1.

Lewis Manufacturing Company is planning to invest in equipment costing

$240,000. The estimated cash flows from this equipment are expected to be
as follows:

Year Cash Inflows

1 $100,000
2 75,000
3 55,000
4 40,000
5 50,000
Total $320,000

Assume that the cash inflows occur evenly over the year. The payback period for this
investment is
a. 3.75 years
b. 3.25 years
c. 2.4 years
d. 1.3 years

2. KaylinCompany purchased a piece of equipment for $100,000 that had a useful life of 5
years. The equipment had no salvage value. It saves the company $40,000 a year and costs
the company $5,000 a year to operate. What is the accounting rate of return on the
equipment?
a. 30%
b. 15%
c. 40%
d. 35%

3. Matusadona Company plans to invest $450,000 in a new factory. With a discount rate of 14
percent, the present value from the factory is $483,000. To yield a 14 percent internal rate of
return, the actual investment cost cannot exceed the $450,000 estimate by more than
a. $63,000
b. $33,000
c. $16,500
d. This cannot be determined from the information given.

Figure 1

Glady, Inc., is considering the purchase of production equipment that costs

$800,000. The equipment is expected to generate annual cash inflows of
$250,000. The equipment is expected to have a useful life of five years
with no salvage value. The firm's cost of capital is 14 percent.

4. Refer to Figure 1. Payback for Glady's project is

a. 5 years
b. 3.2 years
c. 4 years
d. 3.125 years

5. Refer to Figure 1. If depreciation is $190,000 per year, Glady's accounting rate of return
based on the average investment would be
a. 15.0%
b. 7.5%
c. 6.25%
d. 5.5%
 6. Refer to Figure 1. Excluding the effect of income taxes, Glady's net present value of the
project is
a. $165,200
b. $450,000
c. $58,250
d. $233,550

7. Refer to Figure 1. The approximate internal rate of return of Glady's project is

a. 16%
b. 20%
c. 24%
d. 25%
Figure 2

JD, Inc., is considering the purchase of production equipment that costs

$400,000. The equipment is expected to generate annual cash inflows of
$125,000. The equipment is expected to have a useful life of five years
with no salvage value. The firm's cost of capital is 12 percent.

8. Refer to Figure 2. JD's payback for the project is

a. 2.9 years
b. 3.2 years
c. 3.25 years
d. 4.2 years
9. Refer to Figure 2. If depreciation is $90,000 per year, JD's accounting rate of return
based on the average investment would be
a. 12.0%
b. 14.5%
c. 17.0%
d. 17.5%

10. Refer to Figure 2. JD's net present value of the project is

a. $40,480
b. $48,625
c. $50,625
d. $54,450
11. Refer to Figure 2. JD's approximate internal rate of return of the project is
a. 16%
b. 15%
c. 13%
d. 12%
12. Refer to Figure 2. Based on quantitative factors, should JD accept, reject, or wait on the
project?
a. accept
b. reject
c. wait