Test Bank For Accounting for Decision Making and Control Jerald Zimmerman 10 Edition

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