The payback period suffers from which of the following deficiencies?

	a.	It is a rough measure of the uncertainty of future cash flows.
	b.	It helps control the risk of obsolescence.
	c.	It ignores the time value of money.
	d.	It ignores the financial performance of a project beyond the payback period.
	e.	Both c and d.

QUESTION 2

Taxes are not an important consideration in developing cash flow assessments.

True

False

QUESTION 3

Tootsie Clothing Store is considering opening a new store. The expected purchase price is $270,000, expected annual revenues are $150,000, and expected annual costs are $90,000, including $22,500 of depreciation. The store has a payback period of approximately:

		1.8 years
		3.0 years
		3.3 years
		4.5 years

QUESTION 4

Grover Company is considering a proposal to invest $80,000 in an asset with a 10-year life. The annual net cash inflows from using the asset are estimated to be $12,000. The company requires a rate of return of 10% for this type of asset. The following present value information is available:

	At 10%	At 12%
Present value of $1 for 10 periods	0.3855	0.3220
Present value of an annuity of $1 for 10 periods	6.1446	5.6502

The IRR on this asset is estimated to be:

		10%
		12%
		Less than 10% but more than 8%
		More than 10%, but less than 12%

QUESTION 5

Sundquist Company invested in an asset with a useful life of 4 years. The company's required rate of return is 12% for this class of asset. The net cash flows and present value factors for 4 years are as follows:

Period	Net Cash Flows from Asset	Present Value of an Annuity of $1 at 12%
1	$ 8,000	0.9091
2	$ 8,800	0.8264
3	$ 9,600	0.7513
4	$10,400	0.6830

If the asset generates a positive net present value of $2,000, what was the amount of the original investment?

		$7,273
		$26,861
		$28,861
		$30,861

QUESTION 6

An asset is purchased for $60,000. It is expected to provide an additional $14,000 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $6,000. The hurdle rate is 10%. The present value of an annuity factor of 10% for 10 years is 6.1446, and the present value of $1 discounted for 10 years at 10% is 0.3855. The present value of annuity factors at 10% for 3, 4, 5, 6, 7, 8, and 9 years are 2.4869, 3.1699, 3.7908, 4.3553, 4.8684, 5.3349, and 5.7590, respectively. The minimum useful life that would provide a 10% return is between:

		3 and 4 years
		5 and 6 years
		7 and 8 years
		9 and 10 years

QUESTION 7

Allin Company is considering two projects. Project W has an investment cost of $15,000 and a net present value of $6,000. Project T has an investment cost of $20,000 and a net present value of $9,000. Due to limited resources, Allin can invest in only one project. Which project is the better investment for Allin?

		Invest in Project W
		Invest in Project T
		Invest in either Project W or Project T because both have positive net present values
		Cannot be determined

QUESTION 8

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2) QUESTIONS:

Parkways Inc. is considering the purchase of a new machine. the machine will cost $60,000 to purchase and will generate $15,000 of cash revenues per year for the next 8 years. the machine will cost $1,000 per year to maintain and has an estimated salvage value of $5,000 at the end of the 8 years. Parkways requires a minimum rate of return of 14%. Determine the Net Present Value of this investment proposal.

PV of $1 (14%, 8n) is .351; PVOA (14%, 8n) is 4.639

		$6,701
		$57,000
		$1,166
		$0

QUESTION 9

In performing sensitivity analysis for Parkways Inc. investment proposal, determine the Minimum Net Cash Inflow the equipment must generate each year for its 8-year life if the estimated salvage value at the end of 8 years remains $5,000.

		$12,588.69
		$12,555.51
		$13,733.12
		$14,000

QUESTION 10

The Witt Corporation is considering purchasing a new machine with the following characteristics:

Initial Cost: $25,000

Useful Life: 4 years

Salvage: $ 1,000

The company uses the straight-line method of depreciation and requires a minimum rate of return of 10%.

In evaluating this investment proposal, Witt determines the new machine would produce annual operating cost savings of $9,000 per year over the 4-year life. Determine the Accounting Rate of Return for this investment proposal.

		36%
		24%
		12%
		10%

QUESTION 11

Fellowship Partners want to know the net present value of a machine that will cost $100,000 today and will generate the following cash flows:

Year 1	$70,000
Year 2	$50,000
Year 3	$35,000
Year 4	$25,000
Year 5	$5,000

The machine has a salvage value of $15,000 at the end of year 5, and the company intends to dispose of it at that time. Fellowship uses a hurdle rate of 12% when evaluating all investment proposals. Determine NPV using the following tables:

PRESENT VALUE OF $1

Years

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

12.00%

14.00%

1

0.9709

0.9615

0.9524

0.9434

0.9346

0.9259

0.9174

0.9091

0.893

0.877

2

0.9426

0.9246

0.9070

0.8900

0.8734

0.8573

0.8417

0.8264

0.797

0.769

3

0.9151

0.8890

0.8638

0.8396

0.8163

0.7938

0.7722

0.7513

0.712

0.675

4

0.8885

0.8548

0.8227

0.7921

0.7629

0.7350

0.7084

0.6830

0.636

0.592

5

0.8626

0.8219

0.7835

0.7473

0.7130

0.6806

0.6499

0.6209

0.567

0.519

PRESENT VALUE OF AN ORDINARY ANNUITY
Years	3%	4%	5%	6%	7%	8%	9%	10%	12%	14%
1	0.9709	0.9615	0.9524	0.9434	0.9346	0.9259	0.9174	0.9091	0.893	0.877
2	1.9135	1.8861	1.8594	1.8334	1.8080	1.7833	1.7591	1.7355	1.690	1.647
3	2.8286	2.7751	2.7232	2.6730	2.6243	2.5771	2.5313	2.4869	2.402	2.322
4	3.7171	3.6299	3.5460	3.4651	3.3872	3.3121	3.2397	3.1699	3.037	2.914
5	4.5797	4.4518	4.3295	4.2124	4.1002	3.9927	3.8897	3.7908	3.605	3.433

		$54,520
		$46,015
		$43,180
		$4,895