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Year Service Life Quiz

The net present value method takes into account:

An increase in the discount rate will:

In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total-cost approach will be

The preference rule for ranking projects by the profitability index is:

Which of the following statements is correct?

The cost of a new machine is $24,000. The machine has a 5-year service life and no salvage. The annual cash flow will be 15% of the cost of the machine. The payback will occur:

Equipment will be purchased at a cost of $30,000. It will have no salvage value. The cash flows are expected to be: $12,000, $10,000, $15,000, and $8,000, over the life of the equipment. The payback period will occur in:

The company expects an after-tax income of $2,400 per year over the life of an investment that will cost $25,000, has a 5-year service life, and has no salvage value. The average return on investment (accounting rate of return) is:

Which is not true of the net present value method of determining the acceptability of an investment?

Each of the three projects cost $20,000, the amount available for investment. Each project has a service life of 3 years and no salvage value. The investment cash flows and present value of $1 at 10% are: 
Project A Project B Project C PV factor
at 10%
 
Year 1 $10,000 $28,000 $ 1,000 .909
Year 2 10,000 1,000 3,000 .826
Year 3 10,000 1,000 26,000 .751
 
If 10% is an acceptable earnings rate, which project should be selected?

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