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1.
Ataxia Fitness Center is considering an investment in some additional weight

training equipment. The equipment has an estimated useful life of 10 years
with no salvage value at the end of the 10 years. Ataxia expects net annual
cash inflows of $54,000 from this equipment. Ataxia's internal rate of return
on this equipment is 14%. Ataxia's discount rate is also 14%. What is the
payback period on this equipment?
A) 1.92 years B) 2.70 years C) 3.70 years D) 5.22 years
54000 * 5.216 = $281664
281664 / 54000 = 5.22 years
Answer: D
2. Assume you can invest money at a 14% rate of return. How much money must
be invested now in order to be able to withdraw $5,000 from this investment
at the end of each year for 8 years, the first withdrawal occurring one year
from now?
A) $24,840 B) $23,195 C) $21,440 D) $1,755
5000 * 4.639 = $23195
‫ ؞‬The answer is B
3. Neu Company is considering the purchase of an investment that has a positive
net present value based on a discount rate of 12%. The internal rate of return
would be:
A) zero. B) 12%. C) greater than 12%. D) less than 12%.
‫ ؞‬The answer is C
4. The net present value of a proposed investment is negative. Therefore, the
discount rate used must be:
A) greater than the project's internal rate of return.
B) less than the project's internal rate of return.
C) greater than the minimum required rate of return.
D) less than the minimum required rate of return.
Answer: A
5. Some investment projects require that a company increase its working capital.
Under the net present value method, the investment and eventual recovery of
working capital should be treated as:
A) an initial cash outflow.
B) a future cash inflow.
C) both an initial cash outflow and a future cash inflow.
D) irrelevant to the net present value analysis.
Answer: C
6. Ludington, Inc. purchased a new machine on January 1 for $350,000. The
machine is expected to have a useful life of 8 years and no salvage value.
Straight-line depreciation is to be used. The internal rate of return on the
project is 14%. The present value of the annual cash inflows generated by the
machine was calculated to be $371,120 using the internal rate of return of
14%. What was the annual cash inflow that was used in the calculation of the
present value?
A) $350,000 x 0.351 B) $350,000 ÷ 4.639
C) $371,120 x 0.351 D) $371,120 ÷ 4.639
Answer: D
7. An investment project has the following characteristics:
Cost of equipment ............. $22,820
Annual cash inflows .......... $5,000
Internal rate of return ......... 12%
The life of the equipment would be:
A) It is impossible to determine from the data given. B) 7 years
C) 12 years D) 4.56 years.
5000 * 4.564 = $22820
Answer: B
8. Stratford Company purchased a machine with an estimated useful life of seven
years. The machine will generate cash inflows of $9,000 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 $17,000?
A) $43,812 B) $26,812 C) $17,000 D) $22,195
0 Inv. 1.00 ?
1-7 $9000 4.868 43812
-----------
17000
‫ ؞‬Inv. = 43812 – 17000 = $26812
Answer: B
9. Anthony operates a part time auto repair service. He estimates that a new
diagnostic computer system will result in increased cash inflows of $1,500 in
Year 1, $2,100 in Year 2, and $3,200 in Year 3. If Anthony's required rate of
return is 10%, then the most he would be willing to pay for the new computer
system would be:
A) $4,599 B) $5,501 C) $5,638 D) $5,107
1500 * 0.909 = $1363.5
2100 * 0.826 = $1734.6
3200 * 0.751 = $2403.2
------------
$5501.3
Answer: B
10.Fossa Road Paving Company is considering an investment in a curb-forming
machine. The machine will cost $240,000, will last 10 years, and will have a
$40,000 salvage value at the end of 10 years. The machine is expected to
generate net cash inflows of $60,000 per year in each of the 10 years. Fossa's
discount rate is 18%. What is the net present value of this machine?
A) $5,840 B) $37,280 C) $(48,780) D) $69,640
0 240000 1.00 (240000)
1-9 60000 4.303 258180
10 60000 + 40000 0.191 19100
------------
$ 37280
Answer: B

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Ataxia Fitness Center is considering an investment in some additional weight

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