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O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,810,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,000,000. The following information is available: O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,810,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,000,000. The following information is available: The accounting rate of return for the Indiana proposal is closest to (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.) A) 23.67%. B) 22.74%. C) 38.67%. D) 34.25%. The accounting rate of return for the Indiana proposal is closest to (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)


A) 23.67%.
B) 22.74%.
C) 38.67%.
D) 34.25%.

E) A) and D)
F) None of the above

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What would a project's profitability index be if the project has an internal rate of return which is equal to the company's discount rate?


A) It would be 0.5.
B) It would be 0.0.
C) It would be 1.0.
D) It cannot be determined from information provided

E) A) and B)
F) B) and C)

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An annuity is best described as which of the following statements?


A) A stream of equal installments made at equal time intervals
B) Another term used for present value
C) Another term used for future value
D) A stream of interest payments on a principal amount invested

E) B) and C)
F) A) and D)

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O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,850,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,600,000. The following information is available: O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,850,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,600,000. The following information is available: The net present value of the Kentucky proposal is closest to: Present Value of $1 Present Value of Annuity of $1 A) $2,296,700. B) $2,316,000. C) $2,335,300. D) $4,935,300. The net present value of the Kentucky proposal is closest to: Present Value of $1 O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,850,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,600,000. The following information is available: The net present value of the Kentucky proposal is closest to: Present Value of $1 Present Value of Annuity of $1 A) $2,296,700. B) $2,316,000. C) $2,335,300. D) $4,935,300. Present Value of Annuity of $1 O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,850,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,600,000. The following information is available: The net present value of the Kentucky proposal is closest to: Present Value of $1 Present Value of Annuity of $1 A) $2,296,700. B) $2,316,000. C) $2,335,300. D) $4,935,300.


A) $2,296,700.
B) $2,316,000.
C) $2,335,300.
D) $4,935,300.

E) All of the above
F) C) and D)

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You win the lottery and must decide how to take the payout. Use an 8% discount rate for all parts of this question. Present Value of $1 You win the lottery and must decide how to take the payout. Use an 8% discount rate for all parts of this question. Present Value of $1 Present Value of Annuity of $1 Required: a. What is the present value of $12,000 a year received at the end of each of the next six years? b. What is the present value of taking a $60,000 lump sum now? c. What is the present value of a $90,000 lump sum taken in 7 years? Present Value of Annuity of $1 You win the lottery and must decide how to take the payout. Use an 8% discount rate for all parts of this question. Present Value of $1 Present Value of Annuity of $1 Required: a. What is the present value of $12,000 a year received at the end of each of the next six years? b. What is the present value of taking a $60,000 lump sum now? c. What is the present value of a $90,000 lump sum taken in 7 years? Required: a. What is the present value of $12,000 a year received at the end of each of the next six years? b. What is the present value of taking a $60,000 lump sum now? c. What is the present value of a $90,000 lump sum taken in 7 years?

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a. ($12,000 × 4.623)...

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Byer, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $47,000 and would have a residual value of $5000 at the end of its 6-year life. The annual operating expenses of the new extruder would be $4000. The other option that Byer has is to rebuild its existing extruder. The rebuilding would require an investment of $40,000 and would extend the life of the existing extruder by 6 years. The existing extruder has annual operating costs of $11,000 per year and does not have a residual value. Byer's discount rate is 12%. Using net present value analysis, which option is the better option and by how much? Present Value of $1 Byer, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $47,000 and would have a residual value of $5000 at the end of its 6-year life. The annual operating expenses of the new extruder would be $4000. The other option that Byer has is to rebuild its existing extruder. The rebuilding would require an investment of $40,000 and would extend the life of the existing extruder by 6 years. The existing extruder has annual operating costs of $11,000 per year and does not have a residual value. Byer's discount rate is 12%. Using net present value analysis, which option is the better option and by how much? Present Value of $1 Present Value of Annuity of $1 A) Better by $21,777 to rebuild existing extruder B) Better by $21,777 to purchase new extruder C) Better by $24,312 to rebuild existing extruder D) Better by $24,312 to purchase new extruder Present Value of Annuity of $1 Byer, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $47,000 and would have a residual value of $5000 at the end of its 6-year life. The annual operating expenses of the new extruder would be $4000. The other option that Byer has is to rebuild its existing extruder. The rebuilding would require an investment of $40,000 and would extend the life of the existing extruder by 6 years. The existing extruder has annual operating costs of $11,000 per year and does not have a residual value. Byer's discount rate is 12%. Using net present value analysis, which option is the better option and by how much? Present Value of $1 Present Value of Annuity of $1 A) Better by $21,777 to rebuild existing extruder B) Better by $21,777 to purchase new extruder C) Better by $24,312 to rebuild existing extruder D) Better by $24,312 to purchase new extruder


A) Better by $21,777 to rebuild existing extruder
B) Better by $21,777 to purchase new extruder
C) Better by $24,312 to rebuild existing extruder
D) Better by $24,312 to purchase new extruder

E) All of the above
F) C) and D)

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The Hawn Corporation bought a new machine that cost $150,000 with a 10-year life and a residual value of $20,000. The company plans to generate annual cash inflows of $40,000 over 10 years. Calculate the accounting rate of return.

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On a whim you purchased a scratch-off lottery ticket at the gas station. It must have been your lucky day because you won $1,500,000. Being logical and rational you decide to invest the money at 6% for 11 years until you are ready to start a family. At the end of 11 years, how much will your investment be worth? Future Value of $1 On a whim you purchased a scratch-off lottery ticket at the gas station. It must have been your lucky day because you won $1,500,000. Being logical and rational you decide to invest the money at 6% for 11 years until you are ready to start a family. At the end of 11 years, how much will your investment be worth? Future Value of $1 Future Value of Annuity of $1 A) $22,458,000 B) $2,847,000 C) $790,500 D) $3,018,000 Future Value of Annuity of $1 On a whim you purchased a scratch-off lottery ticket at the gas station. It must have been your lucky day because you won $1,500,000. Being logical and rational you decide to invest the money at 6% for 11 years until you are ready to start a family. At the end of 11 years, how much will your investment be worth? Future Value of $1 Future Value of Annuity of $1 A) $22,458,000 B) $2,847,000 C) $790,500 D) $3,018,000


A) $22,458,000
B) $2,847,000
C) $790,500
D) $3,018,000

E) A) and B)
F) All of the above

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Somerville Corporation is considering investing in specialized equipment costing $616,000. The equipment has a useful life of 5 years and a residual value of $52,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are: Somerville Corporation is considering investing in specialized equipment costing $616,000. The equipment has a useful life of 5 years and a residual value of $52,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are: Somerville Corporation's required rate of return is 12%. The net present value of the investment is closest to: Present Value of $1 Present Value of Annuity of $1 A) $181,098 positive. B) $181,098 negative. C) $39,123 negative. D) $69,000 positive. Somerville Corporation's required rate of return is 12%. The net present value of the investment is closest to: Present Value of $1 Somerville Corporation is considering investing in specialized equipment costing $616,000. The equipment has a useful life of 5 years and a residual value of $52,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are: Somerville Corporation's required rate of return is 12%. The net present value of the investment is closest to: Present Value of $1 Present Value of Annuity of $1 A) $181,098 positive. B) $181,098 negative. C) $39,123 negative. D) $69,000 positive. Present Value of Annuity of $1 Somerville Corporation is considering investing in specialized equipment costing $616,000. The equipment has a useful life of 5 years and a residual value of $52,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are: Somerville Corporation's required rate of return is 12%. The net present value of the investment is closest to: Present Value of $1 Present Value of Annuity of $1 A) $181,098 positive. B) $181,098 negative. C) $39,123 negative. D) $69,000 positive.


A) $181,098 positive.
B) $181,098 negative.
C) $39,123 negative.
D) $69,000 positive.

E) B) and D)
F) All of the above

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The accounting rate of return uses non-cash flow factors including depreciation in calculating the operating income of the asset.

A) True
B) False

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Investments with longer payback periods are more desirable, all else being equal.

A) True
B) False

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Accounting Rate of Return and Payback Period are methods better used for capital investments that have a relatively short lifespan such as computer equipment and software.

A) True
B) False

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Assuming an interest rate of 5%, if you invest a lump sum of $6000 now, the balance of your investment in 7 years will be closest to: Future Value of $1 Assuming an interest rate of 5%, if you invest a lump sum of $6000 now, the balance of your investment in 7 years will be closest to: Future Value of $1 Future Value of Annuity of $1 A) $42,000. B) $9774. C) $34,716. D) $8442. Future Value of Annuity of $1 Assuming an interest rate of 5%, if you invest a lump sum of $6000 now, the balance of your investment in 7 years will be closest to: Future Value of $1 Future Value of Annuity of $1 A) $42,000. B) $9774. C) $34,716. D) $8442.


A) $42,000.
B) $9774.
C) $34,716.
D) $8442.

E) A) and B)
F) B) and C)

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Calculating interest on the principal and on all the interest earned to date is called compound interest.

A) True
B) False

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The net present value with equal annual net cash inflows is calculated by


A) multiplying the amount of each cash inflow by the annuity present value factor for a given discount rate and given number of payments.
B) multiplying the amount of all the cash inflows added together by the annuity present value factor for a given discount rate and given number of payments.
C) dividing the amount of each cash inflow by the annuity present value factor for a given discount rate and given number of payments.
D) dividing the annuity present value factor for a given discount rate and given number of payments by the total of the annual cash inflows.

E) A) and B)
F) B) and C)

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The ________ capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations.


A) ARR
B) Payback
C) NPV
D) IRR

E) A) and D)
F) B) and C)

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Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. What is the total present value of future cash inflows and residual value from the Wacky Water Race game? Present Value of $1 Present Value of Annuity of $1 A) $2589 B) $28,543 C) $36,589 D) $30,741 What is the total present value of future cash inflows and residual value from the Wacky Water Race game? Present Value of $1 Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. What is the total present value of future cash inflows and residual value from the Wacky Water Race game? Present Value of $1 Present Value of Annuity of $1 A) $2589 B) $28,543 C) $36,589 D) $30,741 Present Value of Annuity of $1 Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. What is the total present value of future cash inflows and residual value from the Wacky Water Race game? Present Value of $1 Present Value of Annuity of $1 A) $2589 B) $28,543 C) $36,589 D) $30,741


A) $2589
B) $28,543
C) $36,589
D) $30,741

E) All of the above
F) B) and C)

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Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. Using the net present value model, which alternative(s) should Family Fun Park select? Present Value of $1 Present Value of Annuity of $1 A) The Whack-A-Mole game should be selected. B) Neither investment should be selected. C) Both investments should be selected. D) The Wacky Water Race game should be selected. Using the net present value model, which alternative(s) should Family Fun Park select? Present Value of $1 Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. Using the net present value model, which alternative(s) should Family Fun Park select? Present Value of $1 Present Value of Annuity of $1 A) The Whack-A-Mole game should be selected. B) Neither investment should be selected. C) Both investments should be selected. D) The Wacky Water Race game should be selected. Present Value of Annuity of $1 Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. Using the net present value model, which alternative(s) should Family Fun Park select? Present Value of $1 Present Value of Annuity of $1 A) The Whack-A-Mole game should be selected. B) Neither investment should be selected. C) Both investments should be selected. D) The Wacky Water Race game should be selected.


A) The Whack-A-Mole game should be selected.
B) Neither investment should be selected.
C) Both investments should be selected.
D) The Wacky Water Race game should be selected.

E) A) and B)
F) C) and D)

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Another name for the minimum desired rate of return is


A) discount rate.
B) required rate of return.
C) hurdle rate.
D) All of the above

E) A) and B)
F) C) and D)

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When you graduate from college, your mother plans to give you a gift of $40,000 to start you on your way. However, to determine what you learned in business school, your mother presents you with four options on how to receive the gift. Which of the four options presented by your mother will yield the greatest present value to you? Present Value of $1 When you graduate from college, your mother plans to give you a gift of $40,000 to start you on your way. However, to determine what you learned in business school, your mother presents you with four options on how to receive the gift. Which of the four options presented by your mother will yield the greatest present value to you? Present Value of $1 Present Value of Annuity of $1 A) A lump sum of $40,000 today B) $20,000 per year for the next 2 years using a 4% discount rate C) A lump sum of $40,000 after grad school (2 years) assuming a 5% discount rate D) A lump sum of $40,000 after grad school (2 years) assuming a 4% discount rate Present Value of Annuity of $1 When you graduate from college, your mother plans to give you a gift of $40,000 to start you on your way. However, to determine what you learned in business school, your mother presents you with four options on how to receive the gift. Which of the four options presented by your mother will yield the greatest present value to you? Present Value of $1 Present Value of Annuity of $1 A) A lump sum of $40,000 today B) $20,000 per year for the next 2 years using a 4% discount rate C) A lump sum of $40,000 after grad school (2 years) assuming a 5% discount rate D) A lump sum of $40,000 after grad school (2 years) assuming a 4% discount rate


A) A lump sum of $40,000 today
B) $20,000 per year for the next 2 years using a 4% discount rate
C) A lump sum of $40,000 after grad school (2 years) assuming a 5% discount rate
D) A lump sum of $40,000 after grad school (2 years) assuming a 4% discount rate

E) A) and D)
F) None of the above

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