Principles of Managerial Finance, 13e, Global Edition (Gitman) Chapter 11 Capital Budgeting Cash Flows
11.1 Discuss the three three major cash flow flow components. components. 1) The three major cash flow components include the initial investment, operating cash inflows, and terminal cash flows. Answer: TRU Topic: To pic: !ajor "ash #low "omponents $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) The three major cash flow components include the initial investment, non*operating cash inflows, and terminal cash flows. Answer: #A+% Topic: To pic: !ajor "ash #low "omponents $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) Accounting figures and cash flows are not necessaril- the same due to the presence of certain non*cash ependitures on the firm/s income statement. Answer: TRU Topic: To pic: Relevant "ash "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 0) The relevant cash flows for a proposed capital ependiture are the incremental after*ta cash outflows and resulting suse2uent inflows. Answer: TRU Topic: To pic: Relevant "ash "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 3) 4nitial cash flows and suse2uent operating cash flows for a project are sometimes referred to as A) necessar- cash flows. &) relevant cash flows. ") consistent cash flows. D) ordinar- cash flows. Answer: & Topic: To pic: Relevant "ash "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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8) Relevant cash flows for a project are est descried as A) incidental cash flows. &) incremental cash flows. ") sun( cash flows. D) accounting cash flows. Answer: & Topic: To pic: Relevant "ash "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 9) Relevant cash flows are the incremental cash c ash outflows and inflows associated with a proposed capital ependiture. Answer: TRU Topic: To pic: Relevant "ash "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) 4ncremental cash flows represent the additional cash flows epected as a direct result of the proposed project. Answer: TRU Topic: To pic: 4ncremental "ash #lows $uestion %tatus: ;ew AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills <) %hould financing costs such as the returns paid to ondholders and stoc(holders e considered in computing after ta operating cash flows= >h- or wh- not= Answer: #inancing costs are not an incremental incremental cash flow for capital udgeting purposes. #inancing costs are a direct conse2uence of how the project is financed, not whether the project is economicall- viale. #inancing costs are emedded in the re2uired rate of return used to discount project cash flows. Topic: To pic: Relevant "ash "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 11. Discuss relevant relevant cash flows, flows, epansion versus replacement replacement decisions, sun( sun( costs and opportunit- costs, and international capital udgeting. 1) 4f a new asset is eing considered as a replacement for an old asset, the relevant cash flows would e found - adding together the epected cash flows still remaining on the old asset to the epected cash flows for new asset. Answer: #A+% Topic: To pic: Replacement 7roject Anal-sis $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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) %un( costs are cash outla-s that have alread- een made and therefore have no effect on the cash flows relevant to the current decision. As a result, sun( costs should not e included as relevant in computing a project/s incremental cash flows. Answer: TRU Topic: To pic: %un( "osts $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) ?pportunit- costs should e included as cash ca sh cash flows when determining a project/s incremental cash flows. Answer: TRU Topic: To pic: ?pportunit- "ost $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 0) A sun( cost is a cash flow that could e reali@ed from the est alternative use of an owned asset. Answer: #A+% Topic: To pic: %un( "osts $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 3) An opportunit- cost is a cash flow that could e reali@ed from the est alternative use of an owned asset. Answer: TRU Topic: To pic: ?pportunit- "ost $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 8) A sun( cost is a cash outla- that has alread- een made and therefore has no effect on the cash flows relevant to a current decision. Answer: TRU Topic: To pic: %un( "osts $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 9) "ompanies involved in international capital udgeting ud geting projects can minimi@e the long*term currenc- ris( - financing the foreign investment at least partl- in the local capital mar(ets. Answer: TRU Topic: To pic: 4nternational "apital &udgeting $uestion %tatus: ;ew AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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) "ompanies involved in international capital udgeting ud geting projects can minimi@e political ris(s structuring the investment as a joint venture and selecting a well*connected local partner. Answer: TRU Topic: To pic: 4nternational "apital &udgeting $uestion %tatus: ;ew AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills <) >hen ma(ing replacement decisions, the development of relevant cash flows is complicated when compared to epansion decisions, due to the need to calculate cash inflows. A) conventional &) non*conventional ") incremental D) initial Answer: " Topic: To pic: Replacement 7roject Anal-sis $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 16) 4n developing the cash flows for an epansion project, the anal-sis is the same as the anal-sis for replacement projects where A) all cash flows from the old assets are e2ual. &) prior cash flows are irrelevant. ") all cash flows from the old asset are @ero. D) cash inflows e2ual cash outflows. Answer: " Topic: To pic: pansion versus Replacement 7roject Anal-sis $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 11) "ash outla-s that had een previousl- made and have no effect on the cash flows relevant to a current decision are called A) incremental historical costs. &) incremental past epenses. ") opportunit- costs foregone. D) sun( costs. Answer: D Topic: To pic: %un( "osts $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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1) "ash flows that could e reali@ed from the est alternative use of an owned asset are called A) incremental costs. &) lost resale opportunities. ") opportunit- costs. D) sun( costs. Answer: " Topic: To pic: %un( "osts $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 1) 7lease eplain the difference etween a sun( cost and an opportunit- cost and give an eample of each t-pe of cost. Answer: There is no one correct answer to this 2uestion. A correct answer depends upon the student/s response. Topic: To pic: %un( "osts versus versus ?pportunit- "osts "osts $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 11. "alculate the initial investment investment associated with a proposed capital ependiture. 1) To calculate the initial investment, we sutract all cash inflows occurring at time @ero from all cash outflows occurring at time @ero. Answer: TRU Topic: To pic: 4nitial 4nvestment $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) The asic cash flows that must e considered when determining the initial investment associated with a capital ependiture are the installed cost of the new asset, the after*ta proceeds Bif an-) from the sale of an old asset, and the change Bif an-) in net wor(ing capital. Answer: TRU Topic: To pic: 4nitial 4nvestment $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) The change in net wor(ing capital regardless of whether an increase or decrease is not taale ecause it merel- involves a net uild*up or reduction of current alance sheet accounts. Answer: TRU Topic: ;et >or(ing >or(ing "apital 4nvestment 4nvestme nt $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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0) 4f an investment in a new asset results in a change in current assets that eceeds the change in current liailities, this change in net wor(ing capital represents an initial cash outflow. Answer: TRU Topic: ;et >or(ing >or(ing "apital 4nvestment 4nvestme nt $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 3) 4f an investment in a new asset results in a change in current liailities that eceeds the change in current assets, this change in net wor(ing capital represents an initial cash outflow. Answer: #A+% Topic: ;et >or(ing >or(ing "apital 4nvestment 4nvestme nt $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 8) >hen evaluating a capital udgeting project, the change in net wor(ing capital must e considered as part of A) the operating cash inflows. &) the initial investment. ") the incremental operating cash inflows. D) the operating cash outflows. Answer: & Topic: ;et >or(ing >or(ing "apital 4nvestment 4nvestme nt $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 9) The change in net wor(ing capital when evaluating a capital udgeting decision is A) the change in current liailities minus the change in current assets. &) the increase in current assets. ") the increase in current liailities. D) the change in current assets minus the change in current liailities. Answer: D Topic: ;et >or(ing >or(ing "apital 4nvestment 4nvestme nt $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) An important cash inflow in the anal-sis of initial cash flows for a replacement project is A) taes. &) the cost of the new asset. ") installation cost. D) the sale value of the old asset. Answer: D Topic: To pic: Replacement 7roject Anal-sis $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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<) 4n evaluating the initial investment for a capital u dgeting project, A) an increase in net wor(ing capital cap ital is considered a cash inflow. &) a decrease in net wor(ing capital is considered a cash outflow. ") an increase in net wor(ing capital is considered a cash outflow. D) net wor(ing capital does not have to e considered. Answer: " Topic: ;et >or(ing >or(ing "apital 4nvestment 4nvestme nt $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 16) The asic variales that must e considered in determining the initial investment associated with a capital ependiture are all of the following C"7T A) incremental annual savings produced - the new asset. &) cost of the new asset. ") proceeds from the sale of the eisting asset. D) taes on the sale of an eisting asset. Answer: A Topic: To pic: 4nitial 4nvestment $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 11) A corporation is considering epanding operations to meet growing demand. >ith the capital epansion, the current accounts are epected to change. !anagement epects cash to increase 6,666, accounts receivale - 06,666, and inventories - 86,666. At the same time accounts pa-ale will increase - 36,666, accruals - 16,666, and long*term det - 166,666. The change in net wor(ing capital is A) an increase of 16,666. &) a decrease of 06,666. ") a decrease of 16,666. D) an increase of 86,666. Answer: D Topic: ;et >or(ing >or(ing "apital 4nvestment 4nvestme nt $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 1) A corporation is considering epanding epand ing operations to meet growing demand. >ith the capital epansion the current accounts are epected to change. !anagement epects cash to increase 16,666, accounts receivale - 6,666, and inventories - 6,666. At the same time accounts pa-ale will increase - 06,666, accruals - 6,666, and long*term det - 6,666. The change in net wor(ing capital is A) an increase of 16,666. &) a decrease of 16,666. ") a decrease of <6,666. D) an increase of 6,666. Answer: & Topic: ;et >or(ing >or(ing "apital 4nvestment 4nvestme nt $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 9 "op-right 5 61 7earson ducation
1) 4f accounts receivale increase - 1,666,666, inventor- decreases - 366,666, and accounts pa-ale increase - 366,666, net wor(ing capital would A) decrease - 366,666. &) increase - 1,366,666. ") increase - ,666,666. D) eperience no change. Answer: D Topic: ;et >or(ing >or(ing "apital 4nvestment 4nvestme nt $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 10) All of the following would e used in the computation of an investment/s initial investment C"7T A) the annual after ta inflow epected from the investment. &) the initial purchase price of the investment. ") the resale value of an old asset eing replaced. D) the ta on the sale of an old asset eing replaced. Answer: A Topic: To pic: 4nitial 4nvestment $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 11.0 Discuss the ta implications associated with the the sale of an old asset. 1) Under !A"R% depreciation, the depreciale value of an asset is e2ual to the asset/s purchase price minus an- installation costs. Answer: #A+% Topic: Depreciale Deprec iale Ealue Ealue of an Asset $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) The oo( value of an asset is e2ual to its depreciale value minus the accumulated depreciation. Answer: TRU Topic: &oo( Ealue Ealue of an Asset $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) 4n case of an eisting asset which is depreciale and is used in usiness usiness and is sold for a price e2ual to its initial purchase price, the difference etween the sales price and its oo( value is considered as recaptured depreciation and will e taed as ordinar- income. Answer: TRU Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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0) Recaptured depreciation is the portion of o f the sale price that is elow oo( value and has not een depreciated. Answer: #A+% Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 3) "apital gain is the portion of the sale price that is in ecess of the initial purchase price. Answer: TRU Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 8) Recaptured depreciation is the portion of o f the sale price that is in ecess of the initial purchase price. Answer: #A+% Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 9) 4f an asset is depreciale and used u sed in usiness, an- loss on the sale of the asset is deductile onl- against other capital gains income, not n ot against ordinar- income. Answer: #A+% Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) 4f an asset is sold for more than its initial purchase price, the gain on the sale is composed of of two parts: a capital gain and recaptured depreciation. Answer: TRU Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills <) 4f an asset is sold for oo( value, the gain on the sale is composed of two parts: a capital gain and recaptured depreciation. Answer: #A+% Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 16) 4f an asset is sold for less than its oo( value, the loss on the sale ma- e used to offset ordinar- operating income. Answer: TRU Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills < "op-right 5 61 7earson ducation
11) The oo( value of an asset is e2ual to the A) fair mar(et value minus the accounting value. &) original purchase price minus annual depreciation epense. ") original purchase price minus accumulated depreciation. D) depreciated value plus recaptured depreciation. Answer: " Topic: &oo( Ealue Ealue of an Asset $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 1) The ta treatment regarding the sale of eisting assets that are sold for more than the oo( value and more than the original purchase price results in A) an ordinar- ta enefit. &) no ta enefit or liailit-. ") recaptured depreciation taed as ordinar- income. D) a capital gain ta liailit- and recaptured depreciation taed as ordinar- income. Answer: D Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 1) The ta treatment regarding the sale of eisting assets that are sold for more than the oo( value ut less than the original purchase price results in A) an ordinar- ta enefit. &) a capital gain ga in ta liailit-. ") recaptured depreciation taed as ordinar- income. D) a capital gain ta liailit- and recaptured depreciation taed as ordinar- income. Answer: " Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 10) The ta treatment regarding the sale of eisting assets that are sold for their oo( value results in A) an ordinar- ta enefit. &) no ta enefit or liailit-. ") recaptured depreciation taed as ordinar- income. D) a capital gain ta liailit- and recaptured depreciation taed as ordinar- income. Answer: & Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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13) The ta treatment regarding the sale of eisting assets that are sold for less than the oo( value results in A) an ordinar- ta enefit. &) a capital loss ta enefit. ") recaptured depreciation taed as ordinar- income. D) a capital gain ta liailit- and recaptured depreciation taed as ordinar- income. Answer: & Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 18) A corporation is selling an eisting asset for 1,666. The asset, when purchased, cost 16,666, was eing depreciated under !A"R% using a five*-ear recover- period, and has een depreciated for four full -ears. 4f the assumed ta rate is 06 percent on ordinar- income and capital gains, the ta effect of this transaction is A) 6 ta liailit-. &) 9,386 ta liailit-. ") 0,066 ta liailit-. D) 9,96 ta liailit-. liailit-. Answer: D Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 19) A corporation is selling an eisting asset for 1,966. The asset, when purchased, p urchased, cost 16,666, was eing depreciated under !A"R% using a five*-ear recover- period, and has een depreciated for four full -ears. 4f the assumed ta rate is 06 percent on ordinar- income and capital gains, the ta effect of this transaction is A) 6 ta liailit-. &) 06 ta liailit-. ") ,186 ta liailit-. D) ,186 ta enefit. Answer: A Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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1) A corporation is selling an eisting asset for 1,666. The asset, when purchased, p urchased, cost 16,666, was eing depreciated under !A"R% using a five*-ear recover- period, and has een depreciated for four full -ears. 4f the assumed ta rate is 06 percent on ordinar- income and capital gains, the ta effect of this transaction is A) 6 ta liailit-. &) 1,166 ta liailit-. ") ,866 ta liailit-. D) 6 ta enefit. Answer: D Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 1<) A firm is selling an eisting asset for 3,666. The asset, when purchased, cost 16,666, was eing depreciated under !A"R% using a five*-ear recover- period and has een depreciated for four full -ears. 4f the assumed ta rate is 06 percent p ercent on ordinar- income and capital gains, the ta effect of this transaction is A) 6 ta liailit-. &) 1,6 ta liailit-. ") 1,186 ta liailit-. D) ,666 ta enefit. Answer: & Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 6) A loss on the sale of an asset a sset that is depreciale and used in usiness is F F a loss on the sale of a non*depreciale asset is . A) deductile from capital gains incomeF deductile from ordinar- income &) deductile from ordinar- incomeF deductile onl- against capital gains ") a credit against the ta liailit-F not deductile D) not deductileF deductile onl- against capital gains Answer: & Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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1) A corporation has decided to replace an eisting asset with a newer model. Two Two -ears ago, the eisting asset originall- cost 6,666 and was eing depreciated under !A"R% using a five* -ear recover- period. The eisting asset can e sold for 3,666. The new asset will cost 93,666 and will also e depreciated under un der !A"R% using a five*-ear recover- period. 4f the assumed ta rate is 06 percent on ordinar- income and capital gains, the initial investment is A) 0,666. &) 3,006. ") 30,06. D) 36,666. Answer: " Topic: To pic: 4nitial 4nvestment $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills ) A corporation has decided to replace an eisting asset with a newer model. Two Two -ears ago, the eisting asset originall- cost 96,666 and was eing depreciated under !A"R% using a five* -ear recover- period. The eisting asset can e sold for 6,666. The new asset will cost 6,666 and will also e depreciated under un der !A"R% using a five*-ear recover- period. 4f the assumed ta rate is 06 percent on ordinar- income and capital gains, the initial investment is A) 0,386. &) 00,86. ") 0<,06. D) 9,866. Answer: A Topic: To pic: 4nitial 4nvestment $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills ) The portion of an asset/s sale price that is aove its oo( value and elow its initial purchase price is called A) a capital gain. &) recaptured depreciation. ") a capital loss. D) oo( value. Answer: & Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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0) The portion of an asset/s sale price that is elow its oo( value and elow its initial purchase price is called A) a capital gain. &) recaptured depreciation. ") a capital loss. D) oo( value. Answer: " Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 3) "ompute the initial purchase price for an asset with oo( value of 0,66 0 ,66 and total accumulated depreciation of 3,66. Answer: 4nitial purchase price G oo( value H accumulated depreciation G 0,66 H 3,66 G 16,666 Topic: Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 8) A mier was purchased two -ears ago for 16,666 and can e sold for 13,666 toda-. The mier has een depreciated using the !A"R% 3*-ear recover- period and the firm pa-s 06 percent taes on oth ordinar- income and capital gain. Ba) "ompute recaptured depreciation depreciation and capital gain Bloss), if an-. an-. B) #ind the firm/s firm/s ta liailitliailit-.. Answer: Ba) &oo( Ea Ealue G 16,666 B1 * 6.6 * 6.) 6.) G 39,866 Recaptured depreciation G 16,666 * 39,866 G 8,066 "apital gain G 13,666 * 16,666 G 3 ,6 6 6 89,066 B) Ta Ta liailitliailit- G 89,066 I 6.06 G 8,<86 8,<86 Topic: To pic: !A"R% Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 9) An asset was purchased three -ears ago for 166,666 and an d can e sold for 06,666 06 ,666 toda-. The asset has een depreciated using the !A"R% 3*-ear recover- period and the firm pa-s 06 percent taes on oth ordinar- income and capital gain. Ba) "ompute recaptured depreciation depreciation and capital gain Bloss), if an-. an-. B) #ind the firm/s firm/s ta liailitliailit-.. Answer: Ba) &oo( Ea Ealue G 166,666 B1 * 6.6 * 6. * 6.1<) 6.1<) G <,666 Recap captured depreciation G 06,666 666 * <,666 G 11,66 ,666 "apital gain G 6 11,666 B) Ta Ta liailitliailit- G 11,666 11,666 I 6.06 G 0,066 Topic: To pic: !A"R% Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 10 "op-right 5 61 7earson ducation
) A machine was purchased two -ears ago for 16,666 and can e sold for 36,666 toda-. The machine has een depreciated using the !A"R% 3*-ear recover- period and the firm pa-s 06 percent taes on oth ordinar- income and capital gains. Ba) "ompute recaptured depreciation depreciation and capital gain Bloss), if an-. an-. B) #ind the firm/s firm/s ta liailitliailit-.. Answer: Ba) &oo( Ea Ealue G 16,666 B1 * 6.6 * 6.) 6.) G 39,866 Recaptured depreciation G 6 "apital loss G 39,866 * 36,666 G 9 ,866 B) Ta Ta enefit enefit G 9,866 I 6.06 G ,606 ,606 Topic: To pic: !A"R% Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills <) "ompute the depreciation values for an asset which costs 33,666 and re2uires 3,666 in installation costs using !A"R% 3*-ear recover- period. Answer: Depreciale Eal Ealue ue G 33,666 H 3,666 G 86,666
Topic: !A"R% Depreciation Topic: $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills Table 11.1
#ine 7ress is considering replacing the eisting press with a more efficient press. The new press costs 33,666 and re2uires 3,666 in installation costs. The old press was purchased -ears ago for an installed cost of 3,666 and can e sold for 6,666 net of an- removal costs toda-. &oth presses are depreciated under the !A"R% 3*-ear recover- schedule. The firm is in 06 percent marginal ta rate. 6) "alculate the oo( value of the eisting press eing replaced. B%ee Tale 11.1) Answer: &oo( value of eisting press press G 3,666 I J1 * B6.6 H 6.)K G 18,66 Topic: To pic: 4nitial 4nvestment, !A"R% Depreciation Depreciation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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1) "alculate the ta effect from the sale of the eisting asset. B%ee Tale Tale 11.1) Answer: Ta: 6,666 * 18,66 G ,66 recaptured depreciation ,66 I 6.06 G 1,6 ta Topic: To pic: 4nitial 4nvestment, !A"R% Depreciation Depreciation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills ) "alculate the initial investment of the new asset. B%ee Tale 11.1) Answer:
Topic: 4nitial 4nvestment, !A"R% Depreciation Topic: Depreciation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 11.3 #ind the relevant operating cash inflows associated with a proposed capital ependiture. 1) All enefits epected from a proposed project must e measured on a cash flow asis which ma- e found - adding an- non*cash charges deducted as an epense on the firm/s income statement ac( to net profits after taes. Answer: TRU Topic: To pic: ?perating "ash #low $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) 4n evaluating a proposed project, incremental operating cash inflows are relevant cash flows. Answer: TRU Topic: To pic: ?perating "ash #low $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) 4n computing after*ta operating cash flows, oth operating costs and financing costs must e deducted from an- cash inflows received. Answer: #A+% Topic: To pic: ?perating "ash #low $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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0) 4n computing after*ta operating cash flows, onl- operating costs ut n ot financing costs must e deducted from an- cash inflows received. Answer: TRU Topic: To pic: ?perating "ash #low $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 3) &enefits epected from proposed capital ependitures must e on an after*ta asis ecause A) taes are cash outflows. &) no enefits ma- e used - the firm until ta claims are satisfied. ") there ma- also e ta enefits to e evaluated. D) it is common, accepted practice to do so. Answer: & Topic: To pic: Relevant "ash "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 8) ?ne asic techni2ue used to evaluate after*ta operating cash flows is to A) add noncash charges to net income. &) sutract depreciation from operating revenues. ") add cash epenses to net income. D) sutract cash epenses from noncash charges. Answer: A Topic: To pic: ?perating "ash #low $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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Table 11.2
"omputer Dis( Duplicators, 4nc. has een considering several capital investment proposals for the -ear eginning in 660. #or each investment proposal, the relevant cash flows and other relevant financial data are summari@ed in the tale elow. 4n the case of a replacement decision, the total installed cost of the e2uipment will e partiall- offset - the sale of eisting e2uipment. The firm is suject to a 06 percent ta rate on ordinar- income and an d on long*term capital gains. The firm/s cost of capital is 13 percent.
L;ot applicale 9) #or 7roposal 1, the cash flow pattern for the epansion project is . B%ee Tale Tale 11.) A) a mied stream and conventional &) a mied stream and non*conventional ") an annuit- and conventional D) an annuit- and non*conventional Answer: A Topic: To pic: pansion 7roject Anal-sis $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills ) #or 7roposal 1, the initial outla- e2uals . B%ee Tale 11.) 11.) A) 1,6,666 &) 1,006,666 ") 1,366,666 D) 1,86,666 Answer: " Topic: To pic: 4nitial ?utla$uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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<) #or 7roposal 1, the depreciation epense for -ear 1 is . . B%ee Tale Tale 11.) A) 116,066 &) 113,66 ") 136,666 D) 66,666 Answer: " Topic: To pic: 4ncremental Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 16) #or 7roposal 1, the annual incremental after*ta cash flow from operations for -ear 1 is . B%ee Tale Tale 11.) A) 86,666 &) 33,666 ") 66,666 D) 16,666 Answer: D Topic: To pic: 4ncremental ?perating "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 11) #or 7roposal , the cash flow pattern for the replacement project p roject is . B%ee Tale 11.) A) a mied stream and conventional &) a mied stream and non*conventional ") an annuit- and conventional D) an annuit- and non*conventional Answer: A Topic: To pic: "onventional versus ;onconventional "ash #lows #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 1) #or 7roposal , the oo( value of the eisting asset is . B%ee Tale 11.) A) 1,866 &) 0,066 ") 88,066 D) 6,666 Answer: A Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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1) #or 7roposal , the ta effect on the sale of the eisting asset results in . B%ee Tale Tale 11.) A) 1,666 ta liailit&) 10,386 ta liailit") 3,6 ta liailitD) 18,866 ta liailitAnswer: & Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 10) #or 7roposal , the initial outla- e2uals . B%ee Tale 11.) A) 16,96 cash outflow &) 180,386 cash outflow ") 136,666 cash outflow D) 189,36 cash outflow Answer: & Topic: To pic: 4nitial ?utla$uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 13) #or 7roposal , the incremental depreciation epense for -ear is . B%ee Tale 11.) A) 18,66 &) 8,066 ") ,066 D) 86,666 Answer: D Topic: To pic: 4ncremental Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 18) #or 7roposal , the annual incremental after*ta cash flow from operations for -ear is . B%ee Tale Tale 11.) A) 1,666 &) 0,666 ") 88,666 D) 0,666 Answer: " Topic: To pic: 4ncremental ?perating "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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19) #or 7roposal , the cash flow pattern for the replacement project is . B%ee Tale Tale 11.) A) a mied stream and conventional &) a mied stream and non*conventional ") an annuit- and conventional D) an annuit- and non*conventional Answer: A Topic: To pic: Replacement 7roject Anal-sis $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 1) #or 7roposal , the oo( value of the eisting asset is . B%ee Tale 11.) A) 1,666 &) 0,666 ") 3,666 D) 6,666 Answer: D Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 1<) #or 7roposal , the ta effect on the sale of the eisting asset results in . B%ee Tale Tale 11.) A) ,666 ta liailit&) 18,666 ta liailit") 6,666 ta liailitD) ,66 ta liailitAnswer: & Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 6) #or 7roposal , the initial outla- e2uals . B%ee Tale 11.) A) 196,066 &) 11,666 ") 1<8,666 D) 66,666 Answer: & Topic: To pic: 4nitial ?utla$uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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1) #or 7roposal , the incremental depreciation epense for -ear is . B%ee Tale 11.) A) 1,666 &) 0,666 ") 09,36 D) 36,36 Answer: " Topic: To pic: 4ncremental Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills ) #or 7roposal , the incremental depreciation epense for -ear 8 is . B%ee Tale 11.) A) 13,936 &) 16,936 ") ,666 D) 8,136 Answer: A Topic: To pic: 4ncremental Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills ) #or 7roposal , the annual incremental after*ta cash flow from operations for -ear is . B%ee Tale Tale 11.) A) 03,666 &) 93,136 ") <6,136 D) 16<,106 Answer: D Topic: To pic: 4ncremental ?perating "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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Table 11.3
"uda !arine ngines, 4nc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs 36,666 and has installation costs of ,666. The asset will e depreciated using a five*-ear recover- schedule. The eisting e2uipment, which originall- cost 3,666 and will e sold for 16,666, has een depreciated using an !A"R% five*-ear recover- schedule and three -ears of depreciation has alread- een ta(en. The new e2uipment is epected to result in incremental efore*ta e fore*ta net profits of 13,666 per -ear. The firm has a 06 percent ta rate. 0) The cash flow pattern for the capital investment proposal is . B%ee Tale 11.) 11.) A) a mied stream and conventional &) a mied stream and non*conventional ") an annuit- and conventional D) an annuit- and non*conventional Answer: A Topic: To pic: "onventional versus ;onconventional "ash #lows #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills 3) The oo( value of the eisting asset is . B%ee Tale 11.) A) 9,36 &) 13,666 ") 1,36 D) 3,666 Answer: A Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 8) The ta effect on the sale of the eisting asset results in . B%ee Tale 11.) 11.) A) 66 ta enefit &) 1,666 ta liailit") 1,166 ta liailitD) 8,666 ta liailitAnswer: " Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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9) The initial outla- e2uals e2u als . B%ee Tale Tale 11.) A) 01,166 &) 00,166 ") ,66 D) ,<86 Answer: & Topic: To pic: 4nitial 4nvestment $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills ) The incremental depreciation epense for -ear 1 is . B%ee Tale 11.) A) ,36 &) 9,866 ") 9,666 D) 9,<36 Answer: & Topic: To pic: 4ncremental Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills <) The incremental depreciation epense for -ear 3 is . B%ee Tale 11.) A) ,36 &) 3,116 ") 9,<36 D) 8,86 Answer: D Topic: To pic: 4ncremental Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 6) The annual incremental after*ta cash flow from operations for -ear 1 is . B%ee Tale 11.) A) 1,<36 &) 18,866 ") 3,866 D) 6,666 Answer: & Topic: To pic: 4ncremental ?perating "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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Table 11.4
Degnan Dance "ompan-, 4nc., a manufacturer of dance and eercise apparel, is considering replacing an eisting piece of e2uipment e2u ipment with a more sophisticated machine. The following information is given.
The firm pa-s 06 percent taes on ordinar- income and capital gains. 1) "alculate the oo( value of the eisting asset eing replaced. B%ee Tale 11.0) Answer: &oo( value of eisting e2uipment G 166,666 I J1 * B6.6 H 6.)K G 0,666 Topic: To pic: !A"R% Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills ) "alculate the ta effect from the sale of the eisting asset. B%ee Tale Tale 11.0) Answer: Ta: 163,666 * 166,666 G 3,666 capital gain I 6.0 G ,666 3,666 recaptured depreciation I 6.0 G 6,66 Total ta liailit,66 Topic: To pic: !A"R% Depreciation $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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) "alculate the initial investment re2uired for the new asset. B%ee Tale 11.0) Answer:
Topic: 4nitial 4nvestment Topic: $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 0) "alculate the incremental earnings efore depreciation and taes. B%ee Tale 11.0) 11.0) Answer:
Topic: 4ncremental &DT Topic: $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 3) "alculate the incremental depreciation. B%ee Tale 11.0) Answer:
Topic: 4ncremental Depreciation Topic: $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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8) %ummari@e the incremental after*ta cash flow Brelevant cash flows) for -ears t G 6 through t G 3. B%ee Tale 11.0) Answer:
Topic: 4ncremental "ash #lows Topic: $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 11.8 Determine the terminal cash flow associated associated with a proposed capital capital ependiture. 1) All of the following must e considered in computing the terminal value of a replacement project C"7T A) ?perating cash flow for the final -ear &) After*ta After*ta proceeds for the sales of the new asset ") After*ta After*ta proceeds for the sales of the old asset D) "hange in net wor(ing capital Answer: A Topic: Terminal "ash #lows $uestion %tatus: ;ew AA"%& 'uidelines: 'uidelines: Reflective thin(ing thin(ing s(ills s(ills
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) A corporation is evaluating the relevant cash flows for a capital udgeting decision and must estimate the terminal cash flow. The The proposed machine will e disposed of at the end of its usale life of five -ears at an estimated sale price p rice of 13,666. The machine has an original purchase price of 6,666, installation cost of 6,666, and will e depreciated under the five* -ear !A"R%. ;et wor(ing capital is epected to decline - 3,666. The firm has a 06 percent ta rate on ordinar- income and long*term capital gain. The terminal cash flow is A) 0,666. &) 18,666. ") 10,666. D) 8,666. Answer: & Topic: Terminal "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills ) A corporation is evaluating the relevant cash flows for a capital udgeting decision and must estimate the terminal cash flow. The The proposed machine will e disposed of at the end of its usale life of five -ears at an estimated sale price p rice of ,666. The machine has an original purchase price of 6,666, installation cost of 6,666, and will e depreciated under the five* -ear !A"R%. ;et wor(ing capital is epected to decline - 3,666. The firm has a 06 percent ta rate on ordinar- income and long*term capital gain. The terminal cash flow is A) 3,66. &) 9,66. ") ,66. D) 8,66. Answer: " Topic: Terminal "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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Table 11.4
Degnan Dance "ompan-, 4nc., a manufacturer of dance and eercise apparel, is considering replacing an eisting piece of e2uipment e2u ipment with a more sophisticated machine. The following information is given.
The firm pa-s 06 percent taes on ordinar- income and capital gains. 0) 'iven the information in Tale Tale 11.0, compute the initial investment. Answer:
Topic: 4nitial 4nvestment Topic: $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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3) 'iven the information in Tale 11.0, 11.0, compute the incremental annual cash flows. Answer:
Topic: 4ncremental ?perating "ash #lows Topic: $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 8) 'iven the information in Tale 11.0, 11.0, compute the pa-ac( period. Answer:
7& G H JB9,66 * 89,66)M0,186K G .8 -ears. Topic: To pic: 7a-ac( !ethod $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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9) 'iven the information in Tale 11.0 11.0 and 13 percent cost of capital, Ba) compute compute the net present present value. value. B) %hould the the project e accepted= accepted= Answer: Ba)
;7E G 99,1 * 9,66 G *<,< B) %ince ;7E N 6, the the project should should e rejected. rejected. Topic: ;et 7resent Ealue Ealue $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills Table 11.5
;uff #olding &o "ompan-, "ompan-, 4nc. is considering purchasing a new gluing machine. The gluing machine costs 36,666 and re2uires installation costs of ,366. This outla- would e partialloffset - the sale of an eisting gluer. The eisting gluer originall- cost 16,666 and is four -ears old. 4t is eing depreciated under !A"R% using a five*-ear recover- schedule and can currentl e sold for 13,666. The eisting gluer has a remaining useful life of five five -ears. 4f held until -ear 3, the eisting machine/s mar(et value would e @ero. ?ver its five*-ear life, the new machine should reduce operating costs Becluding depreciation) - 19,666 per -ear. Training Training costs of emplo-ees who will operate the new machine will e a one*time cost of 3,666 which should e included in the initial outla-. The new machine will e depreciated under !A"R% using a five* -ear recover- period. The firm has a 1 percent cost of capital and a 06 percent ta on ordinarincome and capital gains. ) The pa-ac( period for the project is . B%ee Tale 11.3) A) -ears &) -ears ") etween and 0 -ears D) etween 0 and 3 -ears Answer: " Topic: To pic: 7a-ac( !ethod $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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<) The ta effect of the sale of the eisting asset is . . B%ee Tale 11.3) A) a ta liailit- of ,06 &) a ta enefit of 1,366 ") a ta liailit- of ,6 D) a ta liailit- of 3,6 Answer: D Topic: Depreciation Deprec iation and Taes $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 16) The initial outla- for this project is . . B%ee Tale 11.3) A) 0,6 &) 06,6 ") 09,6 D) 3,106 Answer: " Topic: To pic: 4nitial ?utla$uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 11) The present value of the project/s annual cash flows is . B%ee Tale Tale 11.3) A) 09,6 &) 0,6 ") 31,8<0 D) 166,38 Answer: " Topic: 7resent Ealue Ealue of ?perating "ash #lows $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills 1) The net present value of the project is . B%ee Tale 11.3) A) ,90 &) ,003 ") 3,810 D) 9,366 Answer: A Topic: ;et 7resent Ealue Ealue $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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1) The internal rate of return for the project is . . B%ee Tale Tale 11.3) A) etween 9 and percent &) etween < and 16 percent ") greater than 1 percent D) etween 16 and 11 percent Answer: " Topic: To pic: 4nternal Rate of Return $uestion %tatus: Revised AA"%& 'uidelines: 'uidelines: Anal-tic s(ills
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