MC practice key

Question 1

In the equipment replacement decisions, which one of the following does not affect the decision-making process?

a) current disposal price of the old equipment
b) operating costs of the old equipment
c) original fair value of the old equipment
d) operating costs of the new equipment

Answer 1

c) original fair value of the old equipment

Question 2

The NPV method assumes that cash flows are reinvested at

a) the discount rate used in the analysis
b) the internal rate of return
c) the rate that would cause the payback method to show a NPV greater than zero
d) the rate that would cause the payback method to show a NPV equal the project’s IRR adjusted for taxes

Answer 2

a) the discount rate used in the analysis

Question 3

Which of the following is the strength of the payback method?

a) it considers cash flows for all years of the project
b) it distinguishes cash inflows from cash outflows
c) it considers the time value of money
d) it is easy to understand

Answer 3

d) it is easy to understand

Question 4

NPV = 300, what are the conclusions?

a) the NPV is too small; the project should be rejected
b) the rate of return is greater than the required rate of return
c) the NPV is not suitable for evaluating this project
d) the investment project should only be accepted if NPV is zero

Answer 4

b) the rate of return is greater than the required rate of return

Question 5

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

a) Increased operating costs
b) Overhaul of equipment
c) Salvage value of equipment when project is complete
d) Depreciation expense

Answer 5

d) Depreciation expense

Question 6

The cash payback period is computed by dividing the cost of the capital investment by the
a) Annual net income
b) Net annual cash inflow
c) Present value of cash inflow
d) Present value of the net income

Answer 6

b) Net annual cash inflow