1.

Calculate the net present value of a project which requires an initial investment of
$243,000 and it is expected to enerate a cash inflow of $!0,000 each month for 12
months. "ssume that the salvae value of the project is #ero. $he taret rate of return
is 12% per annum.
2. "n initial investment on plant and machiner& of $',320 thousand is expected to
enerate cash inflows of $3,411 thousand, $4,0(0 thousand, $!,'24 thousand and
$2,0)! thousand at the end of first, second, third and fourth &ear respectivel&. "t the
end of the fourth &ear, the machiner& will *e sold for $+00 thousand. Calculate the
present value of the investment if the discount rate is 1'%. ,ound &our answer to
nearest thousand dollars.
3. -resent .alue of /eries of $1 Cash 0lows 1annuit&23
" project will cost $!0,000 and the annual net cash inflows will *e $11,'(1 for the !4
&ear life of the project. $he compan& has an '% cost of acquirin investment capital.
5se the present value ta*le a*ove and calculate the internal rate of return 1IRR2.
a. 4%.
*. )%.
c. '%.
d. 10%.
e. 12%.
4. -resent .alue of /eries of $1 Cash 0lows 1annuit&23
" compan&6s initial cash outflow for an investment project is $)',000 and the
investment6s annual cash inflow for ! &ears is $1',000 per &ear. Calculate the net
present value of the investment project assumin the compan& has an '% hurdle rate.
a. 707
*. $3,'(4
c. $(,'1)
d. $22,000
e. 8one of the a*ove
!. 9hich of the followin is one of the potential advantaes of the net4present value
18-.2 method over the internal4rate4of4return 1:,,2 method;
a. :t is easier to compute a project6s 8-. than its :,,
*. " project6s 8-. does not have to *e adjusted for ris< considerations
c. " hurdle rate is not used in the 8-. method
d. 8-. method relies on a sinle discount rate
e. 8one of the a*ove
). -resent .alue of $1
Consider the followin information for two projects3
$he hurdle rate is 10%. 9hich of the followin is true?
a. $he present value of the operatin costs for =ear >ne, -roject ", is
$11),'1(2.
*. $he present value of the acquisition cost of -roject " is $1!4,!402.
c. $he present value of the cash outflow for =ear $wo, -roject ?, is
$112,3+02.
d. $he present value of the cash outflow for =ear $wo, -roject ?, is
$13(,(232
e. >nl& 1"2 and 1C2 are true.
(. -resent .alue of $1
" compan& is considerin the purchase of a new refrierated deliver& truc< for
$1(!,000. $he compan& has a desired rate of return of '% and plans to use the truc<
in operations for ! &ears, at which time it will *e replaced. @anaement *elieves that
the truc< will enerate annual incremental revenue, net of cost of oods sold, of
$'!,000. "nnual cash operatin costs are expected to increase *& $3!,000.
@anaement plans to depreciate the asset as a ! &ear asset under @"C,/ 120% &ear
1, 32% &ear 2, 1+.2% &ear 3, 11.!2% &ear 4 A &ear !, !.()% in &ear )2. "ssume a
30% tax rate. $he net present value 1ta<in income taxes into consideration2 of the
deliver& truc< purchase is closest to3
a. $(,34+
*. $13!,24!2
c. $4+,4()
d. $(,)!2
e. 8one of the a*ove
'. -resent .alue of $1
" compan& is considerin the purchase of a new refrierated deliver& truc< for
$1(!,000. $he compan& has a desired rate of return of '% and plans to use the truc<
in operations for ! &ears, at which time it will *e replaced. @anaement *elieves that
the truc< will enerate incremental annual net sales revenue of $'!,000 1after ta<in
in to account the increase in cost of oods sold2. "nnual cash expenses are expected to
increase *& $3!,000. @anaement plans to depreciate the asset as a ! &ear asset under
@"C,/ 120% &ear 1, 32% &ear 2, 1+.2% &ear 3 and 11.!2% &ear 4 A &ear !, !.()%
in &ear )2 and to sell it for its net *oo< value. "ssume a 30% tax rate. $a<in income
taxes into consideration, the lenth of the pa&4*ac< period for this particular
investment option is closest to3
a. 1 &ear
*. 2 &ears
c. 3 &ears
d. 4 &ears
e. ! &ears or more
+. " compan& purchased an asset for $120,000. $he second &ear depreciation expense is
$30,000. $he compan&6s tax rate is 3!%. 9hat is the depreciation tax shield for the
second &ear;
a. $10,!00
*. $30,000
c. $1+,!00
d. $',(!0
e. $10,(!0
10. 9hich of the followin is false a*out the use of @"C,/ for tax purposes;
a. " half4&ear convention is used.
*. /alvae value is not considered.
c. /traiht4line depreciation is optional to @"C,/.
d. Bver& asset is placed in one of six classes.
e. Cepreciation percentaes for each @"C,/ propert& class are in pu*lished :,/ ta*les.
11. " deprecia*le asset cost $40,000, has a $3,000 salvae value, and is in the !4&ear
@"C,/ propert& class life, which is depreciated under the dou*le4declinin *alance
1CC?2 method. 9hat is the amount of the first &ear depreciation expense under
@"C,/;
a. $12,'00
*. $1),000
c. $14,'00
d. $4,000
e. $',000
12. 9hich of the followin formulas will &ield the total cash flow from the sale of a
deprecia*le asset at a ain;
a. -roceeds from the sale 7 1Dain x $ax rate2
*. -roceeds from the sale x 11 7 $ax rate2
c. -roceeds from the sale E 1Dain x 11 7 $ax rate22
d. -roceeds from the sale E 1Dain x $ax rate2
e. -roceeds from the sale 7 1DainF$ax rate2
13. 9hich of the followin formulas will &ield the total cash flow from the sale of a
deprecia*le asset at a loss;
a. -roceeds from the sale E 1Goss x 11 E$ax rate22
*. -roceeds from the sale x 11 7 $ax rate2
c. -roceeds from the sale E 1Goss x 11 7 $ax rate22
d. -roceeds from the sale E 1Goss x $ax rate2
e. -roceeds from the sale 7 1Goss x 11E$ax rate22
14. -resent .alue of $1
Consider the followin for each of the 34&ear projects, usin a 10% discount rate3
9hich of the projects has the lowest net present value;
a. -roject "
*. -roject ?
c. -roject C
d. -roject C
e. Cannot *e determined from the information provided.
1!. Consider the followin3
9hich of the followin statements is true;
a. -roject " has the lowest profita*ilit& index.
*. -roject ? has the lowest profita*ilit& index.
c. -roject C has the lowest profita*ilit& index.
d. -roject ? would *e ran<ed num*er 1, usin the profita*ilit& index for ran<in
projects.
e. -rofita*ilit& rate cannot *e determined from the information provided.
1). 9hich of the followin is not one of the difficulties in appl&in the 8-. approach to
a C:@ investment decision;
a. Hurdle rates that are set too low.
*. $ime hori#ons are too short.
c. ?ias toward incremental projects.
d. Dreater uncertainties a*out operatin cash flows.
e. Bxclusion of *enefits which are difficult to quantif&.
1341. :n the decision to replace an old machine with a new machine, which of the
followin would *e considered a relevant cost;

a. $he *oo< value of the old equipment.

*. "morti#ation expense on the old equipment.

c. $he loss on the disposal of the old equipment.

d. $he current disposal price for the old equipment.
1342. $he decision to drop a product line should *e *ased on3

a. the fact that the product line shows a net loss over several periods.

*. the a*ilit& of the firm to eliminate some fixed costs as a result of
droppin the product.

c. whether the fixed costs that can *e avoided *& droppin the product
line are less than the contri*ution marin that will *e lost.

d. whether the fixed costs that can *e avoided *& droppin the product
line are reater than the contri*ution marin lost.
1343. $o maximi#e total contri*ution marin, a firm should3

a. promote those products havin the hihest unit contri*ution marins.

*. promote those products havin the hihest contri*ution marin ratios.

c. promote those products havin the hihest contri*ution marin per unit
of a constrained resource.

d. promote those products havin the hihest contri*ution marins and
contri*ution marin ratios.
1344. $wo or more products produced from a common input are termed3

a. common costs.

*. joint products.

c. joint costs.

d. *&4products.
134!. :n a decision to sell or process further *e&ond the split4off point, a manaer
should *ase the decision on3

a. the amount of joint product costs allocated.

*. the incremental revenue attaina*le *e&ond the split4off point.

c. the incremental cost incurred *e&ond the split4off point.

d. the incremental operatin income attaina*le *e&ond the split4off point.
134). $he ,eal, :nc. ma<es 3!,000 motors to *e used in the production of its sewin
machines. $he cost per motor at this level of activit& would include3 Cirect materials,
$4.!0I Cirect la*our, $4.)0I .aria*le factor& overhead, $3.(!I 0ixed factor& overhead,
$3.4!. "n outside supplier recentl& *ean producin a compara*le motor for the
sewin machine. $he price to ,eal for this motor is $1!. :f ,eal decided not to
ma<e the motors, there would *e no other use for the production facilities. :f ,eal
decides to continue ma<in the motor, how much hiher or lower would net income
*e than if the motors are purchased from the outside supplier;

a. $(2,2!0 hiher.

*. $4!,!00 lower.

c. $311,!00 hiher.

d. $120,(!0 hiher.
134(. $he 9orldCo has two divisions3 8orth and /outh. $he divisions have the
followin revenues and expenses3
8orth /outh
/ales $4!0,000 $400,000
.aria*le costs 22!,000 1!0,000
Cirect fixed costs 130,000 10!,000
"llocated corporate costs 120,000 +!,000
8et income 1loss2 12!,0002 !0,000
$he manaement of 9orldCo is considerin the elimination of the 8orth Civision. :f
the 8orth Civision were eliminated, the direct fixed costs associated with this division
could *e avoided. Diven these data, the elimination of the 8orth Civision would result
in an overall compan& net income 1loss2 of3

a. $!0,000.

*. 1$(0,0002.

c. $2!,000.

d. 1$(!,0002.
134'. Jac<6s -ersonal Cevices ma<es and sells hand4held computers. Bach computer
reularl& sells for $200. $he followin cost data per computer are *ased on a full
capacit& of 12,000 computers produced each period3 Cirect materials. $(!I Cirect
la*our, $!!I 0actor& >verhead 1(!% varia*le, 2!% unavoida*le fixed2, $4'. " special
order has *een received *& Jac<6s for a sale of 2,!00 computers to an overseas
customer. $he onl& sellin costs that would *e incurred on this order would *e $10
per computer for shippin. Jac<6s is now sellin (,200 computers throuh reular
distri*utors each period. 9hat should *e the minimum sellin price per computer in
neotiatin a price for this special order;

a. $200.

*. $1)).

c. $1('.

d. $1().
134+. Kuestions + 4 10 refer to the followin3 9elter, :nc. is considerin the addition
of a new line of product to its current product lines. $he expected cost and revenue
data for the new product are as follows3 "nnual sales, 2,!00 units. /ellin price per
unit, $304. .aria*le costs per unit3 -roduction, $12! and /ellin, $4+. "voida*le
tracea*le fixed costs per &ear3 -roduction, $!0,000 and /ellin, $(!,000. 5navoida*le
allocated corporate costs per &ear, $!!,000. :f the new product is added to the existin
product line, the contri*ution marin of the other existin product lines is expected to
drop $)!,000 per &ear. :f the new product line is added next &ear, the increase in net
income resultin from this decision would *e3

a. $32!,000.

*. $200,000.

c. $14!,000.

d. $13!,000.
13410. 9hat is the lowest sellin price per unit that could *e chared for the new
product line and still ma<e it economicall& desira*le to add the new product line;

a. $24).

*. $224.

c. $232.

d. $2'2.
1341. :n the decision to replace an old machine with a new machine, which of the followin
would *e considered a relevant cost;
a. $he *oo< value of the old equipment.
*. "morti#ation expense on the old equipment.
c. $he loss on the disposal of the old equipment.
d. The current disposal price for the old equipment.
Your choice of "c" was incorrect. The correct answer is "d".
1342. $he decision to drop a product line should *e *ased on3
a. the fact that the product line shows a net loss over several periods.
*. the a*ilit& of the firm to eliminate some fixed costs as a result of droppin the product.
c. whether the fixed costs that can *e avoided *& droppin the product line are less than the
contri*ution marin that will *e lost.
d. whether the fixed costs that can be avoided by dropping the product line are greater
than the contribution margin lost.
Your choice of "a" was incorrect. The correct answer is "d".
1343. $o maximi#e total contri*ution marin, a firm should3
a. promote those products havin the hihest unit contri*ution marins.
*. promote those products havin the hihest contri*ution marin ratios.
c. promote those products having the highest contribution margin per unit of a
constrained resource.
d. promote those products havin the hihest contri*ution marins and contri*ution marin
ratios.
Your choice of "a" was incorrect. The correct answer is "c".
1344. $wo or more products produced from a common input are termed3
a. common costs.
b. joint products.
c. joint costs.
d. *&4products.
You answered correctly!
134!. :n a decision to sell or process further *e&ond the split4off point, a manaer should *ase
the decision on3
a. the amount of joint product costs allocated.
*. the incremental revenue attaina*le *e&ond the split4off point.
c. the incremental cost incurred *e&ond the split4off point.
d. the incremental operating income attainable beyond the split-off point.
You answered correctly!
134). $he ,eal, :nc. ma<es 3!,000 motors to *e used in the production of its sewin
machines. $he cost per motor at this level of activit& would include3 Cirect materials, $4.!0I
Cirect la*our, $4.)0I .aria*le factor& overhead, $3.(!I 0ixed factor& overhead, $3.4!. "n
outside supplier recentl& *ean producin a compara*le motor for the sewin machine. $he
price to ,eal for this motor is $1!. :f ,eal decided not to ma<e the motors, there would *e
no other use for the production facilities. :f ,eal decides to continue ma<in the motor, how
much hiher or lower would net income *e than if the motors are purchased from the outside
supplier;
a. !"#"$% higher.
*. $4!,!00 lower.
c. $311,!00 hiher.
d. $120,(!0 hiher.
Your choice of "d" was incorrect. The correct answer is "a".
134(. $he 9orldCo has two divisions3 8orth and /outh. $he divisions have the followin
revenues and expenses3
8orth /outh
/ales $4!0,000 $400,000
.aria*le costs 22!,000 1!0,000
Cirect fixed costs 130,000 10!,000
"llocated corporate costs 120,000 +!,000
8et income 1loss2 12!,0002 !0,000
$he manaement of 9orldCo is considerin the elimination of the 8orth Civision. :f the
8orth Civision were eliminated, the direct fixed costs associated with this division could *e
avoided. Diven these data, the elimination of the 8orth Civision would result in an overall
compan& net income 1loss2 of3
a. $!0,000.
b. &!%#%%%'.
c. $2!,000.
d. 1$(!,0002.
Your choice of "d" was incorrect. The correct answer is "b".
134'. Jac<6s -ersonal Cevices ma<es and sells hand4held computers. Bach computer reularl&
sells for $200. $he followin cost data per computer are *ased on a full capacit& of 12,000
computers produced each period3 Cirect materials. $(!I Cirect la*our, $!!I 0actor& >verhead
1(!% varia*le, 2!% unavoida*le fixed2, $4'. " special order has *een received *& Jac<6s for a
sale of 2,!00 computers to an overseas customer. $he onl& sellin costs that would *e
incurred on this order would *e $10 per computer for shippin. Jac<6s is now sellin (,200
computers throuh reular distri*utors each period. 9hat should *e the minimum sellin
price per computer in neotiatin a price for this special order;
a. $200.
*. $1)).
c. $1('.
d. (!).
Your choice of "c" was incorrect. The correct answer is "d".
134+. Kuestions + 4 10 refer to the followin3 9elter, :nc. is considerin the addition of a new
line of product to its current product lines. $he expected cost and revenue data for the new
product are as follows3 "nnual sales, 2,!00 units. /ellin price per unit, $304. .aria*le costs
per unit3 -roduction, $12! and /ellin, $4+. "voida*le tracea*le fixed costs per &ear3
-roduction, $!0,000 and /ellin, $(!,000. 5navoida*le allocated corporate costs per &ear,
$!!,000. :f the new product is added to the existin product line, the contri*ution marin of
the other existin product lines is expected to drop $)!,000 per &ear. :f the new product line
is added next &ear, the increase in net income resultin from this decision would *e3
a. $32!,000.
*. $200,000.
c. $14!,000.
d. (*$#%%%.
Your choice of "a" was incorrect. The correct answer is "d".
13410. 9hat is the lowest sellin price per unit that could *e chared for the new product line
and still ma<e it economicall& desira*le to add the new product line;
a. $24).
b. ""+.
c. $232.
d. $2'2.
You answered correctly!
"8/9B, LB=3
1. /olution
9e have,
:nitial :nvestment M $243,000
8et Cash :nflow per -eriod M $!0,000
8um*er of -eriods M 12
Ciscount ,ate per -eriod M 12% N 12 M 1%
8et -resent .alue
M $!0,000 O 11 P 11 E 1%2Q4122 N 1% P $243,000
M $!0,000 O 11 P 1.01Q4122 N 0.01 P $243,000
R $!0,000 O 11 P 0.''(44+2 N 0.01 P $243,000
R $!0,000 O 0.112!!1 N 0.01 P $243,000
R $!0,000 O 11.2!!1 P $243,000
R $!)2,(!4 P $243,000
R $31+,(!4
OR
-resent .alue of cash inflow $!)2,(!!
1$!0,000 x 11.2!!12
Gess3 Cost of :nvestment 243,000
,-T ./-0-,T 1234- *(5#!$$ rounded-off
2. /olution
-. 0actors3
=ear 1 M 1 N 11 E 1'%2Q1 R 0.'4(!
=ear 2 M 1 N 11 E 1'%2Q2 R 0.(1'2
=ear 3 M 1 N 11 E 1'%2Q3 R 0.)0')
=ear 4 M 1 N 11 E 1'%2Q4 R 0.!1!'
$he rest of the pro*lem can *e solved more efficientl& in ta*le format as show *elow3
=ear 1 2 3 4
8et Cash :nflow $3,411 $4,0(0 $!,'24 $2,0)!
/alvae .alue +00
$otal Cash :nflow $3,411 $4,0(0 $!,'24 $2,+)!
O -resent .alue 0actor 0.'4(! 0.(1'2 0.)0') 0.!1!'
-resent .alue of Cash 0lows $2,'+0.)' $2,+23.01 $3,!44.)( $1,!2+.31
$otal -. of Cash :nflows $10,'''
P :nitial :nvestment P ',320
,et .resent 1alue "#$)6 thousand
3. 7. )%
0eed*ac<3
9hen we have a series of equal pa&ments, the internal rate of return is determined in
two steps, as follows3
1. Civide the initial cash outflow *& the equivalent annual cash inflows to derive
the annuit& discount factor3 !0,000F11,'(1 M 4.211+4!0'
2. Goo< up the annuit& discount factor in the present value ta*le with nM!.
4. 7. $3,'(4
0eed*ac<3
$1',000 S 3.++3 M $(1,'(4
$(1,'(47$)',000 M $3,'(4
!. 2. :t is easier to compute a project6s 8-. than its :,,
0eed*ac<3 $he two potential advantaes of the 8-. method over the :,, method are
112 it is easier to compute a project6s 8-. than its :,,, and 122 a project6s 8-. can *e
adjusted for ris< considerations. ?oth methods use a hurdle rate. $he :,, method
relies on a sinle discount rate.
). -. >nl& 1"2 and 1C2 are true.
0eed*ac<3
8et4present value anal&sis of -roject "3
$he present value of the cash outflow for =ear $wo, -roject ? M $11!,0002 x 0.'2) M
$112,3+02.
(. 2. $(,34+
0eed*ac<3
$'!,000 S 11730%2 M $!+,!00
$3!,000 S 11730%2 M $24,!00
Cepreciation $ax /hield3
'. 8. 4 &ears
0eed*ac<3
$he pa&*ac< period is approximatel& 3 &ears, 10 months.
$otal cash flow in the first three &ears is $142,3'0 M 14!,!00 E !1,'00 E 4!,0'02.
$1(!,000 7 $142,3'0 M $32,)20. $32,)20 N 41,04' M approx. +.! months.
+. 2. $10,!00
0eed*ac<3
$he depreciation tax shield is the annual depreciation expense associated with an asset
that provides a reduction in income tax. Cepreciation tax shield M Cepreciation or
other noncash expense x $ax rate. $he depreciation tax shield is $10,!00 1M $30,000 x
3!%2.
10. 8. Bver& asset is placed in one of six classes.
0eed*ac<3 @"C,/ depreciation ta*les provide for eiht 1'2 propert& classes that are
*ased on estimated useful lives, per :nternal ,evenue Code.
11. -. $',000
0eed*ac<3
$he half4&ear convention applies. $he depreciation for the first &ear, under @"C,/,
is $40,000 x 0.40 x T M $',000 1or $40,000 x 0.202. $he complete schedule is3
8ote that the total depreciation is $40,000 1M $',000 E $12,'00 E $(,)'0 E $4,)0' E
$4,)0' E $2,3042. Salvage value is ignored under MACRS.
12. 2. -roceeds from the sale 7 1Dain x $ax rate2
0eed*ac<3 "s an example, assume proceeds of $3,000 on an asset with a *oo< value
of $1,000, and a tax rate on ains of 3!%. $he ain is $2,000. $he tax on the ain is
$(00 1$2,000 x 3!%2. $he total cash flow from the sale is $2,300 1M $3,000 4 $(002I
or -roceeds from the sale 7 1Dain x $ax rate2 M $3,000 7 1$2,000 x 3!%2 M $2,300.
13. 8. -roceeds from the sale E 1Goss x $ax rate2
0eed*ac<3 "s an example, assume proceeds of $3,000 on an asset with a *oo< value
of $!,000, and a tax rate is 3!%. $he loss is $2,000. ,eduction in income tax due the
loss is $(00 1$2,000 x 3!%2. $he total cash flow from the sale is $3,(00 1M $3,000 E
$(002I or -roceeds from the sale E 1Goss x $ax rate2 M $3,000 7 1$2,000 x 3!%2 M
$2,300.
14. 8. -roject C
0eed*ac<3
$he net present value of each project3
1!. 9. -roject C has the lowest profita*ilit& index.
0eed*ac<3
$he profitability index is computed as3
-rofita*ilit& index, -roject "3 1$(+,'00F$)0,000 M 1.33.
-rofita*ilit& index, -roject ?3 1$)2,300F$!!,000 M 1.13
-rofita*ilit& index, -roject C3 1$!0,200F$4',000 M 1.0!.
1). 2. Hurdle rates that are set too low.