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1) In addition to most capital investment decisions, what additional investment is usually needed? A) Tax deferral B) Current asset investment C) Sales and marketing expense D) Interest rate projections E) Infrastructure commitments 2) Of the current methods of investment appraisal, which offers the best measurement? A) Internal Rate of Return B) Payback Period C) Marginal Rate of Return D) Net Present Value E) Cash back rate 3) What is the primary factor in the creation of positive cash flow? A) Expense reduction B) Increases in sales revenue C) Effective investment appraisal D) An expanding economy E) Product innovation 4) Machine A is bought for $200,000 and has a residual value of $80,000 after six years of use. The amortization is straight-line and the annual profit before depreciation generated by the machine is $30,000. What is the ARR? A) 2.4% B) 4.3% C) 7.1% D) 16.7% E) 17.9% 5) A metal fabricator requires a return of 11%. The company is considering the purchase of six 40-ton hydraulic shop presses at a cost of $11,300 each. The profit before depreciation over the next ten years is projected at $5,700, $6,800, $7,200 and $8,500 for the first four years and then expected to be $9,700 for the next six years. Depreciation is straight-line with a residual value of $13,400. Which of the following should you advise the metal fabricator do? A) Invest because the ARR shows a positive return of 6.8%. B) Invest because ARR is 10.7% over the required rate. C) Not invest because ARR shows a return of (1.9%). D) Invest as ARR shows a positive return of 13.4%. E) Not invest as ARR is underachieved by 6.4%. 6) A carpet manufacturer, whose discount rate is 10%, can purchase texturizing equipment for $1,250,000 to process yarn. Incremental income before straight line depreciation from sales of texturized carpets is projected over the next five years as $95,000, $165,000, $357,000, $725,000 and $315,000, respectively. The company believes that the fashion will pass and demand in Year 6 will all but disappear. The machine can be sold at the end of Year 5 for $250,000. What should you advise the company to do? A) Purchase the equipment as NPV is $86,952. B) Not purchase the equipment as NPV is ($54,784). C) Purchase the equipment as ARR is 10.9%. D) Not purchase the equipment as the ARR is only 9.3%. E) Purchase the equipment as both the NPV and ARR are negative. 7) A specialty original equipment manufacturer (OEM) to the automobile industry, has maintained an ROCE above 12% over the past four years by insisting on an ARR of over 12%. However, in the past four periods, consumer spending has begun to decline. Interest rates are falling. The company should A) Expect ROCE to drop significantly given fewer high yield investment opportunities available during economic slow-down B) Focus R&D efforts to develop recession proof or counter cyclical investment opportunities C) Shift resources immediately from producing vulnerable products to more recession proof market offerings D) Review current process and financing contracts to institute cost cutting procedures E) Take advantage of a well diversified product portfolio to limit exposure 8) Omaro Ltd. would like to clear their warehouse and yard of damaged equipment and metal scrap. If the company purchases an industrial recycling bin for $1800, a contractor will pick up the materials and pay by the kilogram for the scrap. Omaro adjusts all cash flows for time value and uses a 10% discount rate. What dollar value of scrap do they have to generate each year to be able to break even on their investment in three years? A) $544 B) $ 600 C) $ 724 D) $ 844 E) $1,352 9) Chrome Brite Plating Inc. is considering a purchase of a new nickel plating machine for $35,000. It expects that for the following five years, cash inflow will be $10,000, $20,000, $50,000, $70,000 and $75,000 as its business expands. If the company requires a return of 14% on new investment, the net present value (NPV) is A) $103,314 B) $138,314 C) $173,314 D) $182,102 E) $339,102 10) Korral Kids is a chain of children’s premium outdoor clothing that is expanding into a neighbouring city. It can lease space in a downtown location requiring a major refitting for a cost of $550,000. Instead it could lease a smaller mall location with lower traffic but would only require redecoration and furnishing at $250,000. Income before depreciation expense for the mall location over the next three years is $40,000, $65,000, $85,000. It is projected to be $90,000 for the three years after that. Expected cash inflow for the downtown location is projected at $90,000, $125,000, $165,000, and $185,000 for the three years after that. If the company is looking for a 14% return it should A) Invest in the downtown location as it has the highest cash flows B) Invest in the downtown location as it has the highest NPV at $76,424 C) Invest in the mall location as it has the highest NPV at $33,520 D) Invest in the mall location as it has the highest present value at $283,520 E) Invest in the downtown location as it has the highest NPV at $576,424 1

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