1. An investment will generate annual CFAT (cash flows after taxes) of $630,000. It would cost $1,680,000 to acquire and should last five years with no salvage value expected. The payback period for this investment is: a. 6.27 years c. 2 years and 8 months b. 2 years and 6 months d. 2.8 years 2. Refer to the preceding question. The investments accounting rate of return using its initial investment and straight-line depreciation is: a. 35% c. 25.4% b. 17.5% d. Cannot be determined from the given information 3. The Queens Co. estimates it can save $4,200 per year in cash operating costs for the next 10 years if it buys a special-purpose machine at a cost of $16,500. No salvage value is expected. The companys minimum required rate of return is 14%. a. The investment is acceptable because the NPV is positive. c. The project is acceptable because the IRR is less than the cost of capital rate. b. The investment should be rejected because the NPV is negative. d. The project should be rejected based on its IRR. 4. Refer to question 3. The NPV is (rounded): a. $16,500 c. $5,407 b. $21,900 d. ($5,407) 5. The reason depreciation must be considered in a NPV analysis is: a. Depreciation is a cash flow item c. Depreciation should not be considered b. Depreciation has no tax effects d. Depreciation can save income taxes 6. A company is considering investing in one of two machines: one new and one it already has been using. If the old machine, acquired three years ago, has four years of remaining life, what is the present value of the tax savings generated by straight-line depreciation over its remaining life. The original cost of the machine was $448,000. The cost of capital is 12% and the tax rate = 40%. Round to nearest whole dollar. a. $25,600 c. $112,000 b. $77,747 d. $136,058 2 7. A special machine can save $11,200 per year in cash operating expenses for the next 10 years. The cost is $44,000. No salvage value is expected. Assume the tax rate averages 2/7 of taxable income, straight-line depreciation is used, and the cost of capital = 10% . The CFAT is (round to the nearest dollar): a. $11,200 c. 6,800 b. $9,257 d. $4,000 8. Refer to the preceding question. The internal rate of return, using linear interpolation and rounding to two decimal places, is: a. 25.45% c. 12.34% b. 21.04% d. 16.47% 9. A machine is being considered as a capital investment. Its cost is exactly equal to the present value of the inflows promised by the machine over its useful life discounted at the companys cost of capital. If the cost of capital is 14%, then the internal rate of return (IRR) of this machine is: a. Greater than 14% c. Equal to 14% b. Less than 14% d. Cannot be determined from the given information 10. Refer to the preceding question. The net present value (NPV) of the machine must be: a. Greater than zero c. Zero b. Less than zero d. Cannot be determined from the given information 11. An assumption made by the net present value method is that: a. All cash flows occur at the beginning of the period c. All cash flows ignore the time value of money b. All cash flows are reinvested in other projects that yield the internal rate of return d. All cash flows are reinvested in other projects that yield the cost of capital 12. You want to determine the internal rate of return of a project that generates non-equal cash flows over its life. By trial and error, you find that a discount rate of 16% yields a negative net present value, but a discount rate of 10% yields a positive net present value. The true rate of return must be: a. Greater than 16% or less than 10% c. Greater than 16% b. Less than 16% but greater than 10% d. Cannot be determined from the given information 13. Given cash flows for an investment proposal: Years 1/ $4,000; 2/ $3,600; 3/ $3,000; 4/ $2,400; and 5/ $2,000. If the investments cost is $9,000, the payback period (rounded to nearest tenth) is: a. 3 years c. 2.5 years b. 4 years d. 2.9 years 3 14. A vendor sells fresh flowers bundled into small units. He waits for his supplier to deliver fresh units of flowers each morning. He can only sell fresh flowers (not yesterdays leftovers) and has developed the following probability distribution of daily demand for this item: Demand Probability 0 5% 1 20% 2 40% 3 25% 4 10% Unit cost to acquire = $.60; unit selling price = $1.20; Salvage value (from a charitable organization) = $.20 per unit. Using net profit as a payoff, and the expected value criterion, how many units should the vendor order each day to maximize profit over the long-term? a. 1 c. 3 b. 2 d. 4 15. Refer to the previous question. The most the vendor should be willing to pay for any information concerning demand is: a. $1.29 c. $1.39 b. $0.90 d. $0.39 16. A payoff table, based on net profits, used to make a decision involving variable demand considers which kind of loss? a. Loss of future profits c. Loss from obsolete items b. Loss from understock costs d. Opportunity losses 17. A strategy for reaching a decision when uncertainty can be assigned probabilities is: a. Maximax criterion c. Criterion of rationality b. Maximin criterion d. Table of regrets 18. A researcher is given three options for leasing time on a supercomputer: 1/ Unlimited computer time for $6,000 per month; 2/ Pay $2,000 per month plus $40/hour of use; 3/ Pay $80/hour. The researcher has developed this probability distribution concerning his monthly use of computer time: # hours of use per month Probability 30 .10 60 .15 100 .25 150 .30 4 200 .20 Which option should be selected, using the expected value criterion, so as to minimize monthly costs? (Construct a payoff table reflecting the possible costs for each combination of action and event. Then apply the EV criterion.) a. Option 1 c. Option 3 b. Option 2 d. It does not matter which option is chosen 19. When the EOQ formula is used, which costs are minimized? a. Order costs and carrying costs c. Order, carrying and stockout costs b. Order costs and stockout costs d. Carrying costs and stockout costs 20. What assumption is made in developing and applying the EOQ model? a. Demand is variable c. Demand is known and constant b. Demand is always maximized d. Demand is not relevant 21. The Queens Box Company experiences a constant demand of 48,000 boxes per year to operate its business. The unit cost is .30 (cents). Placing an order costs $20 and annual carrying costs are $2/unit. The company operates 250 days per year and maintains a safety stock of 576 boxes. The lead time for an order of boxes is 4 business days. The EOQ (rounded to the nearest whole number) is: a. 576 units C. 3098 units b. 490 units d. 980 units 22. Refer to the preceding question. The total order and carrying costs associated with the EOQ level is: a. $980 c. $1960 b. $490 d. None of these 23. Refer to question 23. The reorder point, R, is: a. 1,344 units c. 576 units b. 768 units d. Cannot be determined from this information 24. In applying the minimax regret criterion, which types of payoffs are not usually considered: a. Overstock costs c. Regrets b. Understock costs d. Payoffs on the diagonal of a payoff table 25. Regarding net present value (NPV), which of the following is true: a. NPV < 0 is acceptable c. NPV has nothing to do with IRR b. NPV >0 is not acceptable d. NPV may involve more outflows than just cost.