Charles Darwin University

ACCOUNTING

Week 6 Quiz 1

1)Gamma Electronics is considering the purchase of testing equipment that will cost

$500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next four years. If Gamma Electronics has a 15% cost of capital, what's the NPV of the investment?

a.  $213,745

b.  $185,865

c.  $713,745

d.  $500,000

 

2. Flaws of the accounting rate of return method include:
   1. the choice of accounting g hurdle return rate is essentially arbitrary
   2. depreciation method has a large impact on the accounting rate of return
   3. this method makes no adjustment for project risk or for the time value  of money
   4. all of the above

 

3. Delta Pharmaceuticals has 200 million shares outstanding with a current market price of $30 per share. Its stock rose to $32 on the news that Delta Pharmaceuticals' long-awaited new drug Zentac is to hit the market next month. What's the market's consensus of the NPV that the new drug will generate for Delta Pharmaceuticals?
   1. $400 million
   2. $6,400 million
   3. $6,000 million
   4. None of the above

 

4. The IRR method assumes that the reinvestment rate of cash flows is
   1. the cost of capital
   2. the IRR
   3. essentially arbitrary
   4. zero

 

5. You must know the discount rate of an investment project to compute its
   1. NPV,    IRR,     PI,     and     discount      payback period
   2. NPV, PI, discount payback period
   3. NPV, PI, IRR
   4. NPV,     accounting       rate      of     return,      PI, discount payback period

 

6. Gamma Electronics is considering the purchase of testing equipment that will cost

$500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next

 

four years. If Gamma Electronics has a 15% cost of capital, what's the IRR of the investment?

a.  23.4%

b.  15.0%

c.   34.9%

d.  100.0%

 

7. Kelley Industries is evaluating  two investment proposals. The scale of Project 1 is roughly 4 times that of the Project 2. The following data is provided for the two investment alternatives.

IRR

Project 1                                         28%

Project 2                                         50%

Incremental project                   26%

If the two projects are mutually exclusive, and the firm's hurdle rate is 18%, which project should the firm choose?

1. 1. project 1
   2. project 2
   3. the incremental project
   4. both projects

 

8. Gamma Electronics is considering the purchase of testing equipment that will cost

$500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next four years. What's the payback period for the investment?

1. 1. 1.8 years
   2. 2.0 years
   3. 2.5 years
   4. 2.8 years

 

9. You must know all the cash flows of an investment project to compute its
   1. NPV,    IRR,     PI,     and     discount      payback period
   2. NPV,     IRR,      PI,     payback       period,      and discount payback period,
   3. NPV, PI, IRR
   4. NPV, accounting rate of return, IRR, PI

 

10. A project may have multiple IRRs when
    1. the     project     generates      an     alternating series of net cash inflows and outflows
    2. the project generates an immediate cash inflow followed by cash outflow
    3. the project has a negative NPV
    4. the project is of considerably large scale

 

11. A firm has 10  million  shares  outstanding with a current market price of $20 per share. There is one investment project available to the firm. The initial investment of the project is $20 million, and the NPV of the project is

$10 million. What will be the firm's stock

price if capital markets fully reflect the value of undertaking the project?

a.  $19

b.  $20

c.  $21

d.  $22

 

12. The capital budgeting process involves

 

the coming year. There are three projects available and the cash flows of each project appear below. Assume a cost of capital of 12%. Which project or projects  do  you select?

Project 1

Project 2                               Project 3 Cash flow

a.  identifying        potential      investments                            and estimating the incremental cash inflows and  outflows  of  cash  associated  with	Year -$500,000 Year	0   1	-$1,000,000	-$400,000   200,000
each investment	300,000		500,000
b.  analyzing              and            prioritizing             the	Year	2		300,000
investments       utilizing       various      decision	350,000		700,000
criteria	Year	3		300,000
c.  implementing           and        monitoring          the	350,000		700,000

selected investment projects

4. estimating a fair rate of return on each investment given its risk
5. all of the above

 

13. Gamma Electronics is considering the purchase of testing equipment that will cost

$500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next four years. If Gamma Electronics has a 15% cost of capital, what's the profitability index of the investment?

a.   1.4

b.  0.4

c.   2.0

d.  1.0

 

14. You are provided with the following data on two mutually exclusive projects. The cost of capital is 15%.

Project 1

 

1. 1. Project 1
   2. Project 2
   3. Project 3
   4. Project 1 & Project 2

 

16. The preferred technique for evaluating most capital investments is
    1. payback period
    2. discount payback period
    3. internal rate of return
    4. net present value

 

17. Suppose a particular investment project will require an initial cash outlay of $1,000,000 and will generate a cash inflow of $500,000 in each of the next three years. What is the project's  IRR?  Suppose  a  company's  hurdle rate is 15%, should it accept the project?
    1. 23%; reject the project
    2. 23%; accept the project
    3. 15%; reject the project
    4. 15%; accept the project

Project 2

Initial cash outflow                                      -$5,000

-$1,000

Year 1 cash inflow                                      $5,000

$1,000

Year 2 cash inflow                                      $2,500

$  850

NPV                                                                   $1,238

$  512

PI                                                                               1.25

1.51

Which project should you accept? What is the problem that you should be concerned with in making this decision?

1. Project 1; the timing of cash flows
2. Project 2; the timing of cash flows
3. Project 1; project scale
4. Project 2; project scale

 

15) You have a $1 million capital budget and must make the decision about which investments your firm should undertake for

 

 

18. Gamma Electronics is considering the purchase of testing equipment that will cost

$500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next four years. If the firm has a 15% cost of capital, what's the discount payback period of the investment?

1. 1. 1.5 years
   2. 2.0 years
   3. 2.4 years
   4. 2.6 years

 

19. Suppose a particular investment project will generate an immediate cash inflow of

$1,000,000 followed by  cash outflows of

$500,000 in each of the next three years. What   is   the   project's   IRR?   Suppose   a company's hurdle rate is 15%, should it accept the project?

1. 1. 23%; reject the project