Question : 21) Forise Water Company drills small commercial water wells. The : 1211995

21) Forise Water Company drills small commercial water wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below.

Initial investment:

Asset$600,000

Working capital$ 128,000

Operations (per year for four years):

Cash receipts$450,000

Cash expenditures$ 190,000

Disinvestment:

Salvage value of drill (existing)$ 50,000

Discount rate18%

What is the net present value of the investment? Assume there is no recovery of working capital.

A) $(124,280)

B) $21,400

C) $82,724

D) $149,400

22) The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

A) net present value method

B) accrual accounting rate-of-return method

C) payback method

D) internal rate of return method

23) The internal rate-of-return (IRR) method calculates ________.

A) the discount rate at which an investment’s present value of the total of all expected cash inflows equals the present value of its expected cash outflows.

B) the discount rate at which an investment’s future value of all expected cash inflows equals the present value of its expected cash outflows.

C) the discount rate at which an investment’s total of all expected cash inflows equals the present value of its expected cash outflows.

D) the discount rate at which sum of an investment’s present value of all expected cash inflows equals the present value of its expected cash outflows.

24) In capital budgeting, a project is accepted only if the internal rate of return equals or ________.

A) exceeds the required rate of return

B) exceeds the inflation rate

C) exceeds the risk-free rate

D) exceeds the accrual accounting rate of return

25) The Comil Corporation recently purchased a new machine for its factory operations at a cost of $390,875. The investment is expected to generate $125,000 in annual cash flows for a period of five years. The required rate of return is 12%. The old machine has a remaining life of five years. The new machine is expected to have zero value at the end of the five-year period. The disposal value of the old machine at the time of replacement is zero. What is the internal rate of return?

A) 15%

B) 16%

C) 17%

D) 18%

26) Locil Corporation recently purchased a new machine for $415,275 with a nine-year life. The old equipment has a remaining life of nine years and no disposal value at the time of replacement. Net cash flows will be $75,000 per year. What is the internal rate of return?

A) 11%

B) 16%

C) 20%

D) 24%

27) 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 four years and the new equipment has a value of $91,110 with a four-year life. The expected additional cash inflows are $30,000 per year. What is the internal rate of return?

A) 12%

B) 16%

C) 10%

D) 8%

28) Diamond Manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of four years and the new equipment has a value of $87,776 with a four-year life. The expected additional cash inflows are $32,000 per year. What is the internal rate of return?

A) 10%

B) 12%

C) 17%

D) 20%

29) Midize Flower Company provides flowers and other nursery products for decorative purposes in medium to large sized restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van has a value of $66,645 with a seven-year life. The expected additional cash inflows are $15,000 per year. What is the internal rate of return?

A) 10%

B) 13%

C) 15%

D) 20%

30) The net present value method of capital budgeting is preferred over the internal rate-of-return method  because ________.

A) the net present value method is expressed as a percentage of initial investment

B) the net present values of individual projects can be added to determine the effects of accepting a combination of projects

C) the percentage return computed under the net present value method is very easy to compare

D) the calculation under the net present value method is easy as it does not use time value of money