Multiple Choice Answers

1. The City of Miami is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs. Which of the following items, all related to the transaction, would not be considered in the decision? (Points : 5)
Savings in operating costs as a result of the new vehicle.
Proceeds from disposal of the old vehicle.
Purchase price of the new vehicle.
Purchase price of the old vehicle.

2. Susan Jackson is considering buying a machine to produce silk-screened T-shirts. The following estimated data are available for her proposed project:
Cost of the machine: $16,000
Annual net cash flows generated: 5,000
Salvage value of the machine : 1,000
Useful life of the machine: 5 years
Minimum required return: 10%

The net present value of this investment opportunity is: (Points : 5)

3. Which of the following choices correctly notes how a project’s depreciation is treated under the simple rate of return method and the internal-rate-of-return method? (Points : 5)
Simple Rate of Return: Ignored
Internal Rate of Return: Considered
Simple Rate of Return: Considered
Internal Rate of Return: Considered
Simple Rate of Return: Ignored
Internal Rate of Return: Ignored
Simple Rate of Return: Considered
Internal Rate of Return: Ignored

4. The Salty Snacks Co. is considering launching a new product that is expected to have a life of 7 years. The initial investment in equipment will cost $480,000. The projected cash revenues and cash expenses for the product are:

Year Revenues Expenses
1 $200,000 $120,000
2 250,000 130,000
3 270,000 120,000
4 220,000 130,000
5 220,000 160,000
6 200,000 130,000
7 200,000 150,000

The payback period for this project is closest to: (Points : 5)
2 years.
3 years.
4 years.
5 years.

5. The book value of equipment is an example of a(n): (Points : 5)
differential cost.
opportunity cost.
sunk cost.
future cost.

6. You estimate that it will take five years to complete your college education. Your parents are going to invest $18,025 today in an account that earns 12%. How much money can you withdraw at the end of each of the next five years, if you wish to have nothing left at the end? (Points : 5)

7. The Vector Company produces four products with the following costs and selling prices:
Dino Fido Pinto Tito
Selling price per unit $50.00 $75.00 $80.00 $90.00
Variable cost per unit $42.00 $60.00 $70.00 $78.00
Machine hours per unit 2.50 3.00 2.50 4.00

If Madison has a limit of 15,000 machine hours and can sell as many of each of the products as can be produced, which of the four products should be produced? (Points : 5)

8. Jones and Company has just purchased a new piece of equipment, the cost characteristics of which are given below:
Purchase cost when new: $30,000
Annual cost savings: $ 6,000
Salvage value: $ -0-
Life of the equipment: 15 years
The company uses a required rate of return of 10% and depreciates equipment using the straight-line method.
The net present value of the investment is: (Points : 5)

9. Nikki O’Teen quit smoking on her 25th birthday. She has decided to deposit the money she saves by not smoking into a mutual fund at the end of each year for the next 40 years. She hopes to “take a nice trip when she retires” with the money. She estimates she has been spending $500 per year on cigarettes and believes her mutual fund will earn 8% per year. How much will Nikki have for her trip? (Points : 5)
$ 86,400
$ 20,000

10. Which of the following statements about capital budgeting is true? (Points : 5)
The payback method is used to compute how profitable one project is compared to another.
If cash flows are not equal every year, the internal rate of return will be easier to compute than the net present value method.
Other things being equal, if a project is acceptable using the net present value method, it will be also acceptable using the internal rate of return method.
A company’s “cost of capital” is the same thing as the interest rate it pays on long-term debt.

11. The term “outsourcing” is most closely associated with: (Points : 5)
decisions to process joint products beyond the split-off point.
equipment replacement decisions.
special order decisions.
make-or-buy decisions.