Capital Investment

1. An investment project for which the net present value is $300 would result in which of the
following conclusions?

a. The net present value is too small; the project should be rejected.
b. The investment project promises slightly more than the required rate of return.
c. The net present value method is not suitable for evaluating this project; the timeadjusted rate of return method should thus be employed in analyzing this project.
d. The investment project should only be accepted if net present value is zero; a positive
net present value indicates an error(s) in the estimates associated with the analysis of
this investment.
2. Working capital required for an investment project would be considered as:
a. a cash outflow at the inception of the project with no discounting required.
b. a cash inflow at the end of the term of the investment project when working capital is
released, discounted back to the inception of the project at the appropriate rate.
c. both a cash outflow at the inception of the project and a cash inflow at the end of the
term of an investment project resulting in an offsetting of two equal amounts that has no
effect on the net present value analysis.
d. described in both item a and item b above.

3. The net present value method:

a. makes no allowance for recovery of the original investment.
b. requires the deduction of amortization in order to provide for the recovery of the
original investment.
c. provides for recovery of the original investment since each inflow is allocated
between a return of principal and interest.
d. only makes allowance for return on the investment.
4. The evaluation of an investment having uneven cash flows using the payback method:
a. cannot be done.
b. can be done only by matching cash inflows and investment outflows on a year-byyear basis.
c. will produce essentially the same results as those obtained through the use of
discounted cash flow techniques.
d. requires the use of a sophisticated calculator or computer software.
5. In which of the following situations would a project be acceptable under the internal rate of return
method? 1. The internal rate of return is equal to the cost of capital. 2. The internal rate of return
is greater than the cost of capital. 3. The internal rate of return is less than or equal to the cost of
capital.

a. Only 1.
b. Only 3.
c. Both 1 and 3.
d. Both 1 and 2.
6. 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 cost of capital is 10%, then the most he would be willing to pay for the new
computer system would be:
a. $4,599.
b. $5,502.
c. $5,638.
d. $5,107.
7. Which of the following capital budgeting techniques implicitly assumes that the cash flows are
reinvested at the company's minimum required rate of return? Net present value/Internal rate of
return
a. Yes/Yes
b. Yes/No
c. No/Yes
d. No/No
8. Questions 8 - 9 refer to the following: BillyBob,Inc. has gathered the following data on a
proposed investment project: Investment in amortizable equipment, $150,000; Annual cash flows,
$ 40,000; Useful life of the equipment, 10 years; Cost of capital, 10%. The company uses
straight-line amortization on all equipment. The payback period for the investment would be:
a. 0.27 years.
b. 3.75 years.
c. 10.00 years.
d. 2.13 years.
9. The simple rate of return on the investment would be:
a. 26.67%.
b. 16.67%.
c. 36.67%.
d. 10.00%.
10. Which of the following statements is accurate regarding the ranking of projects using the net
present value method?
a. Projects can never be ranked using the net present value method.
b. The net present value of one project cannot be compared directly to the net present
value of another project unless the investments in the projects are of equal size.
c. The net present value of one project can be compared directly to the net present value of
another project even when the investments in the projects are not of equal size.
d. All projects, regardless of size, can be ranked using the net present value method.

Answer Key

1. b. The investment project promises slightly more than the required rate of return.
2. d. described in both item a and item b above.

3. c. provides for recovery of the original investment since each inflow is allocated between a
return of principal and interest.
4. b. can be done only by matching cash inflows and investment outflows on a year-by-year
basis.
5. d. Both 1 and 2.
6. b. $5,502.
7. b. Yes/No
8. b. 3.75 years.
9. b. 16.67%.
10.b. The net present value of one project cannot be compared directly to the net present value
of another project unless the investments in the projects are of equal size.

CVP Analysis
1. The break-even point is the point where:
a. total sales revenue equals total expenses, variable and fixed.
b. total contribution margin equals total fixed expenses.

c. both a and b are true.

d. neither a nor b is true.
2. The break-even point in units is calculated using:
a. fixed expenses and the contribution margin ratio.
b. variable expenses and the contribution margin ratio.
c. fixed expenses and the unit contribution margin.
d. variable expenses and the unit contribution margin.
3. The margin of safety can be defined as:
a. the excess of budgeted or actual sales over budgeted or actual variable expenses.
b. the excess of budgeted or actual sales over budgeted or actual fixed expenses.
c. the excess of budgeted or actual sales over the break-even volume of sales.
d. the excess of budgeted net income over actual net income.
4. Which of the following represents the calculation of the contribution margin ratio?
a. (Sales - Fixed Expenses) ( Sales
b. (Sales - Cost of Goods Sold) ( Sales
c. (Sales - Variable Expenses) ( Sales
d. (Sales - Total Expenses) ( Sales
5. The following monthly data are available for the Boarder, Inc. and its only product: Unit
sales price, $36; Unit variable expenses, $28; Total fixed expenses, $50,000; Actual sales
for the month of May, 7,000 units. The margin of safety for the company for May was:
a. $27,000
b. $56,000
c. $6,000
d. $106,000
6. Terrell, Inc. sells a single product at a selling price of $40 per unit. Variable costs are $22
per unit and fixed costs are $82,800. Terrell's break- even point is:
a. $184,000
b. 3,764 units
c. $150,540
d. 2,070 units
7. Barton Co. has sales of 2,000 units at $70 per unit. Variable costs are 40% of the sales
price. If total fixed costs are $44,000, the degree of operating leverage is:
a. .79
b. 1.40
c. 3.50
d. 2.10
8. Keller Co. sells a single product for $28 per unit. If variable costs are 65% of sales and
fixed costs total $9,800, the break-even point will be (rounded):
a. $15,077
b. $18,200
c. 539 units
d. 1,000 units

9. The Martin's variable costs are 35% of sales. Martin is contemplating an advertising
campaign that will cost $25,000. If sales are expected to increase $75,000, the company's
net income will increase by:
a. $26,250
b. $23,750
c. $1,250
d. $65,000
10. The contribution margin ratio is 30% for SpiceCo and the breakeven point in sales is
$150,000. If the company desires a target net income of $60,000, sales would have to be:
a. $200,000
b. $350,000
c. $250,000
d. $210,000

Answer Key
1. c. both a and b are true.
2. c. fixed expenses and the unit contribution margin.
3. c. the excess of budgeted or actual sales over the break-even volume of sales.
4. c. (Sales - Variable Expenses) ( Sales
5. a. $27,000
6. a. $184,000
7. d. 2.10
8. d. 1,000 units
9. b. $23,750
10.b. $350,000