*. Two projects have an initial outlay of $497 and each has an income stream lasting 3 years.
Project A returns $200 per year for 3 years. Project B returns $200 for the first 2 years and
$248 for the third year.
n 8% 10% 12% 14%
1 .9259 .9091 .8929 .8772
2 .8573 .8264 .7972 .7695
3 .7938 .7513 .7118 .6750
The appropriate internal rate of return valuation for Project B is a. $200(.8772) + $200(.7695) + $248(.6750) = $496.74 b. $200(.8929) + $200(.7972) + $248(.7118) = $514.41 c. $200(.9091) + $200(.8264) + $248(.7513) = $533.42
d. $200(.9259) + $200(.8573) + $248(.7938) = $553.50 CIA 1185 IV-31
Required Investment
Given Present Value of Cash Inflow, Ignore Income Taxes
38. (Ignore income taxes in this problem.) A planned factory expansion project has an estimated initial cost of $800,000. Using a 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: (m)
a. $160,000. c. $43,000.
b. $20,000. d. $1,075. AICPA adapted
Even Cash Flow, Ignore Income Taxes No Present Value Table
91. Ann recently invested in a project that promised an internal rate of return of 15 percent. If the project has an expected annual cash inflow of $12,000 for six years, with no salvage value, how much did Ann pay for the project?
a. $35,000 c. $72,000
b. $45,414 d. $31,708 Barfield
83. A firm is considering a project with annual cash flows of $100,000. The project would have a 7-year life, and the company uses a discount rate of 10%. Ignoring income taxes, what is the maximum amount the company could invest in the project and the project still be acceptable?
a. $359,100 c. $486,800
b. $700,000 d. $100,000 H & M
84. A firm is considering a project with annual cash flows of $40,000. The project would have a 10-year life, and the company uses a discount rate of 8%. Ignoring income taxes, what is the maximum amount the company could invest in the project and the project still be acceptable (rounded)?
a. $400,000 c. $203,210
b. $268,400 d. $363,604 H & M
85. A firm is considering a project with annual cash flows of $120,000. The project would have an 8-year life, and the company uses a discount rate of 12 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and the project still be acceptable (rounded)?
a. $488,740 c. $580,291
b. $562,614 d. $596,160 H & M
33. (Ignore income taxes in this problem.) Kipling Company has invested in a project that has an eight-year life. It is expected that the annual cash inflow from the project will be $20,000.
Assuming that the project has a internal rate of return of 12%, how much was the initial investment in the project? (M)
a. $160,000 c. $80,800
b. $99,360 d. $64,640 AICPA adapted
34. (Ignore income taxes in this problem.) White Company's required rate of return on capital budgeting projects is 12%. The company is considering an investment opportunity which 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? (M)
a. $36,050. c. $17,637.
b. $2,774. d. $5,670. G & N 9e
Even Cash Flow, Salvage Value, Ignore Income Taxes, No Present Value Table 65. Tiger Inc. bought a piece of machinery with the following data:
Useful life 6 years
Yearly net cash inflow $45,000
Salvage value 0
-Internal rate of return 18%
Cost of capital 14%
The initial cost of the machinery was a. $157,392.
b. $174,992.
c. $165,812.
d. impossible to determine from the information given. Barfield
41. (Ignore income taxes in this problem.) The Baker Company purchased a piece of equipment with the following expected results:
The initial cost of the equipment was: (M) a. $300,100.
b. $180,250 c. $190,600.
d. Cannot be determined from the information given. G & N 9e
Uneven Even Cash Flow, Ignore Income Taxes, No Present Value Table.
56. (Ignore income taxes in this problem.) Arthur operates a part-time auto repair service. He estimates that a new 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%, then the most he would be willing to pay for the new computer system would be: (M)
a. $6,652. c. $7,747.
b. $6,984. d. $7,556. G & N 9e
35. (Ignore income taxes in this problem.) In order to receive $12,000 at the end of three years and $10,000 at the end of five years, how much must be invested now if you can earn 14%
rate of return? (M)
a. $12,978. c. $13,290.
b. $8,100. d. $32,054. G & N 9e
Even After-tax Annual Cash Flow, No Present Value Table
86. Conte Inc. invested in a machine with a useful life of six years and no salvage value. The machine is expected to produce annual cash flows from operations, net of income tax, of
$2,000. If the estimated internal rate of return is 10%, the amount of the original investment was: (M)
A. $9,000 D. $5,640
B. $11,280 E. $8,710
C. $12,000 C & U
Even After-tax Annual Cash Flow, Salvage Value No Present Value Table
87. The Hopkins Company has estimated that a proposed project's 10-year annual net cash benefit, received each year end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the 10th year. Assuming that these cash inflows satisfy exactly Hopkins' required rate of return of 8%, calculate the initial cash outlay. (E)
A. $16,775 C. $25,000
B. $19,090 D. $30,000 Gleim
Even After-tax Cash Flow, with Present Value Table
. Cause Company is planning to invest in a machine with a useful life of five years and no salvage value. The machine is expected to produce cash flow from operations, net of income taxes, of P20,000 in each of the five years. Cause’s expected rate of return is 10%.
Information on present value and future amount factors is as follows:
Period
1 2 3 4 5
PV of P1 at 10% .900 .826 .751 .683 .621
PVA of P1 at 10% .909 1.736 2.487 3.170 1.611
FV of P1 at 10% 1.000 1.210 1.330 1.464 1.611
FVA of P1 at 10% 1.000 2.100 3.310 4.641 6.105
How much will the machine cost?
A. P32,220 C. P75,820
B. P62,100 D. P122,100 Pol Bobadilla
Uneven After-tax Cash Flow, Salvage Value, with Present Value Table.
88. Kern Co. is planning to invest in a 2-year project that is expected to yield cash flows from operations, net of income taxes, of $50,000 in the first year and $80,000 in the second year.
Kern requires an internal rate of return of 15%. The present value of $1 for one period at 15%
is 0.870 and for two periods at 15% is 0.756. The future value of $1 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 (E)
a. $81,670 c. $130,000
b. $103,980 d. $163,340 AICPA 1189 II-36
89. Orab Co. has the chance to invest in a 2-year project expected to produce cash flows from operations, net of income taxes, of $100,000 in the first year and $200,000 in the second year.
Orab requires an internal rate of return of 20%. The present value of $1 for one period at 20%
is 0.833; for two periods at 20% is 0.694. For this project, Orab should be willing to invest immediately a maximum of: (E)
A. $222,100 C. $283,300
B. $208,200 D. $249,900 AICPA adapted
Required Life
Even Cash Flow, Ignore Income Taxes, No Present Value Table
37. (Ignore income taxes in this problem.) The following information is available on a new piece of equipment:
Cost of the equipment $21,720
Annual cash inflows $5,000
Internal rate of return 16%
Required rate of return 10%
The life of the equipment is approximately: (M) a. 6 years.
b. 4.3 years.
c. 8 years.
d. it is impossible to determine from the data given. G & N 9e Required Increase in Cash Flows
*. The following data pertain to Sunlight Corp., whose management is planning to purchase an automated tanning equipment.
1. Economic life of equipment – 8 years.
2. Disposal value after 8 years – nil.
3. Estimated net annual cash inflows for each of the 8 years – P81,000.
4. Time-adjusted internal rate of return – 14%
5. Cost of capital of Sunlight Corp – 16%
6. The table of present values of P1 received annually for 8 years has these factors: at 14% = 4.639, at 16% = 4.344
7. Depreciation is approximately P46,970 annually.
Find the required increase in annual cash inflows in order to have the time-adjusted rate of return approximately equal the cost of capital. (M)
a. P5,501 c. P4,344
b. P6,501 d. P5,871 RPCPA 0594
Required Annual Before Tax Cash Flow Even Cash Flow
90. Payback Company is considering the purchase of a copier machine for P42,825. The copier machine will be expected to be economically productive for 4 years. The salvage value at the end of 4 years is negligible. The machine is expected to provide 15% internal rate of return.
The company is subject to 40% income tax rate. The present value of an ordinary annuity of 1 for 4 periods is 2.85498. In order to realize the IRR of 15%, how much is the estimated before-tax cash inflow to be provided by the machine?(M)
A. P17,860 C. P25,000
B. P15,000 D. P35,700
91. Scott Corporation’s new project calls for an investment of $10,000. It has an estimated life of 10 years. The IRR has been calculated to be 15 percent. If cash flows are evenly distributed and the tax rate is 40 percent, what is the annual before-tax cash flow each year? (Assume depreciation is a negligible amount.) (M)
92. Para Co. is reviewing the following data relating to an energy saving investment proposal:
Cost $50,000
Residual value at the end of 5 years 10,000
Present value of an annuity of 1 at 12% for 5 years 3.60
Present value of 1 due in 5 years at 12% 0.57
What would be the annual savings needed to make the investment realize a 12% yield?(M)
a. $8,189 c. $12,306
b. $11,111 d. $13,889
Required Cash Flow for a Certain Year
Even Cash Flow, Ignore Income Taxes, No Present Value Table
39. (Ignore income taxes in this problem.) Hilltop Company invested $100,000 in a two-year project. The cash flow was $40,000 for the first year. Assuming that the internal rate of return was exactly 12%, what was the cash flow for the second year of the project? (M)
a. $51,247. c. $64,284.
b. $60,000. d. $80,652. AICPA adapted
Required Investment & Annual Cash Flow
Questions 85 & 86 are based on the following information. G & N 9e (Ignore income taxes in this problem.) The Finney Company is reviewing the possibility of remodeling one of its showrooms and buying some new equipment to improve sales operations.
The remodeling would cost $120,000 now and the useful life of the project is 10 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 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
85. The immediate cash outflow required for this project would be: (E)
a. $(120,000). c. $(90,000).
b. $(150,000). d. $(130,000).
86. What would the annual net cash inflows from this project have to be in order to justify investing in remodeling? (M)
a. $14,495 c. $16,147
b. $35,842 d. $29,158
Required Break-even Sales Peso Sales
14. Calculator Company proposes to invest $6 million in a new calculator making plant. Fixed costs are $1 million a year. A calculator costs $4 million to manufacture and can be sold for
$19. If the plant lasts for 3 years and the cost of capital is10%, what is the approximate break-even level of annual sales? (Assume no taxes.) (M)
A. $227,550 C. $67,000
B. $160,900 D. None of the above B & M
Unit Sales
15. Financial Calculator Company proposes to invest $9 million in a new calculator making plant.
Fixed costs are $2 million a year. A financial calculator costs $8 per unit to manufacture and can be sold for $24 per unit. If the plant lasts for 4 years and the cost of capital is 20%, what is the break-even level of annual rates? (Assume no taxes.) (M)
A. 342,500 units C. 125,000 units
B. 217,500 units D. None of the above B & M
17. Taj Mahal Tour company proposes to invest $3 million in a new tour package. Fixed costs are
$1 million per year. The tour package costs $500 and can be sold at $1500 per package to tourists. This tour package is expected to be attractive for the next five years. If the cost of capital is 20%, what is the break-even number of tourists per year? (Ignore taxes, give an approximation.)
A. 2000 C. 15000
B. 1000 D. None of the above B & M
18. Hammer Company proposes to invest $6 million in a new type of hammer-making equipment.
The fixed costs are $0.5 million per year. The equipment is expected to last for 5 years. The manufacturing costs per hammer is $1. Calculate the break-even volume per year. (Ignore taxes.)
A. 400,000 C. 250,000
B. 500,000 D. None of the above B & M
Required Unit Sales & Selling Price
Questions 55 and 56 are based on the following information. Pol Bobadilla Moorman Products Company is considering a new product that will sell for P100 and have a variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500,000 and having a five-year useful life and no salvage value is needed, and will be depreciated using the straight-line method. The machine has cash operating costs of P20,000 per year. The firm is in
the 40% tax bracket and has cost of capital of 12%. The present value of 1, end of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478.
55. How many units per year must the firm sell for the investment to earn 12% internal rate of return?
A. 12,838 C. 8,225
B. 10,403 D. 7,625
56. Suppose the 20,000 estimated volume is sound, but the price is in doubt, What is the selling price (rounded to nearest peso) needed to earn a 12% internal rate of return?
A. P81 C. P70
B. P85 D. P90
IRR Given Payback Period
93. Smoot Automotive has implemented a new project that has an initial cost, and then generates inflows of $10,000 a year for the next seven (7) years. The project has a payback period of 4.0 years. What is the project's internal rate of return (IRR)?
A. 14.79% C. 18.54%
B. 16.33% D. 15.61% Gleim
IRR Given Cash Flows, Ignore Income Taxes Even Cash Flows, No Present Value Table
94. What is the approximate IRR for a project that costs $50,000 and provides cash inflows of
$20,000 for 3 years?
A. 10% C. 22%
B. 12% D. 27% Gleim
95. Pena Company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the project?
A. 6% C. 8%
B. 7% D. 9% Gleim
96. Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for 5 years?
A. NPV = $36,274. C. IRR = 1.4%.
B. NPV = $20,000. D. IRR is greater than 10%. Gleim
45. An investment opportunity costing $150,000 is expected to yield net cash flows of $45,000 annually for five years. The IRR of the investment is between
a. 10 and 12%. c. 14 and 16%.
b. 12 and 14%. d. 16 and 18%. D, L & H 9e
45 An investment opportunity costing $180,000 is expected to yield net cash flows of $53,000 annually for five years. The IRR of the investment is between
a. 10 and 12% c. 14 and 16%.
b. 12 and 14%. d. 16 and 18%. L & H 10e
49. An investment opportunity costing $400,000 is expected to yield net cash flows of $75,000 annually for eight years. The IRR of the investment is between
a. 10 and 12%. c. 14 and 16%.
b. 12 and 14%. d. 16 and 18%. D, L & H 9e
49. An investment opportunity costing $200,000 is expected to yield net cash flows of $39,000 annually for eight years. The IRR of the investment is between
a. 10 and 12%. c. 14 and 16%.
b. 12 and 14%. d. 16 and 18%. L & H 10e
*. MLF Corporation is evaluating the purchase of a P500,000 die attach machine. The cash inflows expected from the investment is P145,000 per year for five years with no equipment salvage value. The cost of capital is 12%. The net present value factor for five (5) years at 12% is 3.6048 and at 14% is 3.4331. The internal rate of return for this investment is (M)
a. 3.45% c. 13.8%
b. 2.04% d. 15.48% RPCPA 1097
36. (Ignore income taxes in this problem.) Sue Falls is the president of Sports, Inc. She is considering buying a new machine that would cost $14,125. Sue has determined that the new machine promises a internal rate of return of 12%, but Sue has misplaced the paper which tells the annual cost savings promised by the new machine. She does remember that the machine has a projected life of 10 years. Based on these data, the annual cost savings are:
(M)a. it is impossible to determine from the data given.
b. $1,412.50.
c. $2,500.00.
d. $1,695.00. G & N 9e
40. (Ignore income taxes in this problem.) Joe Flubup is the president of Flubup, Inc. He is considering buying a new machine that would cost $25,470. Joe has determined that the new machine promises a 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, the annual cost savings are: (M)
a. impossible to determine from the data given.
b. $2,122.50.
c. $4,500.00.
d. $4,650.00. G & N 9e
97. A firm is considering a project requiring an investment of $13,500. The project would generate annual cash inflows of $3,148 per year for the next 7 years. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The approximate internal rate of return for the project is
a. 6% d. 14%
b. 8% e. 18%.
c. 12% H & M
98. A firm is considering a project requiring an investment of $100,000. The project would generate annual cash inflows of $27,739 per year for the next 5 years. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The approximate internal rate of return for the project is
a. 9% d. 16%
b. 10% e. 28%
c. 12% H & M
99. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of
$100 per year at the end of each year for 20 years. Find the internal rate of return to the nearest whole percentage point. (E)
a. 9% d. 3%
b. 7% e. 11%
c. 5% Brigham
100. Foster Company is considering the purchase of a new machine for $38,000. The machine would generate a net cash inflow of $11,607 per year for five years. At the end of five years, the machine would have no salvage value. The company’s cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention.
What is the internal rate of return for the machine rounded to the nearest percent, assuming no taxes are paid?
a. 12% c. 14%
b. 18% d. 16% H & M
101. Brown Corporation recently purchased a new machine for $339,013.20 with a ten-year life.
The old equipment has a remaining life of ten years and no disposal value at the time of replacement. Net cash flows will be $60,000 per year. What is the internal rate of return? (E)
a. 12% c. 20%
b. 16% d. 24% Horngren
102. Soda Manufacturing Company provides vending machines for soft-drink manufacturers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of three years and the new equipment has a value of
$52,650 with a three-year life. The expected additional cash inflows are $25,000 per year.
What is the internal rate of return? (E)
a. 20% c. 10%
b. 16% d. 8% Horngren
103. The Zeron Corporation recently purchased a new machine for its factory operations at a cost of $921,250. The investment is expected to generate $250,000 in annual cash flows for a period of six years. The required rate of return is 14%. The old machine has a remaining life of six years. The new machine is expected to have zero value at the end of the six-year period.
The disposal value of the old machine at the time of replacement is zero. What is the internal rate of return? (M)
a. 15% c. 17%
b. 16% d. 18% Horngren
57. (Ignore income taxes in this problem.) The following data pertain to an investment proposal:
Present investment required $26,500
Annual cost savings $ 5,000
Projected life of the investment 10 years
Projected salvage value $
-0-The internal rate of return, interpolated to the nearest tenth of a percent, would be: (M)
a. 11.6%. c. 13.6%.
The internal rate of return, interpolated to the nearest tenth of a percent, would be: (M)
a. 13.3%. c. 15.3%.
b. 12.1%. d. 12.7%. G & N 9e
59. (Ignore income taxes in this problem.) The following data pertain to an investment proposal:
Present investment required $14,000
Annual cost savings $ 2,500
Projected life of the investment 8 years
Projected salvage value $
-0-Required rate of return 6%
The internal rate of return, interpolated to the nearest tenth of a percent, would be: (M)
a. 6.7%. c. 8.7%.
b. 9.3%. d. 7.3%. G & N 9e
60. (Ignore income taxes in this problem.) Overland Company has gathered the following data on a proposed investment project:
The internal rate of return on this investment is closest to: (D)
a. 23.4%. c. 22.7%
The internal rate of return is (do not interpolate): (M)
a. 14%. c. 10%.
b. 12%. d. 5%. G & N 9e
104. Whitney Crane Inc. has the following independent investment opportunities for the coming year:
Project Cost Annual Cash Inflows Life (Years) IRR
A $10,000 $11,800 1
B 5,000 3,075 2 15
C 12,000 5,696 3
D 3,000 1,009 4 13
The IRRs for Projects A and C, respectively, are: (M)
a. 16% and 14% d. 18% and 13%
b. 18% and 10% e. 16% and 13%
c. 18% and 20% Brigham
105. Genuine Products Inc. requires a new machine. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash flow analysis indicates the following:
Year Machine A Cash Flow Machine B Cash Flow
0 -$2,000 -$2,000
1 0 832
2 0 832
3 0 832
4 3,877 832
What is the internal rate of return for each machine? (M)
a. IRRA = 16%; IRRB = 20% d. IRRA = 18%; IRRB = 24%
b. IRRA = 24%; IRRB = 20% e. IRRA = 24%; IRRB = 26%
c. IRRA = 18%; IRRB = 16% Brigham
Even Cash Flow, With Present Value Table
*. What is the discounted rate of return, to the nearest percent of an investment of P100,000 that gives an annual income of P12,000 over a 15-year period? (E)
Abridged table of present value of P1.00 received annually for N years
N 6% 8% 10% 12%
15 9.712 8.559 7.606 6.811
a. 6% c. 10%
b. 8% d. none of these RPCPA 1087
*. Mr. Castillo is thinking to buy a lathe machine for P10,000. This machine will result in annual cash inflow of P2,000 a year for ten-year period. Below is an abridged table showing the present value of annuity of P1.00 for N periods.
Years 14% 15% 16%
9 4.946 4.772 4.607
10 5.216 5.019 4.833
11 5.453 5.234 5.029
Using the short-cut method, the discounted rate of return on the project is (E)
a. 13% c. 15% (15.098%)
b. 14% d. 16% RPCPA 0581
IRR Given After Tax Cash Flows Even Cash Flows, No Present Value Table
26. Valentine Company is considering investing in a new project. The project will need an initial
26. Valentine Company is considering investing in a new project. The project will need an initial