Test Bank For Accounting for Decision Making and Control Jerald Zimmerman 10 Edition
Chapter 03 Test Bank – Static Key
Multiple Choice Questions
1. A lump sum of $5,000 is invested at 10% per year for five years. The company’s cost of capital is 8%. Which is true?
A. The investment has a future value of $7,347
B. The investment has a future value of $8,053
C. The investment has a present value of $5,000
D. The investment has a net present value of $5,000
E. None of the above
$5,000 (1 0.1)5 = $8,053
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Topic: Future Values
Topic: Present Values
2. Cash of $12,000 will be received in year 6. Assuming an opportunity cost of capital of 7.2%, which of the following is true?
A. The future value is $18,212
B. The present value is $7,996
C. The present value is $7,907
D. Provide data for tax purposes
E. None of the above
$12,000 × (1 0.072)−6 = $7,907
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Accessibility: Screen Reader Compatible
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Topic: Future Values
Topic: Present Values
3. Gorgeous George is evaluating a five-year investment in an oil-change franchise, which costs $120,000 paid up front. Projected net operating cash flows are $60,000 per year. If Gorgeous George buys shares instead of the franchise, he expects an annual return of 12%. Which is true?
A. The future value of the franchise is $216,287
B. The net present value of the franchise is $216,287
C. The future value of the franchise is $138,900
D. The net present value of the franchise is $96,287
E. None of the above
|
NPV |
= |
Sum PV(Op Cash Flows) − Investment |
|
$96,287 |
= |
$216,287 − $120,000 |
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Topic: Annuities
Topic: Decision to Open a Day Spa
Topic: Future Values
Topic: Present Values
4. Furious Fred expects cash flows from an investment as follows:
Yr 1 $3,000, Yr 2 $5,000, Yr 3 $8,000
Using an opportunity cost of capital of 5.6%, the present value is:
A. $14,118
B. $14,523
C. $14,361
D. $14,909
E. none of the above
|
PVi |
= |
FVi × PVFi |
|
$14,118 |
= |
$3,000 × (1 0.056)−1 $5,000 × (1.056)−2 $8,000 × (1.056)−3 |
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Topic: Present Value of a Cash Flow Stream
5. Which is true?
A. The present value of a 20-year annuity of $1,900 at 8% is $16,854
B. A $100,000 bond with a 5% coupon will sell at a premium when the market rate of interest is 6%
C. The issue price of a $150,000 zero coupon bond that matures in 6 years when the market rate of interest is 6% is $105,744
D. The present value of a perpetual income stream of $4,000 when the market rate of interest is 8% is $50,000
E. None of the above
|
PV of perpetuity |
= |
Annual income/interest rate |
|
$50,000 |
= |
$4,000/0.08 |
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Topic: Annuities
Topic: Present Values
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