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Question 1
Free
Multiple Choice

____ is (are) used when evaluating mutually exclusive investments having unequal lives.

Choose correct answer/s
A

Equivalent annual annuities

B

Replacement chains

C

Linear programming

D

a and b only

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Question 2
Free
Multiple Choice

The advantage(s) of the equivalent annual annuity method over the replacement chain technique in evaluating mutually exclusive investments having unequal lives include

Choose correct answer/s
A

the equivalent annual annuity method is often computationally simpler

B

the equivalent annual annuity method simplifies the handling of the time discrepancies that frequently arise in the replacement chain method

C

the equivalent annual annuity method is theoretically superior

D

a and b only

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Question 3
Free
Multiple Choice

When two or more mutually exclusive alternative investments have ____ , neither the net present value nor the internal rate of return method yields reliable accept-reject information unless the projects are evaluated for an equal period of time.

Choose correct answer/s
A

unequal lives

B

unequal net cash flows

C

unequal net investments

D

a and b

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Question 4
Free
Multiple Choice

Creative Furniture is considering two mutually exclusive projects that would automate part of their production facilities. Project A costs $120,000 and would produce net cash flows of $37,000 annually for 5 years. Project B also costs $120,000 and will produce annual net cash flows of $25,000 for 10 years. Creative's cost of capital is 11 percent.
-Using a replacement chain, which project should be chosen? Assume that in 5 years, Project A will still cost $120,000 and produce 5 more years of $37,000 annual net cash flows.

Choose correct answer/s
A

Project B. NPV of A is negative

B

Project A. NPV of B is negative

C

Project B. NPV is $492 higher

D

Project A. NPV is $6,468 higher

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Question 5
Free
Multiple Choice

Creative Furniture is considering two mutually exclusive projects that would automate part of their production facilities. Project A costs $120,000 and would produce net cash flows of $37,000 annually for 5 years. Project B also costs $120,000 and will produce annual net cash flows of $25,000 for 10 years. Creative's cost of capital is 11 percent.
-Using the equivalent annual annuity method, which project should be chosen?

Choose correct answer/s
A

Project B, NPV is approximately $823 higher

B

Project A, NPVB is negative

C

Project B, NPV is $10,473 approximately higher

D

Project B, NPV is $90.56 approximately higher

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Question 6
Multiple Choice

Dorati Inc. is considering two mutually exclusive projects. Dorati used a 15% required rate of return to evaluate capital expenditure projects. If the two projects have the costs and cash flows shown below, using a replacement chain determine the NPV for each. image
Assume in two years Project S will still cost $70,000 and produce the same two years of cash flows.

Choose correct answer/s
A
NPVs = $8,860: NPVT = $109,240
B
NPVs = $14,690: NPVT = $109,240
C
NPVs = $40,020: NPVT = $109,240
D
None of the above
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Question 7
Multiple Choice

Lakeland Ramblers is considering two mutually exclusive projects to boost their tourist revenue. Project A costs $60,000 and would produce net cash flows of $25,000 for 5 years. Project B cost $100,000 and will produce annual net cash flows of $25,000 for 10 years. If Lakeland's cost of capital is 12%, which project should be chosen using the equivalent annual annuity method?

Choose correct answer/s
A
Project A, NPV is $17,941 higher
B
Project B, NPV is $11,125 higher
C
Project A, NPV is $28,383 higher
D
Project B, NPV is $21,567 higher
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Question 8
Multiple Choice

Casa Chica is considering replacing a piece of equipment. Alternative A costs $80,000, has an eight year life and would produce net cash flows of $18,000 in each of the eight years. Alternative B costs $65,000, has a six year life and would produce net cash flows of $18,000 in each of the six years. If Chica's cost of capital is 13 percent, which alternative should be chosen using the equivalent annual annuity method?

Choose correct answer/s
A
Project A
B
Project B
C
Indifferent between the two projects
D
Neither, because both projects have a negative NPV
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Question 9
Multiple Choice

Toy Manufacturers (TM) is considering two mutually exclusive machines to use in its manufacturing process. The net cash flows for each are given below: image
If the cost of capital for TM is 13%, which machine should they purchase?

Choose correct answer/s
A
Beta: has the highest total net cash flows
B
Beta: it has the highest NPV
C
Axa: it has the highest NPV using infinite replacement
D
Beta: it has the highest NPV using infinite replacement
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Question 10
Multiple Choice

Quorex is evaluating two mutually exclusive projects. Project A has a net investment of $48,000 and net cash flows over a six year period of $12,500 per year. Project B also has a net investment of $48,000 but its net cash flows of $8,640 per year will occur over a 12 year period. If Quorex has a cost of capital of 14% for these projects, which project, if either, should be chosen and what is its NPV?

Choose correct answer/s
A
A, $862
B
A, $1,800
C
B, $2,475
D
B, $902
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Question 11
Multiple Choice

Marvec needs to replace an extruder and two replacements look good. Extruder A costs $102,000 and has a 10 year life. Extruder B costs only $56,000 but its expected life is 6 years. Extruder A will generate net cash flows of $17,600 per year for 10 years and B will generate net cash flows of $13,800 per year for 6 years. If Marvec's cost of capital is 11%, which extruder should be chosen and what is its NPV? Use equivalent annual annuities.

Choose correct answer/s
A
B, $564
B
B, $2,388
C
A, $1,646
D
A, $280
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Question 12
Multiple Choice

Kaneb is evaluating two alternative pipeline welders. Welder A costs $310,000, has a 7 year life, and is expected to generate net cash inflows of $78,000 in each of the 7 years. Welder B costs $320,000, has a 5 year life, and is expected to generate annual net cash inflows of $68,900 in each of the 5 years. Kaneb's cost of capital is 16%. Using the equivalent annual annuity method, which alternative should be chosen and what is its NPV?

Choose correct answer/s
A
B, $4,920
B
A, $7,111
C
B, $10,650
D
A, $7,800
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Question 13
Multiple Choice

Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4 year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $122,000, has an 8 year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years. The cost of replacement for A is $96,000 and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 12% cost of capital. Which press should be chosen?

Choose correct answer/s
A
A
B
B
C
Both A and B
D
neither A or B
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Question 14
Multiple Choice

Boomerang Bungee Corp. is considering the following project. Determine the equal annual annuity for the project if the cost of capital is 14%. Initial Investment: $75,000
image
Year

Choose correct answer/s
A
$5,527.89
B
$4,355.25
C
$7,768.67
D
$2,259.62
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Question 15
Multiple Choice

What would be the equal annual annuity for Wallflowers Florist, Inc. if the cost of capital is 10% and the initial investment is $50,000 (rounded)? image

Choose correct answer/s
A
$2,024
B
$5,033
C
$1,257
D
$8,358
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Question 16
Multiple Choice

What is the equal annual annuity for Scorch & Burn Fire Extinguishers if their cost of capital is 8% and the initial investment is $75,000 (rounded)? image

Choose correct answer/s
A
$5,304
B
$6,271
C
$2,058
D
$4,157
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Question 17
Multiple Choice

The best way to measure projects with unequal lives is:

Choose correct answer/s
A
the Gordon Model
B
the payback period
C
the net present value method
D
equivalent annual annuity approach
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Question 18
Multiple Choice

Under most conditions the equivalent annual annuity method will give the same decision as:

Choose correct answer/s
A
the net present value method
B
linear programming
C
the replacement chain method
D
the internal rate of return
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Question 19
Essay

The importance of time discrepancies depends on several items when making capital budgeting decisions. State those items:

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Question 20
Essay

What does a firm ignore if it chooses the longer-lived project based solely on the net present value or internal rate of return data?

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