10. If the discount factor for i = 8% and n = 2 is 0.85734, the present value of $10,000 is _____. (Round your answer to two decimal places.)

a.$9,663.90

b.$8,754.33

c.$9,666.67

d.$8,573.40

11. Which of the following compounding interest formula is used for computing amounts for n periods into the future? (F= Future value; P= Present value of a future outlay; i = Interest rate)

a.F = P(1 i)ⁿ

b.F = P(1 / i)ⁿ

c.F = P(1 i)ⁿ

d.F = P(1 + i)ⁿ

12. _____ is the minimum acceptable rate of return for a project.

a.The accounting rate of return

b.The required rate of return

c.The ordinary rate of return

d.The average rate of return

13. To make a capital investment decision, a manager must:

a.estimate the quantity and the timing of cash flows.

b.look into the before-tax cash flows before making investments.

c.consider the profits earned in the earlier years before making investments.

d.evaluate the amount of dividend to be declared in the coming financial year.

14.Fly High Inc. intends to invest in a new airplane. Information regarding the investment in the airplane is given below:

	Project A
Life of project	5 years
Initial investment	$30,750,228
Net annual after-tax cash inflow	$7,300,000

The cost of capital for the company is 8%. Calculate the internal rate of return (IRR) for the new airplane.

a.10%

b.6%

c.8%

d.5%

15. Wilson Company is considering a new capital acquisition to support capacity expansion. Relevant information includes: New equipment cost is $240,000; Incremental revenues are $140,000; Incremental operating expenses are $75,000; Incremental working capital is $25,000. The incremental working capital will be recovered at the end of the project's life. Based on this information, NPV for years 1 through 3 is:

a.$240,000 inflow discounted using the future value annuity factor for the required rate of return.

b.$240,000 inflow discounted using the present value annuity factor for the required rate of return.

c.$65,000 inflow discounted using the future value annuity factor for the required rate of return.

d.$65,000 inflow discounted using the present value annuity factor for the required rate of return.

16. The payback period method used to make a capital investment decision is used to assess the:

a.impact of an investment on liquidity.

b.minimum rate of return of a project.

c.profitability of an investment.

d.time value of cash inflows of an investment.

17. Which of the following statements is true while making capital investment decisions for independent projects?

a.The internal rate of return (IRR) and the accounting rate of return (ARR) model yield the same decisions for independent projects.

b.The net present value (NPV) model and the payback period model yield the same decisions for independent projects.

c.The net present value (NPV) model and the internal rate of return (IRR) model yield the same decisions for independent projects.

d.The payback period model and the accounting rate of return (ARR) model yield the same decisions for independent projects.

18. Due to which of the following reasons is the net present value (NPV) method preferred over the internal rate of return (IRR) method when choosing among mutually exclusive alternatives?

a.The NPV method measures profitability in relative terms, whereas the IRR method measures it in absolute terms.

b.The NPV method considers the time value of money while making a capital investment decision, whereas the IRR method considers the accounting rate of return while making a capital investment decision.

c.The NPV method measures the return in terms of income, whereas the IRR method measures the return in terms of a project's cash flows.

d.The NPV method assumes that each cash inflow received is reinvested at the required rate of return, whereas the IRR method assumes that each cash inflow is reinvested at the computed IRR.

19. Which of the following is a limitation of the accounting rate of return (ARR) model while making capital investment decisions?

a.The ARR model is dependent upon net income which can be easily manipulated by managers.

b.The ARR model ignores the cash flow performance of the investments beyond the recovery of original investment.

c.The ARR model is dependent upon required rate of return of investment.

d.The ARR model does not consider the profitability of a project.