Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) (Appendix 13A) Which of the following is associated with an increase in the discount 1)
rate?
A) It is one method of compensating for reduced risk.
B) It will reduce the present value of future cash flows.
C) It will have no effect on net present value.
D) It will increase the present value of future cash flows.
Answer: B
Topic: 13-04 The Time Value of Money, 13-12 Choosing a Discount Rate, 13-39 The Mathematics of Interest
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

2) (Appendix 13A) Suppose an investment has cash inflows of R dollars at the end of each 2)
year for two years. What will be the present value of these cash inflows using a 12%
discount rate?
A) Equal to that under a 10% discount rate.
B) Less than under a 10% discount rate.
C) Sometimes greater than under a 10% discount rate and sometimes less; it depends
on R.
D) Greater than under a 10% discount rate.
Answer: B
Topic: 13-04 The Time Value of Money, 13-06 The Net Present Value Method Illustrated, 13-41 Present Value
and Future Value
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

1
3) Why are the net present value and internal rate of return methods of capital budgeting 3)
superior to the payback method?
A) Because they are easier to implement.
B) Because they consider the time value of money.
C) Because they reflect the effects of depreciation and income taxes.
D) Because they require less input.
Answer: B
Topic: 13-21 Comparison of the Net Present Value and Internal Rate of Return Methods, 13-28 Comparing
the Preference Rules
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-04
Rank investment projects in order of preference.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

4) How are the following items used in the calculation of the net present value of a 4)
proposed project? (Ignore income tax considerations.)

Depreciation Expense Salvage Value

A) Include Include
B) Include Exclude
C) Exclude Include
D) Exclude Exclude

A) Option A B) Option B C) Option C D) Option D

Answer: C
Topic: 13-06 The Net Present Value Method Illustrated, 13-07 Emphasis on Cash Flows
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

2
5) The net present value method takes into account which of the following? 5)

Cash Flow over Life of ProjectTime Value of

Money
A) No Yes
B) No No
C) Yes No
D) Yes Yes

A) Option A B) Option B C) Option C D) Option D

Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-07 Emphasis on Cash Flows
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

6) The net present value method of capital budgeting assumes that cash flows are reinvested 6)
at what rate?
A) The discount rate used in the analysis.
B) The rate of return on the company's debt.
C) A zero rate of return.
D) The internal rate of return on the project.
Answer: A
Topic: 13-11 Simplifying Assumptions
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

7) Some investment projects require that a company expand its working capital to service 7)
the greater volume of business that will be generated. Under the net present value
method, how should the investment of working capital be treated?
A) Both an initial cash outflow for which no discounting is necessary and a future cash
inflow for which discounting is necessary.
B) Irrelevant to the net present value analysis.
C) A future cash inflow for which discounting is necessary.
D) An initial cash outflow for which no discounting is necessary.
Answer: A
Topic: 13-06 The Net Present Value Method Illustrated, 13-10 Recovery of the Original Investment
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

3
8) How is depreciation handled by the following capital budgeting techniques? (Ignore 8)
income taxes in this problem.)

Internal Rate of ReturnSimple Rate of ReturnPayback

A) Excluded Included Excluded
B) Included Excluded Included
C) Excluded Excluded Included
D) Included Included Excluded

A) Option A B) Option B C) Option C D) Option D

Answer: A
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-31 The Payback Method, 13-36 Criticism of
the Simple Rate of Return
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-05
Determine the payback period for an investment., 13-06 Calculate the simple rate of return for an
investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

9) Which of the following capital budgeting techniques consider(s) cash flow over the 9)
entire life of the project?

Internal Rate of Return Payback

A) Yes Yes
B) Yes No
C) No Yes
D) No No

A) Option A B) Option B C) Option C D) Option D

Answer: B
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-31 The Payback Method
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-05
Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

4
10) Which of the following is a weakness of the internal rate of return method for screening 10)
investment projects?
A) It does NOT consider the time value of money.
B) It does NOT take into account all of the cash flows from a project.
C) It implicitly assumes that the company is able to reinvest cash flows from the
project at the company's discount rate.
D) It implicitly assumes that the company is able to reinvest cash flows from the
project at the internal rate of return.
Answer: D
Topic: 13-19 Using the Internal Rate of Return
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

11) If the net present value of a project is zero, based on a discount rate of 16%, which of the 11)
following statements about the project's internal rate of return is correct?
A) It is greater than 16%.
B) It is less than 16%.
C) It is equal to 16%.
D) It cannot be determined from the information given.
Answer: C
Topic: 13-06 The Net Present Value Method Illustrated, 13-18 The Internal Rate of Return Method Illustrated,
13-21 Comparison of the Net Present Value and Internal Rate of Return Methods
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

12) What does the payback method measure? 12)

A) How quickly investment dollars may be recovered.
B) The economic life of an investment.
C) The profitability of an investment.
D) The cash flow from an investment.
Answer: A
Topic: 13-31 The Payback Method, 13-32 Evaluation of the Payback Method
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

5
13) An investment project that requires a present investment of $210,000 will have cash inflows13) of R
dollars each year for the next five years. The project will terminate in five years. Consider the
following statements (ignore income tax considerations):
I. If R is less than $42,000, the payback period exceeds the life of the project.
II. If R is greater than $42,000, the payback period exceeds the life of the project.
III. If R equals $42,000, the payback period equals the life of the project.
Which statement(s) is(are) true?
A) II and III only. B) I and II only.
C) I and III only. D) I, II, and III.
Answer: C
Topic: 13-31 The Payback Method, 13-32 Evaluation of the Payback Method, 13-33 An Extended Example of
Payback
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

14) Which one of the following statements about the payback method of capital budgeting is 14)
correct?
A) The payback method uses discounted cash flow techniques.
B) The payback method will lead to the same decision as other methods of capital
budgeting.
C) The payback method considers cash flows after the payback has been reached.
D) The payback method does NOT consider the time value of money.
Answer: D
Topic: 13-31 The Payback Method, 13-32 Evaluation of the Payback Method
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

15) Which of the following statements about the evaluation of an investment having uneven 15)
cash flows using the payback method is correct?
A) It can be done only by matching cash inflows and investment outflows on a
year-by-year basis.
B) It requires the use of a sophisticated calculator or computer software.
C) It will produce essentially the same results as those obtained through the use of
discounted cash flow techniques.
D) It CANNOT be done.
Answer: A
Topic: 13-34 Payback and Uneven Cash Flows
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

6
16) What is the capital budgeting method that divides a project's annual incremental net 16)
income by the initial investment?
A) The internal rate of return method.
B) The simple (or accounting) rate of return method.
C) The net present value method.
D) The payback method.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-18 The Internal Rate of Return Method Illustrated,
13-31 The Payback Method, 13-36 Criticism of the Simple Rate of Return
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method., 13-05
Determine the payback period for an investment., 13-06 Calculate the simple rate of return for an
investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

17) (Appendix 13B) By what amount does a capital cost allowance (CCA) deduction reduce 17)
income taxes?
A) The amount of the CCA deduction.
B) The tax rate multiplied by the amount of the CCA deduction.
C) The amount of the CCA deduction divided by one minus the tax rate.
D) One minus the tax rate multiplied by the amount of the CCA deduction.
Answer: B
Topic: 13-48 The Concept of After-Tax Cost, 13-49 Capital Cost Allowance Tax Shield
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

18) (Appendix 13B) At what amount should the capital cost allowance (CCA) tax shield be 18)
included in the calculation of the net present value of an investment project?
A) The amount of the CCA multiplied by one minus the tax rate.
B) Zero, since the amount of CCA is not relevant to the calculation of net present
value.
C) The amount of the CCA with no adjustment for taxes.
D) The amount of the CCA multiplied by the tax rate.
Answer: D
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-49 Capital Cost Allowance Tax
Shield, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

7
19) (Appendix 13B) Which of the following items is NOT included in the formula for 19)
calculating the present value of the capital cost allowance (CCA) tax shield?
A) The capital cost allowance rate.
B) Amount of working capital to be released at the end of a project.
C) The firm's marginal income tax rate.
D) The firm's cost of capital.
Answer: B
Topic: 13-08 Typical Cash Flows, 13-10 Recovery of the Original Investment, 13-48 The Concept of After-Tax
Cost, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

20) (Appendix 13A) Which of the following would decrease the net present value of a 20)
project?
A) An increase in the discount rate.
B) An increase in the useful life of the project.
C) A decrease in the income tax rate.
D) A decrease in the initial investment.
Answer: A
Topic: 13-06 The Net Present Value Method Illustrated, 13-12 Choosing a Discount Rate, 13-41 Present Value
and Future Value
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

21) (Appendix 13A) Kipling Company has invested in a project that has an eight-year life. It 21)
is expected that the annual cash inflow from the project will be $20,000. Assuming that
the project has an internal rate of return of 12%, how much was the initial investment in
the project? (Ignore income taxes in this problem.) (Round your PV factor to 5 decimal
places and final answer to nearest whole dollar amount.)
A) $99,353. B) $64,648. C) $160,000. D) $80,800.
Answer: A
Topic: 13-06 The Net Present Value Method Illustrated, 13-18 The Internal Rate of Return Method Illustrated,
13-19 Using the Internal Rate of Return , 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

8
22) (Appendix 13A) White Company's required rate of return on capital budgeting projects is 22)
12%. The company is considering an investment opportunity that would yield a cash
flow of $10,000 in five years. What is the most that the company should be willing to
invest in this project? (Ignore income taxes in this problem.) (Round your PV factor to 5
decimal places and final answer to nearest whole dollar amount.)
A) $36,050. B) $5,674. C) $2,774. D) $17,637.
Answer: B
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

23) (Appendix 13A) In order to receive $12,000 at the end of three years and $10,000 at the 23)
end of five years, how much must be invested now if you can earn 14% rate of return?
(Ignore income taxes in this problem.) (Round your PV factor to 5 decimal places and
final answer to nearest whole dollar amount.)
A) $8,100. B) $13,293. C) $12,978. D) $32,054.
Answer: B
Topic: 13-04 The Time Value of Money, 13-06 The Net Present Value Method Illustrated, 13-13 An Extended
Example of the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

24) (Appendix 13A) Sue Falls is the president of Sports, Inc. She is considering buying a 24)
new machine that would cost $14,125. Sue has determined that the new machine
promises an internal rate of return of 12%, but Sue has misplaced the paper that gives the
annual cost savings promised by the new machine. She does remember that the machine
has a projected life of ten years. Based on these data, what are the annual cost savings?
(Ignore income taxes in this problem.)
A) $2,500.00.
B) $1,412.50.
C) $1,695.00.
D) It is impossible to determine from the data given.
Answer: A
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-19 Using the Internal Rate of Return
, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

9
25) (Appendix 13A) The following information is available on a new piece of equipment: 25)

Cost of the Equipment $21,720

Annual Cash Inflows 5,000
Internal Rate of Return 16%
Required Rate of Return 10%

What is approximately the life of the equipment? (Ignore income taxes in this problem.)
A) 6.0 years.
B) 8.0 years.
C) 4.3 years.
D) It is impossible to determine from the data given.
Answer: B
Topic: 13-04 The Time Value of Money, 13-18 The Internal Rate of Return Method Illustrated, 13-19 Using
the Internal Rate of Return , 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

26) A planned factory expansion project has an estimated initial cost of $800,000. Using a 26)
discount rate of 20%, the present value of future cost savings from the expansion is
$843,000. To yield exactly a 20% internal rate of return, the actual investment cost
cannot exceed the $800,000 estimate by more than which of the following? (Ignore
income taxes in this problem.)
A) $1,075. B) $20,000. C) $160,000. D) $43,000.
Answer: D
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-18 The Internal Rate of Return
Method Illustrated, 13-21 Comparison of the Net Present Value and Internal Rate of Return Methods
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

10
27) (Appendix 13A) Hilltop Company plans to invest $100,000 in a two-year project. The 27)
cash flow will be $40,000 for the first year and $80,000 in year 2. At a required rate of
return of 12% what is the Net Present Value of the project? (Ignore income taxes in this
problem.) (Do not round your intermediate calculations and round the final answer to the
nearest whole dollar.)
A) $20,000. B) $(510). C) $3,316. D) $0.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

28) (Appendix 13A) Joe Flubup is the president of Flubup, Inc. He is considering buying a 28)
new machine that would cost $25,470. Joe has determined that the new machine
promises an internal rate of return of 14%, but Joe has misplaced the paper which tells
the annual cost savings promised by the new machine. He does remember that the
machine has a projected life of 12 years. Based on these data, what are the annual cost
savings to the nearest dollar? (Ignore income taxes in this problem.)
A) $4,650.00.
B) $2,122.50.
C) Impossible to determine from the data given.
D) $4,500.00.
Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-18 The Internal Rate of Return Method Illustrated,
13-19 Using the Internal Rate of Return , 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

11
29) (Appendix 13A) The Baker Company purchased a piece of equipment with the following 29)
expected results:

Useful Life 7 years

Yearly Net Cash Inflow $50,000
Salvage Value -0-
Internal Rate of Return 20%
Discount Rate 16%

What was the initial cost of the equipment? (Ignore income taxes in this problem.) (Round your
PV factor to 5 decimal places and final answer to nearest whole dollar amount.)
A) $190,630.
B) $350,000.
C) $180,230.
D) Cannot be determined from the information given.
Answer: C
Topic: 13-06 The Net Present Value Method Illustrated, 13-18 The Internal Rate of Return Method Illustrated,
13-19 Using the Internal Rate of Return , 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

30) Given the following data: 30)

Present Investment Required $12,000

Net Present Value $430
Annual cost Savings $?
Discount Rate 12%
Life of the Project 10 years

Based on the data given, what would be the profitability index? (Ignore income taxes in this
problem.)
A) 3.58%.
B) 35.8%.
C) 3.05%.
D) Cannot be determined from the information given.
Answer: A
Topic: 13-27 Net Present Value Method, 13-28 Comparing the Preference Rules
LO: 13-04 Rank investment projects in order of preference.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

12
31) (Appendix 13A) The following data pertain to an investment in equipment: 31)

Investment in the Project $10,000

Net Annual Cash Inflows $2,400
Working Capital Required $5,000
Salvage Value of the Equipment $1,000
Life of the Project 8 years

At the completion of the project, the working capital will be released for use elsewhere. What is
the net present value of the project, using a discount rate of 10%? (Ignore income taxes in
this problem.) (Do not round your intermediate calculations and round the final answer
to the nearest whole dollar.)
A) $126. B) ($517). C) $603. D) ($1,729).
Answer: C
Topic: 13-08 Typical Cash Flows, 13-10 Recovery of the Original Investment, 13-13 An Extended Example of
the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

32) (Appendix 13A) The following data pertain to an investment in equipment: 32)

Investment in the Project $10,000

Net Annual Cash Inflows $2,400
Working Capital Required $5,000
Salvage Value of the Equipment $600
Life of the Project 7 year

At the completion of the project, the working capital will be released for use elsewhere. What is
the net present value of the project, using a discount rate of 9%? (Ignore income taxes in
this problem.) (Do not round your intermediate calculations and round the final answer
to the nearest whole dollar.)
A) ($517). B) $142. C) ($1,729). D) $126.
Answer: B
Topic: 13-08 Typical Cash Flows, 13-10 Recovery of the Original Investment, 13-13 An Extended Example of
the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

13
33) (Appendix 13A) A piece of equipment has a cost of $20,000. The equipment will 33)
provide cost savings of $3,500 each year for ten years, after which time it will have a
salvage value of $2,500. If the company's discount rate is 12%, what is the equipment's
net present value? (Ignore income taxes in this problem.) (Do not round your
intermediate calculations and round the final answer to the nearest whole dollar.)
A) $581. B) $546. C) $17,500. D) ($224).
Answer: A
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

34) (Appendix 13A) A piece of equipment has a cost of $25,000. The equipment will 34)
provide cost savings of $4,500 each year for ten years, after which time it will have a
salvage value of $2,500. If the company's discount rate is 15%, what is the equipment's
net present value? (Ignore income taxes in this problem.) (Do not round your
intermediate calculations and round the final answer to the nearest whole dollar.)
A) $546. B) ($224). C) $17,500. D) $3202.
Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

35) (Appendix 13A) Parks Company is considering an investment proposal in which a 35)
working capital investment of $10,000 would be required. The investment would provide
cash inflows of $2,000 per year for six years. The working capital would be released for
use elsewhere when the project is completed. If the company's discount rate is 10%, what
is the investment's net present value? (Ignore income taxes in this problem.) (Do not
round your intermediate calculations and round the final answer to the nearest whole
dollar.)
A) $1,289. B) $3,226. C) ($1,289). D) $4,355.
Answer: D
Topic: 13-08 Typical Cash Flows, 13-10 Recovery of the Original Investment, 13-13 An Extended Example of
the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

14
36) (Appendix 13A) The following data pertain to an investment proposal: 36)

Investment in the Project (equipment) $14,000

Net Annual Cash Inflows Promised $2,800
Working Capital Required $5,000
Salvage Value of the Equipment $1,000
Life of the Project 10 years

The working capital would be released for use elsewhere when the project is completed. What is
the net present value of the project, using a discount rate of 8%? (Ignore income taxes in
this problem.) (Do not round your intermediate calculations and round the final answer
to the nearest whole dollar.)
A) $5,251. B) $2,567. C) ($251). D) $251.
Answer: B
Topic: 13-08 Typical Cash Flows, 13-10 Recovery of the Original Investment, 13-13 An Extended Example of
the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

37) (Appendix 13A) Boston Company is contemplating the purchase of a new machine on which37)the
following information has been gathered:

Cost of the Machine $38,900

Annual Cash Inflows Expected $10,000
Salvage Value $5,000
Life of the Machine 6 years

The company's discount rate is 16%, and the machine will be depreciated using the straight-line
method. Given these data, what is the net present value of the machine to the nearest
dollar, by not rounding intermediate calculations? (Ignore income taxes in this problem.)
A) $0. B) $26,100. C) ($26,100). D) ($23,900).
Answer: A
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

15
38) (Appendix 13A) Benz Company is considering the purchase of a machine that costs 38)
$100,000 and has a useful life of 18 years. The company's required discount rate is 12%.
If the machine's net present value is $5,850, what must be the annual cash inflows
associated with the machine, rounded to the nearest whole dollar, do not round your
intermediate calculations? (Ignore income taxes in this problem.)
A) $42,413.
B) $14,601.
C) $13,760.
D) They are impossible to determine from the data given.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

39) (Appendix 13A) Horn Corporation is considering investing in a four-year project. Cash 39)
inflows from the project are expected to be as follows: Year 1, $2,000; Year 2, $2,200;
Year 3, $2,400; Year 4, $2,600. If using a discount rate of 8%, the project has a positive
net present value of $500, what was the amount of the original investment? (Ignore
income taxes in this problem.) (Do not round your intermediate calculations and round
the final answer to the nearest whole dollar.)
A) $1,411. B) $7,054. C) $2,411. D) $8,054.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

40) (Appendix 13A) The Whitton Company uses a discount rate of 16%. The company has 40)
an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000
per year for each of the next three years. The machine would have no salvage value.
What is the net present value of this machine, rounded to the nearest whole dollar, do not
round your intermediate calculations? (Ignore income taxes in this problem.)
A) ($9,980). B) $22,460. C) $12,000. D) $4,459.
Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

16
41) (Appendix 13A) The Whitton Company uses a discount rate of 15%. The company has 41)
an opportunity to buy a machine now for $16,000 that will yield cash inflows of $8,000
per year for each of the next three years. The machine would have no salvage value.
What is the net present value of this machine, rounded to the nearest whole dollar, do not
round your intermediate calculations? (Ignore income taxes in this problem.)
A) ($9,980). B) $22,460. C) $2,266. D) $12,000.
Answer: C
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

42) (Appendix 13A) The following data pertain to an investment: 42)

Cost of the Investment $18,995

Life of the Project 5 years
Annual Cost Savings $5,000
Estimated Salvage Value $1,000
Discount Rate 10%

What is the net present value of the proposed investment? (Ignore income taxes in this problem.)
(Do not round your intermediate calculations and round the final answer to the nearest whole
dollar.)
A) $3,355. B) $620. C) ($3,430). D) $0.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

17
43) (Appendix 13A) The following data pertain to an investment proposal: 43)

Cost of the investment $20,000

Annual cost savings $5,000
Estimated Salvage Value $1,000
Life of the Project 8 years
Discount Rate 16%

What is the net present value of the proposed investment? (Ignore income taxes in this problem.)
(Do not round your intermediate calculations and round the final answer to the nearest whole
dollar.)
A) $6,064. B) $2,023. C) $1,720. D) $2,154.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

44) (Appendix 13A) Stratford Company purchased a machine with an estimated useful life 44)
of seven years. The machine will generate cash inflows of $90,000 each year over the
next seven years. If the machine has no salvage value at the end of seven years, and
assuming the company's discount rate is 10%, what is the purchase price of the machine
if the net present value of the investment is $170,000? (Ignore income taxes in this
problem.) (Do not round your intermediate calculations and round the final answer to the
nearest whole dollar.)
A) $608,157. B) $170,000. C) $221,950. D) $268,158.
Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

18
45) (Appendix 13A) Sam Weller is thinking of investing $70,000 to start a bookstore. Sam 45)
plans to earn $15,000 cash from the business at the end of each year for the next five
years. At the end of the fifth year, Sam plans to sell the business for $110,000 cash. At a
12% discount rate, what is the net present value of the investment? (Ignore income taxes
in this problem.) (Do not round your intermediate calculations and round the final
answer to the nearest whole dollar.)
A) $62,370. B) $70,000. C) $54,075. D) $46,489.
Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

46) (Appendix 13A) Arthur operates a part-time auto repair service. He estimates that a new 46)
diagnostic computer system will result in increased cash inflows of $2,100 in Year 1,
$3,200 in Year 2, and $4,000 in Year 3. If Arthur's discount rate is 10%, what would be
the maximum amount he should be willing to pay for the new computer system? (Ignore
income taxes in this problem.) (Do not round your intermediate calculations and round
the final answer to the nearest whole dollar.)
A) $7,747. B) $6,984. C) $7,559. D) $6,652.
Answer: C
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

47) (Appendix 13A) The following data pertain to an investment proposal: 47)

Present Investment Required $27,130

Annual Cost Savings $5,000
Projected life the investment 10 years
Projected Salvage Value $-0-

What would be the internal rate of return? (Ignore income taxes in this problem.)
A) 542.6%. B) 13.0%. C) 54.26%. D) 5.426%.
Answer: B
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-46 Using Microsoft Excel
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

19
48) (Appendix 13A) The following data are available on a proposed investment project: 48)

Initial investment $142,500

Annual Cash Inflows $30,000
Life of the investment 8 years
Required Rate of Return 10%

Which of the following statements best describes the internal rate of return on the proposed
investment project? (Ignore income taxes in this problem.)
A) It is between 11% and 12%.
B) It is less than the required rate of return.
C) It is between 12% and 13%.
D) It is between 13% and 14%.
Answer: D
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-46 Using Microsoft Excel
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

49) (Appendix 13A) The following data pertain to an investment proposal: 49)

Present investment required $14,000

Annual cost savings $2,500
Projected life of the investment8 years
Projected Salvage Value $-0-
Required Rate of Return 6%

The internal rate of return on this investment proposal is closest to which of the following?
(Ignore income taxes in this problem.)
A) 8.7%. B) 9.3%. C) 6.7%. D) 7.3%.
Answer: A
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-46 Using Microsoft Excel
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

20
50) 50)
(Appendix 13A) Overland Company has gathered the following data on a proposed investment
project:

Investment in Depreciable Equipment $150,000

Annual Cash Flows $40,000
Life of the Equipment 10 years
Salvage Value -0-
Discount Rate 10%

The internal rate of return on this investment is closest to which of the following? (Ignore income
taxes in this problem.)
A) Greater than 20%. B) Less than 10%.
C) Between 10% and 20%. D) 10%.
Answer: A
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-46 Using Microsoft Excel
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

51) (Appendix 13A) The following information concerns a proposed investment: 51)

Investment Required $14,150

Annual Savings $2,500
Life of the Project 12 years

What is the internal rate of return? (Ignore income taxes in this problem.)
A) 5%. B) 14%. C) 10%. D) 12%.
Answer: B
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-46 Using Microsoft Excel
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

21
52) 52)
Jarvey Company is studying a project that would have a ten-year life and would require a $450,000
investment in equipment that has no salvage value. The project would provide net income each
year as follows for the life of the project:

Sales $500,000
Less cash variable expense 200,000
Contribution margin 300,000
Less fixed expenses:
Fixed cash expenses $150,000
Depreciation expenses 45,000 195,000
Net income $105,000

The company's required rate of return is 12%. What is the payback period for this project? (Ignore
income taxes in this problem.)
A) 2.00 years. B) 9.00 years. C) 4.28 years. D) 3.00 years.
Answer: D
Topic: 13-31 The Payback Method, 13-33 An Extended Example of Payback
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

53) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto 53)
was purchased for $9,000 and will have a six-year useful life and a $3,000 salvage value.
Delivering prescriptions (which the pharmacy has never done before) should increase
gross revenues by at least $5,000 per year. The cost of these prescriptions to the
pharmacy will be about $2,000 per year. The pharmacy depreciates all assets using the
straight-line method. What is the payback period for the auto? (Ignore income taxes in
this problem.)
A) 1.8 years. B) 1.2 years. C) 2.0 years. D) 3.0 years.
Answer: D
Topic: 13-31 The Payback Method, 13-33 An Extended Example of Payback
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

22
54) A company with $800,000 in operating assets is considering the purchase of a machine 54)
that costs $75,000 and which is expected to reduce operating costs by $20,000 each year.
The payback period for this machine in years is closest to which of the following?
(Ignore income taxes in this problem.)
A) 10.70 years. B) 3.75 years. C) 0.27 years. D) 40.00 years.
Answer: B
Topic: 13-31 The Payback Method, 13-33 An Extended Example of Payback
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

55) The Higgins Company has just purchased a piece of equipment at a cost of $120,000. 55)
This equipment will reduce operating costs by $40,000 each year for the next eight years.
This equipment replaces old equipment that was sold for $8,000 cash. What is the new
equipment's payback period? (Ignore income taxes in this problem.)
A) 3.0 years. B) 2.8 years. C) 8.0 years. D) 10.0 years.
Answer: B
Topic: 13-31 The Payback Method, 13-33 An Extended Example of Payback
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

56) The Keego Company is planning a $200,000 equipment investment that has an estimated 56)
five-year life with no estimated salvage value. The company has projected the following annual
cash flows for the investment.

Year Cash Inflows

1 $120,000
2 $60,000
3 $40,000
4 $40,000
5 $40,000
Total $300,000

Assuming that the cash inflows occur evenly over the year, what is the payback period for the
investment? (Ignore income taxes in this problem.)
A) 4.91 years. B) 2.50 years. C) 0.75 years. D) 1.67 years.
Answer: B
Topic: 13-31 The Payback Method, 13-33 An Extended Example of Payback, 13-34 Payback and Uneven Cash
Flows
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

23
57) Denny Corporation is considering replacing a technologically obsolete machine with a 57)
new state-of-the-art numerically controlled machine. The new machine would cost
$450,000 and would have a ten-year useful life. Unfortunately, the new machine would
have no salvage value. The new machine would cost $20,000 per year to operate and
maintain, but would save $100,000 per year in labour and other costs. The old machine
can be sold now for scrap for $50,000. The simple rate of return on the new machine is
closest to which of the following? (Ignore income taxes in this problem.)
A) 7.78%. B) 22.22%. C) 20.00%. D) 8.75%.
Answer: D
Topic: 13-36 Criticism of the Simple Rate of Return
LO: 13-06 Calculate the simple rate of return for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

58) The Jason Company is considering the purchase of a machine that will increase revenues 58)
by $32,000 each year. Cash outflows for operating this machine will be $6,000 each year.
The cost of the machine is $65,000. It is expected to have a useful life of five years with
no salvage value. For this machine, what is the simple rate of return? (Ignore income
taxes in this problem.)
A) 49.2%. B) 40.0%. C) 9.2%. D) 20.0%.
Answer: D
Topic: 13-36 Criticism of the Simple Rate of Return
LO: 13-06 Calculate the simple rate of return for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

59) Perkins Company is considering several investment proposals, as shown below: 59)

Investment Proposal
A B C D
Investment required $80,000 $100,000 $60,000 $75,000
Present value of
Future net cash flows 96,000 150,000 84,000 120,000

What are the preference rankings of the proposals, using the profitability index?
A) D, C, B, A. B) B, D, C, A. C) D, B, C, A. D) A, C, B, D.
Answer: C
Topic: 13-26 Internal Rate of Return Method, 13-27 Net Present Value Method, 13-28 Comparing the
Preference Rules
LO: 13-04 Rank investment projects in order of preference.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

24
60) Information on four investment proposals is given below: 60)

Proposal Investment Net Present Value

1 $50,000 $30,000
2 $60,000 $24,000
3 $30,000 $15,000
4 $45,000 $9,000

What are preference rankings of the four proposals according to the profitability index?
A) 1, 3, 2, 4. B) 2, 1, 4, 3. C) 1, 2, 3, 4. D) 3, 4, 1, 2.
Answer: A
Topic: 13-26 Internal Rate of Return Method, 13-27 Net Present Value Method, 13-28 Comparing the
Preference Rules
LO: 13-04 Rank investment projects in order of preference.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

61) (Appendix 13A and 13B) A company anticipates a taxable cash receipt of $50,000 in 61)
year 4 of a project. The company's tax rate is 30%, and its discount rate is 12%. What is
the approximate present value of this future cash flow? (Do not round your intermediate
calculations and round the final answer to the nearest whole dollar.)
A) $22,243. B) $35,000. C) $9,533. D) $15,000.
Answer: A
Topic: 13-46 Using Microsoft Excel, 13-48 The Concept of After-Tax Cost
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

62) (Appendix 13A and 13B) A company anticipates a taxable cash receipt of $20,000 in 62)
year 3 of a project. The company's tax rate is 30%, and its discount rate is 8%. What is
the approximate present value of this future cash flow? (Do not round your intermediate
calculations and round the final answer to the nearest whole dollar.)
A) $6,000. B) $11,114. C) $14,000. D) $4,763.
Answer: B
Topic: 13-46 Using Microsoft Excel, 13-48 The Concept of After-Tax Cost
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

25
63) (Appendix 13A and 13B) A company anticipates a taxable cash receipt of $50,000 in 63)
year 3 of a project. The company's tax rate is 30%, and its discount rate is 14%. What is
the approximate present value of this future cash flow? Do not round your intermediate
calculations and round the final answer to the nearest whole dollar.)
A) $15,000. B) $35,000. C) $23,624. D) $10,125.
Answer: C
Topic: 13-46 Using Microsoft Excel, 13-48 The Concept of After-Tax Cost
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

64) (Appendix 13A and 13B) A company anticipates a tax-deductible cash expense of 64)
$10,000 in year 2 of a project. The company's tax rate is 30%, and its discount rate is
8%. What is the approximate present value of this future cash outflow? Do not round
your intermediate calculations and round the final answer to the nearest whole dollar.)
A) $2,572. B) $3,000. C) $7,000. D) $6001.
Answer: D
Topic: 13-46 Using Microsoft Excel, 13-48 The Concept of After-Tax Cost
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

65) (Appendix 13A and 13B) A company anticipates a tax-deductible cash expense of 65)
$40,000 in year 2 of a project. The company's tax rate is 30%, and its discount rate is
10%. What is the approximate present value of this future cash outflow? Do not round
your intermediate calculations and round the final answer to the nearest whole dollar.)
A) $12,000. B) $9,917. C) $28,000. D) $23,140.
Answer: D
Topic: 13-46 Using Microsoft Excel, 13-48 The Concept of After-Tax Cost
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

26
66) (Appendix 13A and 13B) A company anticipates a tax-deductible cash expense of 66)
$60,000 in year 2 of a project. The company's tax rate is 30%, and its discount rate is
14%. What is the approximate present value of this future cash outflow? Do not round
your intermediate calculations and round the final answer to the nearest whole dollar.)
A) $18,000. B) $32,318. C) $38,473. D) $42,000.
Answer: B
Topic: 13-46 Using Microsoft Excel, 13-48 The Concept of After-Tax Cost
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

67) (Appendix 13A and 13B) A company anticipates a capital cost allowance (CCA) 67)
deduction of $20,000 in year 2 of a project. The company's tax rate is 30%, and its
discount rate is 12%. What is the approximate present value of the CCA tax shield
resulting from this deduction? (Do not round your intermediate calculations and round
the final answer to the nearest whole dollar.)
A) $14,000. B) $4,783. C) $11,161. D) $6,000.
Answer: B
Topic: 13-46 Using Microsoft Excel, 13-49 Capital Cost Allowance Tax Shield
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

68) (Appendix 13A and 13B) A company anticipates a capital cost allowance (CCA) 68)
deduction of $30,000 in year 3 of a project. The company's tax rate is 30%, and its
discount rate is 12%. What is the approximate present value of the CCA tax shield
resulting from this deduction? (Do not round your intermediate calculations and round
the final answer to the nearest whole dollar.)
A) $14,947. B) $21,000. C) $9,000. D) $6,406.
Answer: D
Topic: 13-46 Using Microsoft Excel, 13-49 Capital Cost Allowance Tax Shield
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

27
69) (Appendix 13A and 13B) A company anticipates a capital cost allowance (CCA) 69)
deduction of $70,000 in year 2 of a project. The company's tax rate is 30%, and its
discount rate is 14%. What is the approximate present value of the CCA tax shield
resulting from this deduction? (Do not round your intermediate calculations and round
the final answer to the nearest whole dollar.)
A) $16,159. B) $37,704. C) $49,000. D) $21,000.
Answer: A
Topic: 13-46 Using Microsoft Excel, 13-49 Capital Cost Allowance Tax Shield
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

70) (Appendix 13A and 13B) A company needs an increase in working capital of $20,000 in 70)
a project that will last four years. The company's tax rate is 30%, and its discount rate is
10%. What is the approximate present value of the working capital to be released at the
end of the project? (Do not round your intermediate calculations and round the final
answer to the nearest whole dollar.)
A) $14,000. B) $13,660. C) $6,000. D) $9,562.
Answer: B
Topic: 13-08 Typical Cash Flows, 13-10 Recovery of the Original Investment, 13-46 Using Microsoft Excel,
13-48 The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes
taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

71) (Appendix 13A and 13B) A company needs an increase in working capital of $50,000 in 71)
a project that will last four years. The company's tax rate is 30%, and its discount rate is
8%. What is the approximate present value of the working capital to be released at the
end of the project (Do not round your intermediate calculations and round the final
answer to the nearest whole dollar.)?
A) $36,751. B) $15,000. C) $35,000. D) $25,726.
Answer: A
Topic: 13-08 Typical Cash Flows, 13-10 Recovery of the Original Investment, 13-46 Using Microsoft Excel,
13-48 The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes
taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

28
72) (Appendix 13A and 13B) A company needs an increase in working capital of $70,000 in 72)
a project that will last three years. The company's tax rate is 30%, and its discount rate is
8%. What is the approximate present value of the working capital to be released at the
end of the project? (Do not round your intermediate calculations and round the final
answer to the nearest whole dollar.)
A) $21,000. B) $49,000. C) $55,568. D) $38,898.
Answer: C
Topic: 13-08 Typical Cash Flows, 13-10 Recovery of the Original Investment, 13-46 Using Microsoft Excel,
13-48 The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes
taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

73) (Appendix 13B) Suppose a machine costs $20,000 now, has an expected life of eight 73)
years, and will require a $7,000 overhaul at the end of the third year. If the tax rate is
40%, what would be the after-tax cost of this overhaul?
A) $4,200. B) $12,000. C) $8,000. D) $2,800.
Answer: A
Topic: 13-08 Typical Cash Flows, 13-48 The Concept of After-Tax Cost, 13-51 Example of Income Taxes and
Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

74) (Appendix 13B) Suppose a machine that costs $80,000 has a useful life of ten years. 74)
Also suppose that capital cost allowance (CCA) deduction on the machine is $8,000 in
year 4. The tax rate is 40%. What would be the tax savings from the CCA tax shield in
year 4?
A) $4,800 inflow. B) $4,800 outflow.
C) $3,200 inflow. D) $3,200 outflow.
Answer: C
Topic: 13-40 Compound Interest
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

29
75) (Appendix 13B) Consider a machine that costs $115,000 now and has a useful life of 75)
seven years. This machine will require a major overhaul at the end of the fourth year that
will cost X dollars. If the tax rate is 40%, and if the after-tax cash outflow for this
overhaul is $3,600, what is the amount of X in dollars?
A) $2,160. B) $1,440. C) $6,000. D) $9,000.
Answer: C
Topic: 13-48 The Concept of After-Tax Cost, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

76) (Appendix 13B) Last year, the sales at Jersey Company were $200,000 and were all cash 76)
sales. The tax-deductible expenses at Jersey were $125,000 and were all cash expenses.
The tax rate was 30%. What was the after-tax net cash inflow at Jersey last year from
these operations?
A) $52,500. B) $37,500. C) $22,500. D) $60,000.
Answer: A
Topic: 13-48 The Concept of After-Tax Cost, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

77) (Appendix 13B) Last year, a firm had taxable cash receipts of $800,000, and the tax rate 77)
was 30%. What was the after-tax net cash inflow from these receipts?
A) $240,000. B) $800,000. C) $560,000. D) $640,000.
Answer: C
Topic: 13-48 The Concept of After-Tax Cost, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

78) (Appendix 13B) A company had tax-deductible cash expenses of $650,000 last year, and 78)
the tax rate was 30%. What was the after-tax net cash outflow for these expenses?
A) $390,000. B) $195,000. C) $650,000. D) $455,000.
Answer: D
Topic: 13-48 The Concept of After-Tax Cost, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

30
79) (Appendix 13B) At the Bartholomew Company last year, all sales were for cash and all 79)
expenses were paid in cash. The tax rate was 30%. If the after-tax net cash inflow from
these operations last year was $10,500, and if the total before-tax and tax-deductible cash
expenses were $35,000, what must have been the total before-tax cash sales?
A) $60,000. B) $45,000. C) $65,000. D) $50,000.
Answer: D
Topic: 13-48 The Concept of After-Tax Cost, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

80) (Appendix 13B) Superstrut is considering replacing an old press that cost $80,000 six 80)
years ago with a new one that would cost $245,000. The old press has a net book value
of $15,000 and could be sold for $5,000. The increased production of the new press
would require an investment in additional working capital of $6,000. The company's tax
rate is 40%. What would be Superstrut's net investment now in the project?
A) $246,000. B) $240,000. C) $245,000. D) $251,000.
Answer: A
Topic: 13-11 Simplifying Assumptions, 13-13 An Extended Example of the Net Present Value Method, 13-48
The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

81) (Appendix 13B) Kane Company is in the process of purchasing a new machine for its 81)
production line. It is near the end of the year, and the machine is being offered at a
special discount if purchased before the end of the year. Kane has determined that the
capital cost allowance (CCA) deduction on the new machine for the year of purchase
would be $13,000. The tax rate is 30%. If Kane purchases the machine and reports a
positive net income for the year, what would be the tax savings from the CCA tax shield
related to this machine for the year of purchase?
A) $0. B) $9,100. C) $3,900. D) $13,000.
Answer: C
Topic: 13-49 Capital Cost Allowance Tax Shield
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

31
82) (Appendix 13B) Last year, the sales at Seidelman Company were $700,000 and were all 82)
cash sales. The company's tax-deductible expenses were $450,000 and were all cash
expenses. The tax rate was 35%. What was the after-tax net cash inflow at Seidelman
last year?
A) $700,000. B) $250,000. C) $87,500. D) $162,500.
Answer: D
Topic: 13-48 The Concept of After-Tax Cost, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

83) (Appendix 13B) The capital cost allowance (CCA) tax shield of a Class 7 asset with a 83)
maximum 15% CCA rate was $12,000 for Year 2. The income tax rate was 40%. What
was the total CCA deduction for the asset for Year 2?
A) $12,000. B) $30,000. C) $20,000. D) $80,000.
Answer: B
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

84) (Appendix 13B) A piece of equipment is in Class 7 with a maximum CCA rate of 15%. 84)
The income tax rate is 40%. The tax savings from the CCA tax shield on this equipment
for the first year was $1,500. What must have been the original capital cost of the
equipment?
A) $50,000. B) $33,333. C) $3,750. D) $25,000.
Answer: A
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

32
Reference: 13-01
Shields Company has gathered the following data on a proposed investment project:

Investment Required in Equipment $400,000

Annual Cash Inflows $80,000
Salvage Value $-0-
Life of the Investment 10 years
Discount Rate 10%

(Ignore income taxes in this problem.)

85) The payback period for the investment is closest to which of the following? 85)
A) 5.0 years. B) 3.0 years. C) 1.0 years. D) 0.2 years.
Answer: A
Topic: 13-31 The Payback Method, 13-32 Evaluation of the Payback Method, 13-33 An Extended Example of
Payback
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

86) The simple rate of return on the investment is closest to which of the following? 86)
A) 10%. B) 20%. C) 5%. D) 15%.
Answer: A
Topic: 13-36 Criticism of the Simple Rate of Return
LO: 13-06 Calculate the simple rate of return for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

87) (Appendix 13A) The net present value on this investment is closest to which of the 87)
following? (Do not round your intermediate calculations.)
A) $400,000. B) $80,000. C) $76,750. D) $91,565.
Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

33
 88) (Appendix 13A) The internal rate of return on the investment is closest to which of the 88)
following?
A) 15%. B) 13%. C) 10%. D) 17%.
Answer: A
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-46 Using Microsoft Excel
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-02
Bugle's Bagel Bakery is investigating the purchase of a new bagel-making machine. This machine would provide an ann
operating cost savings of $3,650 for each of the next four years. In addition, this new machine would allow the productio
one new type of bagel that would result in selling 1,500 dozen more bagels each year. The company earns a contribution
margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450, and it will have a
four-year useful life. Bugle's discount rate is 14%. (Ignore income taxes in this problem.)

89) What is the total annual cash inflow from this machine for capital budgeting purposes? 89)
A) $5,000. B) $4,750. C) $3,650. D) $5,150.
Answer: A
Topic: 13-09 Typical Cash Inflows
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

90) (Appendix 13A) The internal rate of return for this investment is closest to which of the 90)
following?
A) 16%. B) 14%. C) 20%. D) 18%.
Answer: D
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-46 Using Microsoft Excel
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

91) (Appendix 13A) The net present value of this investment is closest to which of the 91)
following? (Do not round your intermediate calculations.)
A) $6,550. B) $13,450. C) $20,000. D) $1,119.
Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

34
Reference: 13-03
Treads Corporation is considering the replacement of an old machine that is currently being used. The old machine is ful
depreciated but can be used by the corporation for five more years. If Treads decides to replace the old machine, Picco
Company has offered to purchase the old machine for $60,000. The old machine would have no salvage value in five yea

The new machine would be acquired from Hillcrest Industries for $1,000,000 in cash. The new machine has an expected
useful life of five years with no salvage value. Due to the increased efficiency of the new machine, estimated annual cash
savings of $300,000 would be generated.

Treads Corporation uses a discount rate of 12%. (Ignore income taxes in this problem.)

92) (Appendix 13A) The net present value of the project is closest to which of the following? 92)
(Do not round your intermediate calculations.)
A) $560,000. B) $136,400. C) $141,500. D) $171,000.
Answer: C
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

93) (Appendix 13A) The internal rate of return of the project is closest to which of the 93)
following?
A) 12%. B) 20%. C) 18%. D) 16%.
Answer: C
Topic: 13-18 The Internal Rate of Return Method Illustrated, 13-46 Using Microsoft Excel
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

35
Reference: 13-04
Oriental Company has gathered the following data on a proposed investment project:

Investment in Depreciable Equipment $200,000

Annual Net Cash Flows $50,000
Life of the Equipment 10 years
Salvage Value -0-
Discount Rate 10%

The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.)

94) What would be the payback period for the investment? 94)
A) 4.00 years. B) 10.00 years. C) 2.41 years. D) 0.25 years.
Answer: A
Topic: 13-31 The Payback Method, 13-32 Evaluation of the Payback Method, 13-33 An Extended Example of
Payback
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

95) What would be the simple rate of return on the investment? 95)
A) 35%. B) 25%. C) 10%. D) 15%.
Answer: D
Topic: 13-36 Criticism of the Simple Rate of Return
LO: 13-06 Calculate the simple rate of return for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

96) (Appendix 13A) What would be the net present value of this investment? (Do not round 96)
your intermediate calculations and round your final answer to the nearest whole number.)
A) ($14,350). B) $77,200. C) $200,000. D) $107,228.
Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

36
Reference: 13-05
Apex Corp. is planning to buy a production machine costing $100,000. This machine's expected useful life is five years,
with no residual value. Apex uses a discount rate of 10% and has calculated the following data pertaining to the purchase
and operation of this machine:

Year Estimated Annual Net Cash

Inflow
1 $60,000
2 $30,000
3 $20,000
4 $20,000
5 $20,000

(Ignore income taxes in this problem.)

97) What is the payback period for this investment? 97)

A) 5.00 years. B) 3.00 years. C) 2.75 years. D) 2.50 years.
Answer: D
Topic: 13-32 Evaluation of the Payback Method, 13-33 An Extended Example of Payback, 13-34 Payback and
Uneven Cash Flows
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

98) (Appendix 13A) The net present value of this investment is closest to which of the 98)
following? (Do not round your intermediate calculations.)
A) $20,444. B) $50,000. C) $80,000. D) $81,025.
Answer: A
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

37
Reference: 13-06
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment
improve sales operations. The remodelling would cost $120,000 now, and the useful life of the project is ten years.
Additional working capital needed immediately for this project would be $30,000; the working capital would be released
for use elsewhere at the end of the ten-year period. The equipment and other materials used in the project would
have a salvage value of $10,000 in ten years. Finney's discount rate is 16%. (Ignore income taxes in this
problem.)

99) What would be the immediate cash outflow required for this project? 99)
A) ($130,000). B) ($120,000). C) ($90,000). D) ($150,000).
Answer: D
Topic: 13-06 The Net Present Value Method Illustrated, 13-07 Emphasis on Cash Flows, 13-08 Typical Cash
Flows
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

100) (Appendix 13A) What would the annual net cash inflows from this project have to be in 100)
order to justify investing in remodelling? (Do not round your intermediate calculations
and round your final answer to the nearest whole number.)
A) $29,159. B) $14,495. C) $16,147. D) $35,842.
Answer: A
Topic: 13-08 Typical Cash Flows, 13-08 Typical Cash Flows, 13-13 An Extended Example of the Net Present
Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

38
Reference: 13-07
The Sawyer Company has $80,000 to invest and is considering two different projects: X and Y. The following data are
available on the projects:

Project X Project Y
Cost of equipment needed now $80,000 ---
Working capital requirement --- $80,000
Annual cash operating inflows $23,000 $18,000
Salvage value in five years $6,000 ---

Both projects will have a useful life of five years; at the end of five years, the working capital will be released for use
elsewhere. Sawyer's discount rate is 12%. (Ignore income taxes in this problem.)

101) (Appendix 13A) What is the net present value of project X? (Do not round your 101)
intermediate calculations and round your final answer to the nearest whole number.)
A) $2,910. B) $5,283. C) $6,314. D) ($11,708).
Answer: C
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

102) (Appendix 13A) The net present value of project Y is closest to which of the following? 102)
(Do not round your intermediate calculations.)
A) $11,708. B) $30,280. C) ($11,708). D) $20,066.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-08 Typical Cash Flows, 13-13 An Extended
Example of the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

39
Reference: 13-08
The Becker Company is interested in buying a piece of equipment. The following data have been assembled concerning
this equipment:

Cost of Required Equipment $250,000

Working capital required $100,000
Annual operating cash inflows $80,000
Cash repair at End of Four years $40,000
Salvage Value at End of Six Years $90,000

This equipment is expected to have a useful life of six years. At the end of the sixth year, the working capital
would be released for use elsewhere. The company's discount rate is 10%. (Ignore income taxes in this
problem.)

103) (Appendix 13A) The present value of all future annual operating cash inflows is closest 103)
to which of the following? (Do not round your intermediate calculations.)
A) $278,700. B) $452,301. C) $480,000. D) $348,421.
Answer: D
Topic: 13-09 Typical Cash Inflows, 13-13 An Extended Example of the Net Present Value Method, 13-46
Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

104) (Appendix 13A) The net present value of this investment is closest to which of the 104)
following? Do not round your intermediate calculations.)
A) $54,640. B) $78,350. C) $27,548. D) $21,904.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-08 Typical Cash Flows, 13-13 An Extended
Example of the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

40
 105) (Appendix 13A) The internal rate of return for this investment is closest to which of the 105)
following?
A) 13%. B) 10%. C) 16%. D) 12%.
Answer: C
Topic: 13-08 Typical Cash Flows, 13-13 An Extended Example of the Net Present Value Method, 13-18 The
Internal Rate of Return Method Illustrated, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-09
UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net
operating cash flows (sales minus cash operating expenses) arising from the rebuilding and sale of the used alternators
would be as follows (numbers in parentheses indicate an outflow):

Year 1 - 10 $90,000
Year 11 ($20,000)
Year 12 $100,000

In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000
to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The
company's discount rate is 10%. (Ignore income taxes in this problem.)

106) (Appendix 13A) What is the present value of the net operating cash flows (sales minus 106)
cash operating expenses) arising from the rebuilding and sale of the alternators, rounded
to the nearest dollar? (Do not round your intermediate calculations.)
A) $596,735. B) $577,864. C) $591,884. D) $582,735.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

41
 107) (Appendix 13A) What is the net present value of ALL cash flows associated with this 107)
investment, rounded to the nearest dollar? (Do not round your intermediate calculations.)
A) $391,884. B) $362,950. C) $382,644. D) $377,864.
Answer: C
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-10
Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with
new system. The following data have been gathered concerning these two alternatives:

Present Proposed New

System System
Purchase Cost New $250,000 $300,000
Accumulated Depreciation $240,000 -
Overhaul costs needed now $230,000 -
Annual Cash operating costs $180,000 $170,000
Salvage value now $160,000 $165,000
Salvage value at the end of eight years $152,000 $200,000
Working capital required -

Westland College uses a 10% discount rate and the total - cost approach to capital budgeting analysis. Both
alternatives are expected to have a useful life of eight years. (Ignore income taxes in this problem.)

108) (Appendix 13A) What is the net present value of the alternative of overhauling the 108)
present system? (Do not round your intermediate calculations and round your final
answer to the nearest whole number.)
A) ($1,119,378). B) ($1,035,406). C) ($1,190,287). D) $717,225.
Answer: A
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-14 The Total-Cost Approach, 13-46 Using
Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

42
 109) (Appendix 13A) What is the net present value of the alternative of purchasing the new 109)
system? (Do not round your intermediate calculations and round your final answer to the
nearest whole number.)
A) ($1,076,662). B) ($1,169,963). C) ($969,895). D) ($1,236,495).
Answer: A
Topic: 13-08 Typical Cash Flows, 13-06 The Net Present Value Method Illustrated, 13-14 The Total-Cost
Approach, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-11
Lambert Manufacturing has $60,000 to invest in either Project A or Project B. The following data are available on these
projects:

Project A Project B
Cost of equipment needed now $120,000 $70,000
Working capital investment needed now - $50,000
Annual net operating cash inflows $50,000 $45,000
Salvage value of equipment in six years $15,000

Both projects have a useful life of six years. At the end of six years, the working capital investment will be released for u
elsewhere. Lambert's discount rate is 14%. (Ignore income taxes in this problem.)

110) (Appendix 13A) The net present value of Project A is closest to which of the following? 110)
(Do not round your intermediate calculations.)
A) $81,267. B) $141,267. C) $74,450. D) $67,610.
Answer: A
Topic: 13-06 The Net Present Value Method Illustrated, 13-08 Typical Cash Flows, 13-13 An Extended
Example of the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

111) (Appendix 13A) The net present value of Project B is closest to which of the following? 111)
(Do not round your intermediate calculations.)
A) $77,769. B) $127,805. C) $54,990. D) $57,268.
Answer: A
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-13 An Extended Example of the Net Present
Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

43
 112) Which of the following statements is(are) correct? 112)
I. Project A is acceptable according to the net present value method.
II. Project A has an internal rate of return greater than 14%.
A) II only. B) Neither I nor II.
C) I only. D) Both I and II.
Answer: D
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-18 The Internal Rate of Return
Method Illustrated, 13-19 Using the Internal Rate of Return
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-12
Fast Food, Inc. has purchased a new donut maker. It cost $16,000 and has an estimated life of ten years. The following
annual donut sales and expenses are projected:

Sales $22,000
Expenses:
Flour, etc. (required in making donuts) $10,000
Salaries $6,000
Depreciation $1,600 $17,600
Operating Income $4,400

(Ignore income taxes in this problem.)

113) The payback period on the new machine is closest to which of the following? 113)
A) 2.7 years. B) 5.0 years. C) 1.4 years. D) 3.6 years.
Answer: A
Topic: 13-31 The Payback Method
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

114) The simple rate of return for the new machine is closest to which of the following? 114)
A) 20.0%. B) 27.5%. C) 80.0%. D) 37.5%.
Answer: B
Topic: 13-36 Criticism of the Simple Rate of Return
LO: 13-06 Calculate the simple rate of return for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

44
Reference: 13-13
Purvell Company has just acquired a new machine. Data on the machine follow:

Purchase Cost $50,000

Annual cost savings $15,000
Life of the Machine 8 years

The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in makin
depreciation deductions.) Assume cash flows occur uniformly throughout a year. (Ignore income taxes in this
problem.)

115) The payback period would be closest to which of the following? 115)
A) 8.00 years. B) 2.90 years. C) 3.00 years. D) 3.33 years.
Answer: D
Topic: 13-31 The Payback Method
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

116) The simple rate of return would be closest to which of the following? 116)
A) 18.75%. B) 12.50%. C) 30.00%. D) 17.50%.
Answer: A
Topic: 13-36 Criticism of the Simple Rate of Return
LO: 13-06 Calculate the simple rate of return for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-14
Hanley Company has purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-yea
period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows
from operations occur uniformly throughout the year. (Ignore income taxes in this problem.)

117) What is the payback period for this investment? (Round your answer to the one decimal 117)
place.)
A) 2.8 years. B) 2.1 years. C) 2.3 years. D) 4.2 years.
Answer: A
Topic: 13-31 The Payback Method
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

45
 118) What is the simple rate of return on the initial investment? 118)
A) 24%. B) 28%. C) 16%. D) 36%.
Answer: C
Topic: 13-36 Criticism of the Simple Rate of Return
LO: 13-06 Calculate the simple rate of return for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-15
Beaver Company had taxable cash sales of $400,000 in Year 1. Tax-deductible cash expenses in Year 1 were $140,000,
capital cost allowance (CCA) deductions were $60,000. The income tax rate was 40%.

119) (Appendix 13B) What were the tax savings from the CCA tax shield for Year 1? 119)
A) $36,000. B) $24,000. C) $32,000. D) $48,000.
Answer: B
Topic: 13-49 Capital Cost Allowance Tax Shield
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

120) (Appendix 13B) What was the after-tax net cash inflow from all sources for Year 1? 120)
A) $104,000. B) $180,000. C) $216,000. D) $156,000.
Answer: B
Topic: 13-48 The Concept of After-Tax Cost, 13-49 Capital Cost Allowance Tax Shield
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-16
Payson Company bought $40,000 worth of office equipment at the beginning of Year 1. This equipment has a useful life
eight years and a salvage value at the end of its useful life of $4,000. This equipment is in Class 7 with capital cost
allowance (CCA) rate of 15%. The income tax rate is 40%.

121) (Appendix 13B) What is the maximum amount of CCA that the company can deduct for 121)
tax purposes for Year 1?
A) $6,000. B) $3,000. C) $5,400. D) $2,700.
Answer: B
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

46
 122) (Appendix 13B) What is the maximum amount of CCA that the company will be able to 122)
deduct for tax purposes for Year 2?
A) $5,550. B) $6,000. C) $4,995. D) $5,100.
Answer: A
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-17
Alpine Company is analyzing two investment projects: P and Q. The following data are available:

Project P Project Q
Investment in Computer Equipment now $140,000 $0
Investment in Working Capital Now $0 $90,000
Net Annual Operating Cash inflows $20,000 $16,000
Life of Project 8 years 8 years

The computer equipment for Project P will have a total salvage value of $8,000 at end of eight years. It will belong to Cl
10 with a 30% maximum CCA rate. At the end of eight years, the working capital for Project Q will be released for
use elsewhere. The income tax rate is 30% and Alpine's after-tax cost of capital is 10%.

123) (Appendix 13B) What is the approximate present value of the tax savings (for all years) 123)
due to the CCA tax shield for Project P? (Do not round your intermediate calculations
and round your final answer to the nearest whole number.)
A) $29,228. B) $31,500. C) $30,908. D) $30,068.
Answer: A
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

124) (Appendix 13A and 13B) What is the approximate present value of the after-tax net 124)
annual operating cash inflows for Project P? (Do not round your intermediate
calculations.)
A) $106,699. B) $32,010. C) $53,074. D) $74,689.
Answer: D
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-46 Using Microsoft Excel, 13-48 The
Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes
taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

47
Reference: 13-18
Manti Company purchased a new machine on January 2, Year 1. Cost and other data relating to the machine follow:

Cost of Machine $140,000

Salvage Value $20,000
Useful Life 12 years

The machine is in Class 7 with a maximum 15% CCA rate. Manti uses an after-tax discount rate of 12% for capital
budgeting decisions. The income tax rate is 40%.

125) (Appendix 13A and 13B) If Manti deducts the maximum CCA for tax purposes, what 125)
will be the approximate present value (as of January 2, Year 1) of the CCA tax shield for
Year 1?(Do not round your intermediate calculations.)
A) $3,750. B) $6,429. C) $4,200. D) $7,500.
Answer: A
Topic: 13-46 Using Microsoft Excel, 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance
Instead of Depreciation
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

126) (Appendix 13A and 13B) If Manti deducts the maximum CCA for tax purposes, what 126)
will be the approximate present value (as of January 2, Year 1) of the CCA tax shield for
Year 2?(Do not round your intermediate calculations.)
A) $9,291. B) $6,194. C) $7,700. D) $19,425.
Answer: B
Topic: 13-46 Using Microsoft Excel, 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance
Instead of Depreciation
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

48
Reference: 13-19
Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision:

Cost of the new van now $20,000

Annual cash operating costs of the new van $6,000
Useful life of the new van 6 years
Salvage value of the van at the end of six years $2,000
Original cost of the old van two years ago $18,000
Book value of the old van now $4,000
Salvage value of the old van now $1,000
Salvage value of the old van six year from now $200
Annual Cash operating costs of the old van $8,000

The old van is in Class 10 with a maximum CCA rate of 30% and will last for six more years. The new van is also in Cla
10 with a maximum CCA rate of 30%. The income tax rate is 40%, and the company's after-tax cost of capital is
10%.

127) What is the incremental cash outlay now for the purchase of the new van? 127)
A) $20,000. B) $21,000. C) $17,000. D) $19,000.
Answer: D
Topic: 13-07 Emphasis on Cash Flows, 13-08 Typical Cash Flows
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

128) (Appendix 13B) What is the approximate annual after-tax savings in cash operating 128)
costs?
A) $800. B) $2,000. C) $1,200. D) $400.
Answer: C
Topic: 13-07 Emphasis on Cash Flows, 13-08 Typical Cash Flows, 13-06 The Net Present Value Method
Illustrated, 13-48 The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

49
 129) (Appendix 13A and 13B) What is the approximate present value of the after-tax net 129)
savings in cash operating costs for all the years? (Do not round your intermediate
calculations.)
A) $8,711. B) $5,226. C) $3,484. D) $12,000.
Answer: B
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-46 Using Microsoft Excel, 13-48 The
Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes
taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

130) (Appendix 13B) What is the value of the incremental UCC (the "C" in the PV CCA 130)
formula) used in the calculation for the present value of CCA tax savings?
A) $18,000 B) $16,000 C) $19,000 D) $20,000
Answer: C
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-20
A piece of equipment, acquired in Year 1, belongs to Class 7 with a maximum CCA rate of 15%. The income tax rate is
40%. The tax savings (before discounting) from the CCA tax shield were $2,830.50 for Year 3. The after-tax cost of cap
is 10%.

131) (Appendix 13B) What is the approximate undepreciated capital cost (UCC) balance for 131)
the equipment at the beginning of Year 3?
A) $47,175. B) $31,450. C) $7,076. D) $8,325.
Answer: A
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

50
 132) (Appendix 13A and 13B) What was the present value of the tax savings from the CCA 132)
tax shield in year 3 to the nearest dollar?
A) $1,698. B) $2,127. C) $1,132. D) $2,831.
Answer: B
Topic: 13-46 Using Microsoft Excel, 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance
Instead of Depreciation, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate
incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

Reference: 13-21
Eureka Company is considering replacing an old computer with a new computer. The following data relate to this
investment decision:

Cost of the new computer $40,000

Annual cash operating costs of the new computer $10,000
Working capital needed now for the new computer $2,000
Useful life of the new computer 6 Years
Salvage value of the new computer at the end of six years $3,000
Original cost of the old van two years ago $18,000
Salvage value of the old computer now $4,000
Salvage value of the old computer six years from now $0

The new computer will belong to Class 10 with a maximum CCA rate of 30%. The income tax rate is also 30%, and the
company's after-tax cost of capital is 12%.

133) What is the present value of the before-tax proceeds that will be received on the sale of 133)
the old computer?
A) $4,000. B) $0. C) $1,200. D) $2,800.
Answer: A
Topic: 13-09 Typical Cash Inflows
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

51
134) (Appendix 13B) What is the approximate present value of the tax savings for all years 134)
because of the CCA tax shield? (Do not round your intermediate calculations and round
your final answer to the nearest whole number.)
A) $8,245. B) $7,786. C) $8,438. D) $6,975.
Answer: D
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

135) (Appendix 13A and 13B) What is the approximate present value of the after-tax net 135)
annual cash operating inflows for all years?
A) $28,780. B) $12,334. C) $23,024. D) $41,114.
Answer: A
Topic: 13-09 Typical Cash Inflows, 13-46 Using Microsoft Excel, 13-13 An Extended Example of the Net
Present Value Method, 13-48 The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes
taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

136) (Appendix 13A and 13B) What is the approximate present value of the after-tax 136)
non-operating cash inflows that will occur in Year 6? (Do not round your intermediate
calculations and round your final answer to the nearest whole number.)
A) $1,064. B) $1,773. C) $2,533. D) $2,077.
Answer: C
Topic: 13-09 Typical Cash Inflows, 13-13 An Extended Example of the Net Present Value Method, 13-46
Using Microsoft Excel, 13-48 The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes
taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

137) (Appendix 13A) What is the approximate effective cost now of the working capital 137)
component of the investment decision? (Do not round your intermediate calculations and
round your final answer to the nearest whole number.)
A) $987. B) $3,014. C) $0. D) $2,000.
Answer: A
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

52
Reference: 13-22
The Morgan Company has been awarded a six-year contract to provide repair service to a commercial bus line. Morgan
Company has gathered the following data associated with the items needed for this contract:

Cost of the Special equipment needed now $300,00

Working capital needed now $80,000
Net annual operating cash inflows $120,000
Equipment maintenance overhaul at the end of four years $20,000
Salvage Value of the equipment in six years $20,000

The special equipment is in Class 7 with a maximum 15% CCA rate. The income tax rate is 40%, and Morgan's after-tax
cost of capital is 14%. At the end of six years, the working capital will be released for use elsewhere.

138) What is the total cash outlay needed to be made now? 138)
A) $300,000. B) $400,000. C) $380,000. D) $360,000.
Answer: C
Topic: 13-08 Typical Cash Flows
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

139) (Appendix 13A and 13B) The present value of the after-tax cash from the sale of the 139)
equipment at the end of six years is closest to which of the following? (Do not round
your intermediate calculations.)
A) $5,467. B) $9,112. C) $0. D) $3,645.
Answer: B
Topic: 13-09 Typical Cash Inflows, 13-46 Using Microsoft Excel, 13-48 The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes
taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

140) (Appendix 13A) The effective cost to Morgan of the need for working capital on the 140)
contract is closest to which of the following? (Do not round your intermediate
calculations and round your final answer to the nearest whole number.)
A) $43,553. B) $80,000. C) $36,480. D) $58,131.
Answer: A
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

53
141) (Appendix 13A and 13B) The present value of the total after-tax net cash inflows 141)
(outflows), excluding any CCA tax shield, in Year 4 is closest to which of the
following? (Do not round your intermediate.)
A) $38,269. B) $35,525. C) $23,684. D) ($7,105).
Answer: B
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-46 Using Microsoft Excel, 13-48 The
Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes
taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

142) (Appendix 13B) Assume the special equipment will have a zero salvage value (instead of 142)
$20,000) at the end of six years. The present value of the total tax savings for all years
because of the CCA tax shield is closest to which of the following? (Do not round your
intermediate calculations.)
A) $56,373. B) $60,143. C) $58,258. D) $62,069.
Answer: C
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

54
Reference: 13-23
Apex Corp. is planning to buy a production machine costing $120,000. This machine's expected useful life is five years,
with no residual value. Apex uses a discount rate of 8% and has calculated the following data pertaining to the purchase
operation of this machine:

Year Estimated Annual Net Cash Inflow

1 $50,000
2 $40,000
3 $20,000
4 $20,000
5 $20,000

(Ignore income taxes in this problem.)

143) What is the payback period for this investment? 143)

A) 2.75 years. B) 5.00 years. C) 3.00 years. D) 3.50 years.
Answer: D
Topic: 13-32 Evaluation of the Payback Method, 13-33 An Extended Example of Payback, 13-34 Payback and
Uneven Cash Flows
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

144) (Appendix 13A) The net present value of this investment is closest to which of the 144)
following? (Do not round your intermediate calculations.)
A) $81,025. B) $4,779. C) $80,000. D) $50,000.
Answer: B
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

145) (Appendix 13A) The present value of a given sum to be received in five years will be 145)
exactly twice as great as the present value of an equal sum to be received in ten years.
Answer: True False
Topic: 13-39 The Mathematics of Interest, 13-40 Compound Interest, 13-41 Present Value and Future Value
LO: 13-07 Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

55
146) (Appendix 13A) An increase in the discount rate will result in an increase in the present 146)
value of a given cash flow.
Answer: True False
Topic: 13-06 The Net Present Value Method Illustrated, 13-39 The Mathematics of Interest, 13-40 Compound
Interest, 13-41 Present Value and Future Value
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

147) (Appendix 13A) The present value of a cash flow decreases as it moves further into the 147)
future.
Answer: True False
Topic: 13-06 The Net Present Value Method Illustrated, 13-39 The Mathematics of Interest, 13-40 Compound
Interest, 13-41 Present Value and Future Value
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

148) When the net present value method is used, the internal rate of return is the discount rate 148)
used to compute the net present value of a project.
Answer: True False
Topic: 13-06 The Net Present Value Method Illustrated, 13-13 An Extended Example of the Net Present Value
Method, 13-18 The Internal Rate of Return Method Illustrated, 13-19 Using the Internal Rate of Return
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02
Evaluate the acceptability of an investment project using the internal rate of return method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

149) (Appendix 13A) The present value concept considers both recovery of the original 149)
investment and return on the original investment.
Answer: True False
Topic: 13-10 Recovery of the Original Investment, 13-11 Simplifying Assumptions, 13-39 The Mathematics of
Interest, 13-41 Present Value and Future Value
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07
Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

56
150) The net present value method assumes that cash flows from a project are immediately 150)
reinvested at a rate of return equal to the discount rate.
Answer: True False
Topic: 13-11 Simplifying Assumptions
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

151) When using the internal rate of return method to evaluate investment projects, if the 151)
internal rate of return is less than the required rate of return, the project should be
accepted.
Answer: True False
Topic: 13-19 Using the Internal Rate of Return , 13-21 Comparison of the Net Present Value and Internal Rate
of Return Methods
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

152) The internal rate of return for a project is the discount rate that makes the net present 152)
value of the project equal to zero.
Answer: True False
Topic: 13-14 The Total-Cost Approach, 13-15 The Incremental-Cost Approach
LO: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

153) In comparing two investment alternatives, the difference between the net present values 153)
of the two alternatives obtained using the total cost approach will be the same as the net
present value obtained using the incremental cost approach.
Answer: True False
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-14 The Total-Cost Approach, 13-15
The Incremental-Cost Approach-
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

154) The payback period is the length of time it takes for an investment to recoup its own 154)
initial cost out of the cash receipts it generates.
Answer: True False
Topic: 13-31 The Payback Method, 13-32 Evaluation of the Payback Method
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

57
155) Projects with shorter payback periods are always more profitable than projects with 155)
longer payback periods.
Answer: True False
Topic: 13-31 The Payback Method, 13-32 Evaluation of the Payback Method
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

156) The payback method of making capital budgeting decisions gives full consideration to 156)
the time value of money.
Answer: True False
Topic: 13-31 The Payback Method, 13-32 Evaluation of the Payback Method
LO: 13-05 Determine the payback period for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

157) If new equipment is replacing old equipment, any salvage received from sale of the old 157)
equipment should not be considered in computing the payback period of the new
equipment.
Answer: True False
Topic: 13-09 Typical Cash Inflows, 13-13 An Extended Example of the Net Present Value Method
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

158) One strength of the simple rate of return method is that it takes into account the time 158)
value of money in computing the return on an investment project.
Answer: True False
Topic: 13-36 Criticism of the Simple Rate of Return
LO: 13-06 Calculate the simple rate of return for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

159) The preference rule for ranking projects by the profitability index is the following: the 159)
higher the profitability index, the more desirable the project.
Answer: True False
Topic: 13-27 Net Present Value Method, 13-28 Comparing the Preference Rules
LO: 13-04 Rank investment projects in order of preference.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

58
160) Depreciation expenses taken on financial reports are relevant for capital budgeting 160)
decisions because it affects the company's net income.
Answer: True False
Topic: 13-07 Emphasis on Cash Flows
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

161) (Appendix 13B) The Regulations that accompany the Canadian Income Tax Act require 161)
that capital cost allowance (CCA) be calculated generally on a declining balance of each
single depreciable asset.
Answer: True False
Topic: 13-06 The Net Present Value Method Illustrated, 13-49 Capital Cost Allowance Tax Shield, 13-50
Capital Cost Allowance Instead of Depreciation, 13-51 Example of Income Taxes and Capital
Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

162) (Appendix 13B) The reduction in taxes made possible by a capital cost allowance (CCA) 162)
tax shield equals the amount of the CCA deduction multiplied by the tax rate.
Answer: True False
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

163) (Appendix 13B) If a company is operating at a profit, all cash inflows associated with an 163)
investment project should be multiplied by one minus the tax rate to be placed on an
after-tax basis.
Answer: True False
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-48 The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

164) (Appendix 13B) Capital cost allowance (CCA) deductions shield revenues from taxation 164)
and thereby lower the amount of taxes that a company must pay.
Answer: True False
Topic: 13-49 Capital Cost Allowance Tax Shield
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

59
165) (Appendix 13B) The release of working capital at the end of an investment project is a 165)
taxable cash inflow.
Answer: True False
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-48 The Concept of After-Tax Cost, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

166) (Appendix 13B) Not all cash inflows are taxable. 166)
Answer: True False
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-48 The Concept of After-Tax Cost, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

167) (Appendix 13B) If a company operates at a profit, the after-tax cost of a tax-deductible 167)
cash expense is determined by multiplying the cash expense by one minus the tax rate.
Answer: True False
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-48 The Concept of After-Tax Cost
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

168) (Appendix 13B) The working capital required at the start of an investment is a tax 168)
deductible cash outflow.
Answer: True False
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-48 The Concept of After-Tax Cost, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

169) (Appendix 13B) To determine the effect of income taxes on a project, multiply the net 169)
present value of the project by one minus the tax rate.
Answer: True False
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-48 The Concept of After-Tax Cost,
13-49 Capital Cost Allowance Tax Shield, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

60
 170) (Appendix 13B) When a company invests in equipment, it gets to immediately expense 170)
the cost of the equipment on the company's income tax return filed with Canada Customs
and Revenue Agency (CCRA).
Answer: True False
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

171) (Appendix 13B) If a firm acquires a depreciable asset on September 1, it can add only 171)
one-third of the capital cost of the asset to the undepreciated capital cost (UCC) in the
calculation of the capital cost allowance (CCA) for the year.
Answer: True False
Topic: 13-49 Capital Cost Allowance Tax Shield, 13-50 Capital Cost Allowance Instead of Depreciation, 13-51
Example of Income Taxes and Capital Budgeting
LO: 13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for
management of ongoing operations, CPA Competency: 5.3.1 Develops or evaluates capital
budgeting processes and decisions.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

172) (Appendix 13A) Prince Company's required rate of return is 10%. The company is considering the purchase of
three machines, as indicated below. Consider each machine independently. (Ignore income taxes in this
problem.)

Required:

a) Machine A will cost $25,000 and will have a useful life of 15 years. Its salvage value will be $1,000, and cos
savings are projected at $3,500 per year. Calculate the machine's net present value.
b) How much should Prince Company be willing to pay for Machine B if the machine promises annual cash
inflows of $5,000 per year for eight years?
c) Machine C has a projected life of ten years. What is the machine's internal rate of return if it costs $31,296
and will save $6,000 annually in cash operating costs? Would you recommend to Prince Company
to purchase Machine C? Explain.
Answer: a)

Year Amount 10% Present

PV Factor Value
Investment Required Now ($25,000) 1.000 ($25,000)
Annual Cost Savings 1-15 $3,500 7.666 $26,621
Salvage Value 15 $1,000 0.239 $239
Net Present Value $1.860

NPV = $1,860.67. Calculated using the NPV formula of Microsoft Excel.

b)
61
 Answer:
Year Amount 10% Present
PV Factor Value
Annual Cash Inflows 1-5 $5,000 5.335 $26.675

PV of $5,00/year = $26,674.63. Calculated using the NPV formula of Microsoft Excel.

Because the present value of the cash inflows is $26,674.63, the company should be willing to pay up t
this amount to acquire Machine B.

c) The internal rate of return is 14% Calculated using the IRR formula of Microsoft Excel.

The machine should be purchased because the internal rate of return is greater than the required rate of
return.
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-18 The Internal Rate of Return Method Illustrated,
13-24 An Example of Uncertain Cash Flows, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02 Evaluate the
acceptability of an investment project using the internal rate of return method., 13-03 Evaluate an investment project
that has uncertain cash flows., 13-07 Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

173) (Appendix 13A) Ursus, Inc. is considering a project that would have a ten-year life and would require a
$2,000,000 investment in equipment. At the end of ten years, the project would terminate and the equipment
would have no salvage value. The project would provide net income each year as follows:

Sales $2,000,000
Less: Variable Expenses $1,400,000
Contribution Margin $600,000
Less: Fixed Expenses $400,000
Net Income $200,000

All of the above items, except for depreciation of $200,000 a year, represent cash flows. The depreciation is
included in the fixed expenses. The company's required rate of return is 12%. (Ignore income taxes in this
problem.)

Required:

a) What is the project's net present value?

b) What is the project's internal rate of return?
c) What is the project's payback period?
d) What is the project's simple rate of return?
Answer: a) Because depreciation is the only non-cash item on the income statement, the net annual
cash flow can be computed by adding back depreciation to net income:

Net Income $200.00

Depreciation $200,000
Net Annual Cash Flow $400,000
62
 Answer: Net Annual Cash Flow $400,000

Year Amount 12% Present

PV Factor Value
Investment Required Now ($2,000,000) 1.000 ($2,000,000)
Net Annual Cash Flows 1-10 $400,000 5.650 $2,260,000
Net Present Value $260,000

NPV = $260,089.21. Calculated using the NPV formula of Microsoft Excel.

b)
The internal rate of return is 15.09% Calculated using the IRR formula of Microsoft Excel.

c) The formula for the payback period is:

Investment required/Net annual cash inflow = Payback period
= $2,000,000/$400,000
= 5 years

d) The formula for the simple rate of return is:

Net income/Initial investment = Simple rate of return
= $200,000/$2,000,000
= 10.0%
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-18 The Internal Rate of Return Method Illustrated,
13-31 The Payback Method, 13-36 Criticism of the Simple Rate of Return, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02 Evaluate the
acceptability of an investment project using the internal rate of return method., 13-05 Determine the payback period
for an investment., 13-06 Calculate the simple rate of return for an investment., 13-07 Explain present value concepts
and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

174) (Appendix 13A) The following data concern an investment project:

Investment in Equipment $16,000

Net Annual cash inflows $3,600
Working capital required $4,500
Salvage value of the equipment $2,000
Life of the project $12 years
Discount rate $14%

The working capital will be released for use elsewhere at the conclusion of the project. (Ignore income taxes
in this problem.)

Required:

63
Calculate the project's net present value and the internal rate of return.
Answer:
Item Year Amount 14% Present
PV Factor Value
Investment Required Now ($16,000) 1.000 ($16,000)
Net Annual Cash Flows 1-12 3,600 5.660 20,376
Working capital
Required Now (4,500) 1.000 (4,500)
Working capital
Released 12 4,500 0.208 936
Salvage value
Equipment 12 2,000 0.208 416
Net present value $ 1,228

NPV = $1,226.19 and IRR = 15.24%. Calculated using the NPV and IRR formula of
Microsoft Excel
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-18 The Internal Rate of Return Method Illustrated,
13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02 Evaluate the
acceptability of an investment project using the internal rate of return method., 13-07 Explain present value concepts
and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

64
175) (Appendix 13A) Bradley Company's required rate of return is 14%. The company has an
opportunity to be the exclusive distributor of a very popular consumer item. No new equipment
would be needed, but the company would have to use one-fourth of the space in a warehouse it
owns. The warehouse cost $200,000 new. The warehouse is currently half-empty, and there are no
other plans to use the empty space. In addition, the company would have to invest $100,000 in
working capital to carry inventories and accounts receivable for the new product line. The company
would have the distributorship for only five years. The distributorship would generate a $17,000 net
annual cash inflow. (Ignore income taxes in this problem.)

Required:

What is the net present value of the project at a discount rate of 14%? Should the project be accepted?
Answer:
Year Amount 14% Present
Factor Value
Investment Required Now $(100,000) 1.000 $(100,000)
Annual Cash Flows 1-5 17,000 3.433 58,361
Working capital 5 100,000 0.519 51,900
released
Net present value $ 10,261

NPV = $10,299.24. Calculated using the NPV formula of Microsoft Excel

Yes, the distributorship should be accepted because the project has a positive net present value.
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07 Explain present
value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

176) (Appendix 13A) Monson Company is considering three investment opportunities with cash flows as described
below: (Ignore income taxes in this problem.)

Project A: Cash investment now $15,000

Cash inflow at the end of 5 years $21,000
Cash inflow at the end of 8 years $21,000
Project A: Cash investment now $11,000
Cash outflow for 5 years $3,000
Addition cash inflow at the end of 5 years $21,000
Project A: Cash investment now $21,000
Cash inflow at the end of 4 years $11,000
Cash outflow for 3 years $5,000
Addition cash inflow at the end of 4 years $15,000

Required:
Calculate the net present value of each project assuming Monson Company uses a 12% discount rate.
65
 Answer: a) NPV = $5,397.51, b) NPV = $(9,898.36).

Amount 12% Present

Factor Value
Cash investment now ($15,000) 1.000 ($15,000)
Cash inflow at the end of 5 year
$21,000 0.567 $11,907
Cash inflow at the end of 8 $21,000 0.404 $8,484
years
Net present value $5,391

Project B:

Amount 12% Present

Factor Value
Cash investment now ($11,000) 1.000 ($11,000)
Cash outflow for 5 year ($3,000) 3.605 $10,815
Cash inflow at the end of 5 $21,000 0.567 $11,907
years
Net present value $9,908

Calculated using the NPV formula of Microsoft Excel

Amount 12% Present

Factor Value
Cash investment now ($21,000) 1.000 ($21,000)
Annual cash inflow for 4 years($11,000) 3.037 $33,407
Cash outflow at the end of 3 ($5,000) 0.712 ($3.560)
years
Additional cash inflow at the $15,000 0.636 $9,540
end of 4 years
Net present value $18,387

c) NPV = $18,384.71. Calculated using the NPV formula of Microsoft Excel

Topic: 13-13 An Extended Example of the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07 Explain present
value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

177) (Appendix 13A) Jim Bingham is considering starting a small catering business. He would need to
purchase a delivery van and equipment costing $125,000 to operate the business and another
$60,000 for inventories and other working capital needs. Rent for the building to be used by the
business will be $35,000 per year. Jim's marketing studies indicate that the annual cash inflow from
the business will amount to $120,000. In addition to the building rent, annual cash outflow for
operating costs will amount to $40,000. Jim wants to operate the catering business for only six
years. He estimates that the equipment could be sold at that time for 4% of its original cost. Jim uses
66
a 16% discount rate. (Ignore income taxes in this problem.)

Required:

Would you advise Jim to make this investment? Use Net Present Value and Profitability analysis to support
your decision.
Answer:
Description Years Amount 16% Present
Factor Value
Van & equipment 0 ($125,000) 1.000 ($125,000)
Working capital 0 ($60,000) 1.000 ($60,000)
Building rent 1-6 ($35,000) 3.685 ($128,975)
Net annual cash
inflow 1-6 $80,000 3.685 $294,800
Salvage values,
Equipment 6 $5,000 0.410 $2,050
Release of working
capital 6 $60,000 0.410 $24,600
Net Present Value $7,475

NPV = $7491.86. Calculated using the NPV formula of Microsoft Excel

P.I. = (125,000 + 60,000 + 7491.86)/(125,000 + 60,000) = 1.04

Yes, Jim would be advised to make the investment because its net present value is positive (quite smal
though). Jim would be earning approximately 4% on his investment and should also consider whether
alternative investments might earn him more.
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-27 Net Present Value Method, 13-46 Using
Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-04 Rank investment
projects in order of preference., 13-07 Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

67
178) (Appendix 13A) General Manufacturing Company consists of several divisions, one of which is the
Transportation Division. The company has decided to dispose of this division because it no longer
fits the company's long-term strategy. An offer of $9,000,000 has been received from a prospective
buyer. If General retained the division, the company would operate the division for only nine years,
after which the division would no longer be needed and would be sold for $600,000. If the company
retains the division, an immediate investment of $500,000 would need to be made to update
equipment to current standards. Annual net operating cash flows would be $1,805,000 if the
division is retained. The company's discount rate is 12%. (Ignore income taxes in this problem.)

Required:

Using the net present value method, determine whether General Manufacturing should accept or reject the
offer made by the potential buyer.
Answer:
Year Explanation Amount 12% Present
Factor Value
0 Investment to update assets$ $(500,000) 1.000 $(500,000)
1-9 Annual cash inflows 1,805,000 5.328 9,617,040
9 Selling price for the division 600,000 0.361 216,600
Net present value $9,333,640

NPV = $9,333,856.89. Calculated using the NPV formula of Microsoft Excel

The sales price of $9,000,000 is less than the present value of the cash flows resulting from retaining th
division. General thus should not accept the offer.
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07 Explain present
value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

68
179) (Appendix 13A) Mark Stevens is considering opening a hobby and craft store. He would need
$100,000 to equip the business and another $40,000 for inventories and other working capital needs.
Rent for the building to be used by the business will be $24,000 per year. Mark estimates that the
annual cash inflow from the business will amount to $90,000. In addition to building rent, annual cash
outflow for operating costs will amount to $30,000. Mark plans to operate the business for only six years. He
estimates that the equipment and furnishings could be sold at that time for 10% of their original cost. Mark
uses a discount rate of 16%. (Ignore income taxes in this problem.)

Required:

Would you advise Mark to make this investment? Use the net present value method.
Answer:
Description Years Amount 16% Present
Factor Value
equipment 0 ($100,000) 1.000 ($100,000)
Working capital 0 ($40,000) 1.000 ($40,000)
Building rent 1-6 ($24,000) 3.685 ($88,440)
Net annual cash
inflow 1-6 $60,000 3.685 $221,100
Salvage values,
Equipment 6 $10,000 0.410 $4,100
Release of working
capital 6 $40,000 0.410 $16,400
Net Present Value $13,160

NPV = $13,172.60. Calculated using the NPV formula of Microsoft Excel

Yes, Mark would be advised to make the investment because its net present value is positive.
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07 Explain present
value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

180) (Appendix 13A) Vernon Company has been offered a seven-year contract to supply a part for the military.
After careful study, the company has estimated the following data relating to the contract:

Cost of equipment needed $300,000

Working capital needed $50,000
Annual cash receipts from the delivery of parts, less cash $70,000
operating costs
Salvage value of equipment at termination of the contract $5,000

It is not expected that the contract would be extended beyond the initial contract period. The company's
discount rate is 10%. (Ignore income taxes in this problem.)
Required:
69
 Use the net present value method to determine if the contract should be accepted. Round all computations to
the nearest dollar.
Answer:
Description Years Amount 10% Present
Factor Value
equipment 0 ($300,000) 1.000 ($300,000)
Working capital 0 ($50,000) 1.000 ($50,000)
Net annual cash
inflow 1-7 $70,000 4.868 $340,760
Salvage values,
Equipment 7 $5,000 0.513 $2,565
Release of working
capital 7 $50,000 0.513 $25,650
Net Present Value $18,975

NPV = $19,013. Calculated using the NPV formula of Microsoft Excel

The contract should be accepted because its net present value is positive.
Topic: 13-08 Typical Cash Flows, 13-09 Typical Cash Inflows, 13-13 An Extended Example of the Net Present Value
Method, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07 Explain present
value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

181) (Appendix 13A) AB Company is considering the purchase of a machine that promises to reduce operating
costs by the same amount for every year of its six-year useful life. The machine will cost $83,150 and has no
salvage value. The machine has a 20% internal rate of return. (Ignore income taxes in this problem.)

Required:

What is the annual cost savings promised by the machine?

Answer: Using the IRR of 20% the payment = $25,003.68. Calculated using the PMT formula of
Microsoft Excel
Topic: 13-11 Simplifying Assumptions, 13-19 Using the Internal Rate of Return , 13-24 An Example of Uncertain Cash
Flows, 13-46 Using Microsoft Excel
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02 Evaluate the
acceptability of an investment project using the internal rate of return method., 13-03 Evaluate an investment project
that has uncertain cash flows., 13-07 Explain present value concepts and the underlying mathematics of interest.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

70
182) Ferris Company has an old machine that is fully depreciated but has a current salvage value of $5,000. The
company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero
salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are:

Increased revenues $20,000 $63,000

Increased expenses: 9,000
Salary of additional operator
Supplies
Depreciation 12,000
Maintenance 4,000 45,000
Increased net income $18,000

(Ignore income taxes in this problem.)

Required:
a) What is the payback period on the new equipment?
b) What is the simple rate of return on the new equipment?
Answer: a) Investment required/Net annual cash inflow = Payback period
($60,000 - $5,000)/($18,000 + $12,000) = 1.83 years (rounded)

b) Incremental net income/Investment = Simple rate of return

$18,000/$55,000 = 32.7% (rounded)
Topic: 13-33 An Extended Example of Payback, 13-36 Criticism of the Simple Rate of Return
LO: 13-05 Determine the payback period for an investment., 13-06 Calculate the simple rate of return for an investment.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

183) (Appendix 13A and 13B) Vernal Company has been offered a seven-year contract to supply a part for the
military. After careful study, the company has developed the following estimated data relating to the contract:

Cost of equipment needed $300,000

Working capital needed to carry inventories $50,000
Annual Net Cash Inflow $90,000
Salvage Value of Equipment $10,000

The equipment above would be in Class 7 with a 15% CCA rate. The company would take the maximum CCA
allowable each year. It is not expected that the contract would be extended beyond the initial contract period.
The company's after-tax cost of capital is 10%, and the tax rate is 30%.

Required:

Use net present value analysis to determine whether or not the contract should be accepted. (Round all
calculations to the nearest dollar.)

71
Answer: The following is one approach to answering the question.

Year Cash Flow Tax After-tax Cash 10% Present

Effect Flow Factor Value
Cost of equipment Now $(300,000) 1.00 $(300,000) 1.00 $(300,00)
Working capital Now $(50,000) 1.00 $(50,000) 1.00 $(50,000)
needed
Net annual cash 1-7 $90,000 0.70 $63,000 4.868 $306,684
inflows
Salvage value 7 $10,000 0.70 $7,000 0.513 $3,591
Working capital 7 $50,000 0.00 $50,000 0.513 $25,650
released
PV of CCA tax $50,619
shield
Net present value $10,894

NPV of cash flows = $(12,500.13). Add to this the present value of CCA tax savings shown
below of $50,619** the NPV of the project = $38,118.87. Calculated using the NPV formula
of Microsoft Excel
Decision: The contract should be accepted, because the project has a positive net present value.

* Because the equipment was acquired for this specific contract, one might assume there will be no
balance in the Class and therefore the proceeds from sale of the equipment will be recaptured and fully
taxed as ordinary income at the 30% tax rate. Since all examples in the text consider the asset class
remaining open and most students will therefore make the assumption there are still assets in
this class the solution does not tax the sale of the equipment at the end. If using the after-tax
amount the NPV of the project is reduced by $1,540. Students who refer to their finance
courses might consider the sale of asset as a capital gain taxed differently.

** Calculating the present value (PV) of the CCA tax shield.

First component (assuming zero salvage value):

Cdt (1 + 0.5k)
PV = ×
(d + k) (1 + k)
(300,000x . 15x . 30) (1+ 0.5x . 10)
= ×
(.15 + .10) (1 + .10)
= $54,000 × 0.9545
= $51,543

Second component (correction for non-zero salvage value):

(S x d x t)
PV = × (1 + k)-n
(d + k)

72
 Answer: (10,000x . 15x . 30)
= × (1 + .10)-7
(.15 + .10)
= $1,800 × 0.513
= $924

Total present value = $51,543 - $924

= $50,619

Topic: 13-13 An Extended Example of the Net Present Value Method, 13-46 Using Microsoft Excel, 13-51 Example of
Income Taxes and Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07 Explain present
value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes taxes into a capital budgeting
analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

184) (Appendix 13A and 13B) Roy Company is trying to decide whether to invest in one of two projects: X or Z.
Associated data for each investment project follow:

Project
X Z
Cost of equipment $90,000 $140,000
Useful life 6 years 9 years
Annual net cash inflow $25,000 $ 30,000
Salvage value $8,000 $12,000

The equipment for each project is in Class 22 with a 30% maximum CCA rate. The income tax rate is 30%.
Roy's after-tax cost of capital is 12%.

Required:

a) Calculate the net present value of each project, and indicate which appears preferable in terms of net
present value.
b) Calculate the profitability index for each project, and indicate which project would be preferable using this
investment criterion.
Answer: a) The net present values of the projects are computed using the information below:

Project X Year Cash Flow Tax After-tax Cash 10% Present

Effect Flow Factor Value
Cost of equipment Now $(90,000) 1.00 $(90,000) 1.000 $(90,000)
Net annual cash 1-6 $25,000 0.70 $17,500 4.111 71,943
inflow
Salvage value 6 $8,000 0.00 $8,000 0.507 $4,056
PV of CCA tax $17,384
shield
Net present value $3,383
73
Answer:
NPV of all cash flows = $(13,997.32). Add to that the PV of CCA tax savings $17,384 * and the NPV
project X = $3,386.67. Calculated using the NPV formula of Microsoft Excel
* The present value (PV) of the CCA tax shield is calculated as follows:
First component (assuming zero salvage value):

Cdt (1 + 0.5k)
PV = ×
(d + k) (1 + k)
(90,000x . 30x . 30) (1+ 0.5x . 12)
= ×
(.30 + .12) (1 + .12)
= $192,860 × 0.9464
= $18,252

Second component (correction for non-zero salvage value):

(S x d x t)
PV = × (1 + k)-n
(d + k)
(8,000x . 30x . 30)
= × (1 + .12)-6
(.15 + .10)
= $1,714 × 0.5066
= $868

Total present value = $18,252 - $868

= $17,384

Project Z Year Cash Flow Tax After-tax Cash 10% Factor Present Value
Effect Flow
Cost of Now $(140,000) 1.00 $(1400,000) 1.000 $(140,000)
equipment
Net annual 1-9 $30,000 0.70 $21,500 5.328 $111,888
cash inflow
Salvage value9 $12,000 0.00 $12,000 0.361 $4,332
PV of CCA $27,465
tax shield
Net present $3,385
value

NPV of cash flows = $(23,779.43). Add to this the PV of CCA tax savings $27,465 * then the NPV of
project Z is $3685.57. Calculated using the NPV formula of Microsoft Excel
* The present value (PV) of the CCA tax shield is calculated as follows.
First component (assuming zero salvage value):

74
Answer: Cdt (1 + 0.5k)
PV = ×
(d + k) (1 + k)
(140,000x . 30x . 30) (1+ 0.5x . 12)
= ×
(.30 + .12) (1 + .12)
= $30,000 × 0.9464
= $28,392

Second component (correction for non-zero salvage value):

(S x d x t)
PV = × (1 + k)-n
(d + k)
(12,000x . 30x . 30)
= × (1 + .10)-9
(.30 + .12)
= $2,571 × 0.3606
= $927

Total present value = $28,392 - $927

= $27,465

Decision: Project Z would seem to be preferable to Project X by a very small amount ($298.90 to be
exact.
b) PI = PV inflows/Investment.

For project X = (3,386.67 + 90,000)/90,000 = 1.0376

For project Z = (3,685.57 + 140,000)/140,000 = 1.0263

Decision: Project X is now preferred by 1% using the profitability index.

Topic: 13-13 An Extended Example of the Net Present Value Method, 13-27 Net Present Value Method, 13-46 Using
Microsoft Excel, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-04 Rank investment
projects in order of preference., 13-07 Explain present value concepts and the underlying mathematics of interest.,
13-08 Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

75
185) (Appendix 13A and 13B) Suppose that your company has ample taxable income to take advantage of capital
cost allowance (CCA) deductions and has the option to use either accelerated or straight-line method to
calculate the CCA deductions.

Required:

Which method would you prefer? Why?

Answer: The accelerated method of capital cost allowance (CCA) would be preferable. It will provide
the bulk of the CCA tax shields early in the life of the asset, whereas the straight-line method
will spread the tax shields out evenly over the entire life of the asset. It is generally better to
have the tax reductions early in the life of an asset than to have them later because of the time
value of money.
Topic: 13-04 The Time Value of Money, 13-39 The Mathematics of Interest, 13-49 Capital Cost Allowance Tax Shield, 13-50
Capital Cost Allowance Instead of Depreciation
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-07 Explain present
value concepts and the underlying mathematics of interest., 13-08 Incorporate incomes taxes into a capital budgeting
analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

186) (Appendix 13A and 13B) Selah Company bought a new computer-assisted design (CAD) software
for $10,000,000 at the beginning of Year 1. The software has a useful life of 3 years and will save
the company annual cash operating expenses of $4,000,000 in each of those 3 years. The software
will have a zero net salvage value at the end of 3 years. It belongs to Class 12 with a capital cost
allowance (CCA) rate of 100%. With special permission from the Canada Revenue Agency, the half-year
CCA rule has been waived for the company to permit a maximum 100% CCA deduction for Year 1. The
company's income tax rate and after-tax cost of capital are 40% and 12%, respectively.

Required:

a) Calculate the maximum total CCA tax shied available to the company.
b) Calculate the present value of the annual cash savings in operating expenses.
c) Calculate the net present value (NPV) of the investment.
d) Was the internal rate of return (IROR) greater than or less than the company's after-tax cost of capital of
12%? (Note: Do NOT try to calculate the implied actual internal rate or return.)
e) By how much must the annual savings in operating expenses be increased or decreased to make the
investment just worthwhile, that is, either zero NPV or 12% IROR?
Answer: a) Since the half year rule is not applicable and there is no salvage value the full value of the asset
multiplied by the tax rate is available to the company.
Tax shield = 10,0000 * .40 = $4,000,000 at the end of year 1. The present value of this is =
$$3,571,428.57 using the PV formula of Microsoft excel.
b) After-tax cash savings = $4,000,000 * (1 - .40) = $2,400,000. PV = $5,764,395.04
c) NPV of the investment = $(664,176.39). Calculated using the NPV formula of Microsoft Excel
PV CCA tax shield + PV savings in operating expenses - initial investment.
Calculated using the NPV formula of Microsoft Excel
d) The internal rate of return is less than 12% because the NPV of the investment is negative.
e) The annual savings have to be increased in this case because NPV is negative or IRR is less than
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Answer: 12%, the after-tax cost of capital. The amount is approximately $276,529.16 in after tax savings
annually which before tax = $276,529.16/(1-.40) = $460,881.93 operating savings per year. Calculated
using the PMT formula of Microsoft Excel
Topic: 13-13 An Extended Example of the Net Present Value Method, 13-19 Using the Internal Rate of Return , 13-24 An
Example of Uncertain Cash Flows, 13-46 Using Microsoft Excel, 13-48 The Concept of After-Tax Cost, 13-49 Capital
Cost Allowance Tax Shield, 13-51 Example of Income Taxes and Capital Budgeting
LO: 13-01 Evaluate the acceptability of an investment project using the net present value method., 13-02 Evaluate the
acceptability of an investment project using the internal rate of return method., 13-03 Evaluate an investment project
that has uncertain cash flows., 13-07 Explain present value concepts and the underlying mathematics of interest., 13-08
Incorporate incomes taxes into a capital budgeting analysis.
CPA Compdtency:: CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing
operations, CPA Competency: 5.3.1 Develops or evaluates capital budgeting processes and decisions.

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