1 A capital investment decision is essentially a decision to:

A exchange current assets for current liabilities.

B exchange current cash outflows for the promise of receiving future cash inflows.
C exchange current cash flow from operating activities for future cash inflows from investing activities.
D exchange current cash inflows for future cash outflows.
B
2 Para Co. is reviewing the following data relating to an energy saving investment proposal: Cost - P50,000; Residual value at the end of 5 years
- 10,000; What would be the annual savings needed to make the investment realize a 12% yield? P12,306
3 A project that when accepted or rejected will not affect the cash flows of another project. A
A. Independent projects B. Dependent projects C. Mutually exclusive projects D. Both b and c
4 The normal methods of analyzing investments
A cannot be used by not-for-profit entities.
B do not apply if the project will not produce revenues.
C cannot be used if the company plans to finance the project with funds already available internally.
D require forecasts of cash flows expected from the project.
D
5 At what stage of the capital budgeting process would management most likely apply present value techniques?
a. Identification stage. b. Search stage. c. Selection stage. d. Financing stage.
C
6 How is the discounted payback method an improvement over the payback method in evaluating investment projects?
a. It involves better estimates of cash flows. c. It considers the time value of money.
b. It considers the overall profitability of the investment. d. It considers the variability of the return.
C
7 A major difference between an investment in working capital and one in depreciable assets is that
A an investment in working capital is never returned, while most depreciable assets have some residual value.
B an investment in working capital is returned in full at the end of a project’s life, while an investment in depreciable assets has no residual
value.
C an investment in working capital is not tax-deductible when made, nor taxable when returned, while an investment in depreciable assets
does allow tax deductions.
D because an investment in working capital is usually returned in full at the end of the project’s life, it is ignored in computing the amount of
the investment required for the project.
A
8 Which of the following is a strength of the payback method?
a. It considers cash flows for all years of the project. c. It considers the time value of money.
b. It distinguishes the source of cash inflows. d. It is easy to understand.
D
9 Tam Co. is negotiating for the purchase of equipment that would cost P100,000, with the expectation that P20,000 per year could be saved in
after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is ten years, with no residual value, and would be
depreciated by the straight-line method. The payback period is 5.0 years.
10 Which of the following is a cost that requires a future outlay of cash that is which relevant for future decision-making?
A. Opportunity cost B. Out-of-pocket cost C. Sunk costs D. Relevant benefits
B
11 In deciding whether to replace a machine, which of the following is NOT a sunk cost?
A. The expected resale price of the existing machine. C. The original cost of the existing machine.
B. The book value of the existing machine. D. The depreciated cost of the existing machine.
A
12 When evaluating depreciation methods, managers who are concerned about capital investment decisions will:
A choose straight line depreciation so there is minimum impact on the decision.
B use units of production so more depreciation expense will be allocated to the later years.
C use accelerated methods to have as much depreciation in the early years of an asset’s life.
D choice of depreciation method has no impact on the capital investment decision.
C
13 Which of the following is an advantage of the accounting rate of return method of evaluating investment returns?
a. The technique considers depreciation.
b. The technique corresponds to the measure that is often used to evaluate performance.
c. The technique considers the time value of money.
d. The technique considers the risk of the investment
B
14 Tam Co. is negotiating for the purchase of equipment that would cost P100,000, with the expectation that P20,000 per year could be saved in
after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is ten years, with no residual value, and it would be
depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. The present value of an annuity of 1 at
12% for ten periods is 5.65. The present value of 1 due in ten periods at 12% is .322. Accrual accounting rate of return based on the initial
investment is 10%
15 Lin Co. is buying machinery it expects will increase average annual operating income by P40,000. The initial increase in the required
investment is P60,000, and the average increase in required investment is P30,000. To compute the accrual accounting rate of return, what
amount should be used as the numerator in the ratio? P40,000
16 If an investment project has a profitability index of 1.15, then the
a. Project’s internal rate of return is 15%.
b. Project’s cost of capital is greater than its internal rate of return.
c. Project’s internal rate of return exceeds its net present value.
d. Net present value of the project is positive.
D
17 Mutually exclusive projects are those that:
A if accepted, preclude the acceptance of competing projects.
B if accepted, can have a negative effect on the company’s profit.
C if accepted, can also lead to the acceptance of a competing project.
D require all managers to consider.
A
18 Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects?
A The NPV method does not assume reinvestment of cash flows while the IRR method assumes the cash flows will be reinvested at t he
internal rate of return.
B The NPV method assumes a reinvestment rate equal to the discount rate while the IRR method assumes a reinvestment rate equal to the
internal rate of return.
C The IRR method does not assume reinvestment of the cash flows while the NPV assumes the reinvestment rate is equal to the discount
rate.
D The NPV method assumes a reinvestment rate equal to the bank loan interest rate while the IRR method assumes a reinvestment rate
equal to the discount rate.
B
19 A follow-up evaluation of a capital project is performed to see that investment expenditures are proceeding on time and on budget, to compare
actual cash flows with those originally predicted, and to evaluate continuation of the project. This follow-up is called a
A. postaudit. B. performance evaluation C. management audit D. project review
A
20 Companies use post audits to:
A chastise managers whose project does not exceed projections.
B prove to managers that they should have accepted projects they previously rejected.
C have the managers revise poorly performing projects so the projects will have larger return in the future.
D provide feedback that enables managers to improve the accuracy of the projections of future cash flows, thereby maximizing the quality of
the firm’s capital investments.
D
21 The net present value (NPV) method of investment project analysis assumes that the project’s cash flows are reinvested at the
a. Computed internal rate of return. c. Discount rate used in the NPV calculation.
b. Risk-free interest rate. d. Firm’s accounting rate of return.
C
22 Kern Co. is planning to invest in a two-year project that is expected to yield cash flows from operations, net of income taxes, of P50,000 in the
first year and P80,000 in the second year. Kern requires an internal rate of return of 15%. The present value of P1 for one period at 15% is
0.870 and for two periods at 15% is 0.756. The future value of P1 for one period at 15% is 1.150 and for two periods at 15% is 1.323. The
maximum that Kern should invest immediately is P103,980
23 Pole Co. is investing in a machine with a three-year life. The machine is expected to reduce annual cash operating costs by P30,000 in each of
the first two years and by P20,000 in year three. Present values of an annuity of P1 at 14% are Period 1 - 0.88; Period 2 - 1.65; Period 3 - 2.32.
Using a 14% cost of capital, what is the present value of these future savings? P62,900
24 For the next two years, a lease is estimated to have an operating net cash inflow of P7,500 per annum, before adjusting for P5,000 per annum
tax basis lease amortization, and a 40% tax rate. The present value of an ordinary annuity of P1 per year at 10% for two years is 1.74. What is
the lease’s after-tax present value using a 10% discount factor? P11,310
25 Tabucol Aggregates, Inc. plans to replace one of its machines with a new efficient one. The old machine has a net book value of P120,000 with
remaining economic life of 4 years. This old machine can be sold for P80,000. If the new machine were acquired, the cash operating
expenses will be reduced from P240,000 to P160,000 for each of the four years, the expected economic life of the new machine. The new
machine will cost Tabucol a cash payment to the dealer of P300,000. The company is subject to 32 percent tax and for this kind of investment,
a marginal cost of capital of 9 percent. The present value of annuity of 1 and the present value of 1 for 4 periods using 9 percent are 3.23972
and 0.70843, respectively. The net present value to be provided by the replacement of the old machine is P15,693
26 Zambales Mines, Inc. is contemplating the purchase of equipment to exploit a mineral deposit that is located on land to which the company has
mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be as sociated with
opening and operating a mine in the area. Cost of new equipment and timbers - 2,750,000; Working capital required - 1,000,000; Net annual
cash receipts* - 1,200,000; Cost to construct new road in three years - 400,000; Salvage value of equipment in 4 years - 650,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, etc.
It is estimated that the mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for
reinvestment elsewhere. The company’s discount rate is 20%. The net present value for the project is: P (79,303).
27 A project’s net present value, ignoring income tax considerations, is normally affected by the
A Proceeds from the sale of the asset to be replaced.
B Carrying amount of the asset to be replaced by the project.
C Amount of annual depreciation on the asset to be replaced.
D Amount of annual depreciation on fixed assets used directly on the project.
A
28 The discount rate (hurdle rate of return) must be determined in advance for the
a. Payback period method. c. Net present value method.
b. Time-adjusted rate of return method. d. Internal rate of return method.
C
29 The internal rate of return is the
a. Rate of interest that equates the present value of cash outflows and the present value of cash inflows.
b. Minimum acceptable rate of return for a proposed investment.
c. Risk-adjusted rate of return.
d. Required rate of return.
A
30 An organization is using capital budgeting techniques to compare two independent projects. It could accept one, both, or neither of the projects.
Which of the following statements is true about the use of net present value (NPV) and internal rate of return (IRR) methods for evaluating
these two projects?
a. NPV and IRR criteria will always lead to the same accept or reject decision for two independent projects.
b. If the first project’s IRR is higher than the organization’s cost or capital, the first project will be accepted but the second project will not.
c. If the NPV criterion leads to accepting or rejecting the first project, one cannot predict whether the IRR criterion will lead to accepting or
rejecting the first project.
d. If the NPV criterion leads to accepting the first project, the IRR criterion will never lead to accepting the first project.
A
(FOR THE NEXT 2 REQUIREMENTS: ) A firm, with an 18% cost of capital, is considering the following projects (on January 1, 2009):
Jan. 1, 2009, Cash outflow Dec. 31, 2013, Cash inflow Project IRR
Project A P3,500 P7,400 15%
Project B 4,000 9,950 ?
Present Value of P1 Due at End of “N” Periods
N 12% 14% 15% 16% 18% 20% 22%
4 .6355 .5921 .5718 .5523 .5158 .4823 .4230
5 .5674 .5194 .4972 .4761 .4371 .4019 .3411
6 .5066 .4556 .4323 .4104 .3704 .3349 .2751

31 Using the net present value method, Project A’s net present value is P(265,460)
32 Project B’s internal rate of return is closest to 20% (bonus

33 Neu Co. is considering the purchase of an investment that has a positive net present value based on Neu’s 12%
hurdle rate. The internal rate of return would be
a. 0 b. 12% c. > 12% d. < 12%
C
(FOR THE NEXT 2 REQUIREMENTS: ) Assume that Straper Industries is considering investing in a project with the following characteristics:
Initial investment P500,000
Additional investment in working capital 10,000
Cash flows before income taxes for years 1 through 5 140,000
Yearly tax depreciation 90,000
Terminal value of investment 50,000
Cost of capital 10%
Marginal tax rate 30%
Investment life 5 years
Assume that all cash flows come at the end of the year.
34 What is the amount of the after-tax cash flows in year 2? P125,000
35 What is the net present value of the investment? P 1,135

(FOR THE NEXT 3 REQUIREMENTS: )Items 62 thru 64 are based on the following information:
Capital Invest Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year.
Project 1 Project 2 Project 3 Project 4
Initial capital outlay P200,000 P298,000 P248,000 P272,000
Annual net cash inflows
Year 1 P 65,000 P100,000 P80,000 P 95,000
Year 2 70,000 135,000 95,000 125,000
Year 3 80,000 90,000 90,000 90,000
Year 4 40,000 65,000 80,000 60,000
Net present value (3,798) 4,276 14,064 14,662
Profitability index 98% 101% 106% 105%
Internal rate of return 11% 13% 14% 15%

36 Which project(s) should Capital Invest Inc. undertake during the upcoming year assuming it has no budget restrictions? Projects 2, 3, and 4.
37 Which project(s) should Capital Invest Inc. undertake during the upcoming year if it has only P600,000 of funds available? Projects 3 and 4.
38 Which project(s) should Capital Invest Inc. undertake during the upcoming year if it has only P300,000 of capital funds available? Project 3.