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V1 Chapter 24 Test Multiple choice 1. A company is considering alternative investment opportunities, each of which requires an initial cash outlay of $110,000. The expected net cash flows from the projects follow: Project W $20,000 50000 74000 $144,000 Project A Project Z Year 1 Year 2 Year 3 Totals $30,000 44,000 70,000 $144,000 $44,000 70,000 30,000 $144,000 Based on a comparison of their net present values, and assuming the same discount rate (greater than zero) is required for the projects, which project is the better investment? (Hint: You do not need to know the exact discount rate to come to a conclusion.) A) Project A B) Project Z C) Project W D) The Projects are equally desirable. E) None of the projects 2. A company is trying to decide which of two new product lines to introduce in the coming year The company requires a 12% return on investment. The predicted revenue and cost data for each product line follows Product A Product EB 20,000 $30 Unit sales 25,000 $30 Unit sales price $15,000 $120,000 $30,000 $8,000 $80,000 $25,000 Direct materials Direct labor Other cash operating expenses $2,500,000 $1,500,000 New equipment costs Estimated useful life (no salvage) 5 years 5 years The company has a 30% tax rate and it uses the straight-line depreciation method. Compute the net present value given the 12% discount rate (given above) for each piece of equipment under each of the two product lines. Which, if either, of these two investments is acceptable? A) Need more information to make decision B) The Projects are equally desirable. C) None of the projects are desirable D) Project A any m pan satist r the ,00 red is E) Project B company is considering the purchase of new equipment for $39,000. The projected after-tax net income is $6,000 after deducting $13,000 of depreciation. The machine has a useful life of three years and no salvage value. Management of the company requires a 3. A 12% return on investment. What is the profitability index (to the nearest whole percent) for this equipment? A) B) C) D) 14% 15% 16% 17%

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