# 51 the net present value method is better than the internal rate of return because 5 4302325

51)

The net present value method is better than the internal rate of return because

51)

______ A)

the internal rate of return is simple. B)

the net present value method is difficult to use in management decisions. C)

investments may have multiple internal rates of return. D)

the NPV's of different projects can be added together, and investments may have multiple internal rates of return. E)

the NPV's of different projects can be added together.

52)

A “what-if” technique that examines how a result will change if the original predicted data are not achieved, or if an underlying assumption changes, is called

52)

______ A)

sensitivity analysis. B)

payback method. C)

net present value analysis. D)

adjusted rate of return analysis. E)

internal rate of return analysis.

53)

Investment A requires a net investment of $600,000. The required rate of return is 10 percent for the three-year annuity.

What are the annual cash inflows in sensitivity analysis if the net present value equals 0?

53)

______ A)

$271,316.40 B)

$184,842.88 C)

$241,254.52 D)

$360,000.00 E)

$249,791.84

54)

The initial investment in working capital is usually recovered

54)

______ A)

in equal portions, with the recovery of the initial investment, based on the matching of revenues and all costs B)

when (if) the project is terminated C)

as soon as the RRR is achieved. D)

in year 0 E)

in year 1

55)

In capital budgeting decisions, relevant cash flows

55)

______ A)

are expected future cash flows that differ between alternatives. B)

are actual cash flows that differ between alternatives. C)

are past cash flows lost. D)

are expected future cash flows that do not differ between alternatives. E)

are actual cash flows that do not differ between alternatives.

56)

All of the following are major categories of cash flows in capital investment EXCEPT

56)

______ A)

management and labour allocation deductions. B)

recurring operating cash flows. C)

initial working capital investment D)

initial investment in machines. E)

income tax cash savings due to amortization deductions.

57)

A project has a net initial investment of $500,000 and the cash flows cover five years. The project involves replacing an old machine with a new machine. Which of the following is false based on the above assumptions, in NPV analysis?

57)

______ A)

incremental working capital investment does not equal the working capital required for the project B)

the book value of the old machine is irrelevant C)

any cash received from a disposal of the old machine would be a relevant cash flow for year 1 D)

recurring operating cash flows can be positive or negative E)

errors in forecasting the terminal disposal price of the new machine are seldom critical

58)

Amortization charges

58)

______ A)

are not relevant in capital budgeting decisions, because they are not discounted. B)

affect the ending balance of operating income, and are thus relevant. C)

are considered an element of cash flows, and are thus relevant. D)

are not relevant because they are not cash flows. E)

none of the above

59)

The relevant terminal disposal price of a machine equals

59)

______ A)

the difference between the salvage values of the old machine and the new machine. B)

the salvage value of the old machine. C)

the salvage value of the new machine. D)

the total of the salvage values of the old machine and the new machine. E)

the NPV of the salvage value of the old.

60)

A company is considering purchasing a new machine, at a cost of $50,000. This amount will be written off over 5 years at $10,000 per year. The company will have to increase its working capital by $4,000 in the first year. The disposal value of the machine being replaced is $1,500.

What is the incremental working capital investment required?

60)

______ A)

$4,000 B)

$36,000 C)

$50,000 D)

$40,000 E)

$2,500