In which of the following situations would it be appropriate to accept a project under the net present value method?

I. Net present value is positive.

II. Net present value is zero.

III. Net present value is negative.

a. Only I.

b. Only II.

c. Both I and II.

d. Both II and III.

2. An investment for which the net present value is \(\$ 300\) would result in which of the following conclusions?

a. The net present value is too small, so the project should be rejected.

b. The investment project promises more than the required rate of return,

c. The net present value method is not suitable for evaluating this project.

d. The investment project should be accepted only if the net present value is zero.

3. Which of the following statements regarding investments in automated equipment is correct?

a. The cost of automating a process is always minor compared to other alternatives.

b. The total cost to automate a process consists of outlays for machinery and equipment.

c. The benefits of automation are always tangible, direct, and easy to quantify.

d. A decision to automate often results from a commitment to quality and customer satisfaction.

4. When a company considers an investment in automated equipment, it should:

a. focus primarily on ways to reduce direct labor cost.

b. select only automation projects with positive net present values.

c. consider both the tangible and intangible benefits of automation.

d. automate the entire process rather than take a piecemeal approach to automation.

5. Wilson Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of \(\$ 8,000\) each year over the next seven years. If the machine has no salvage value at the end of seven years and the company's discount rate is \(10 \%\), what is the purchase price of the machine if the net present value of the investment is \(\$ 12,000\) ? (Round to the nearest dollar.)

a. \(\$ 38,947\)

b. \(\$ 26,947\)

c. \(\$ 12,000\)

d. \(\$ 50,947\)
6. Elizabeth Rankin invested \(\$ 60,000\) to start a business at the beginning of 2005 . She withdrew \(\$ 10,000\) at the end of each year for the next five years. At the end of the fifth year, Elizabeth sold the business for \(\$ 100,000\) cash. At a \(12 \%\) discount rate, what is the net present value of Elizabeth's business investment? (Round to the nearest dollar.)

a. \(\$ 60,000\)

b. \(\$ 36,048\)

c. \(\$ 56,743\)

d. \(\$ 32,791\)
7. Anthony operates a part-time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of \(\$ 1,200\) in year \(1, \$ 2,300\) in year 2 , and \(\$ 3,500\) in 3. If Anthony's cost of capital is \(10 \%\), then the most he would be willing to pay for the new computer system would be (rounded to the nearest dollar):

a. \(\$ 4,599\).

b. \(\$ 5,502\).

c. \(\$ 5,621\).

d. \(\$ 5,107\).
8. The moving baseline concept is based on the assumption that:

a. current cash flows can continue indefinitely into the future.

b. customer dissatisfaction can be avoided with increased quality.

c. a competitor will adversely affect a company's cash flows if an investment is not made.

d. investment in new equipment is an opportunity cost.
9. A manager who fails to terminate a failing capital investment project:

a. is probably unaware that the investment is failing.

b. may do so because sunk costs are not being ignored.

c. may be reacting to pressures within the organizational environment.

d. All of the above are correct.
10. Which of the following items must be estimated when a capital investment decision is made?

a. Service life of investment

b. Residual value of investment

c. Both a and b are correct.

d. Neither a nor b is correct.