. Not enough information is available to answer this question.