61) Which of the following statements about depreciation is TRUE?

A) The tax effects of depreciation are not adjusted for inflation.

B) The tax effects of depreciation must be adjusted for inflation.

C) Canadian tax laws allow for inflation adjustments to depreciation each year.

D) Capital investment is encouraged by not allowing depreciation to be adjusted for the effect of inflation.

62) Which of the following statements about the riskiness of an investment is true?

A) The lower the risk, the higher the discount rate.

B) The higher the risk, the higher the discount rate.

C) The higher the risk, the lower the cost of capital.

D) The higher the risk, the higher the minimum desired rate of return.

63) Which of the following methods determines the interest rate which equates the present value of the future cash flows with the investment outlay?

A) Payback

B) Accounting rate of return

C) Internal rate of return

D) Net present value

64) Which of the following methods determines the interest rate which equates the present value of the future cash flows with the investment outlay?

A) Payback

B) Accounting rate of return

C) Internal rate of return

D) Net present value

65) The discount rate is

A) the rate used to compute payback.

B) the rate used to compute the accounting rate of return.

C) the rate used to compute the internal rate of return.

D) the rate used to compute NPV.

66) Discounting

A) is the process of determining value at a future time.

B) is the process of converting future cash flows to their present value.

C) is a process that doers not consider the time value of money.

D) is a process that can only be used for a single amount (not annuities).

67) The present value of $10,000 to be received 5 years from now and earning an annual return of 8 percent is

A) $6,210.

B) $6,810.

C) $4,000.

D) $4,693.

68) The present value of 5-year annuity of $10,000, earning an annual return of 8 percent is

A) $31,700.

B) $34,700.

C) $37,910.

D) $39,930.

Use the following information to answer the next question(s).

Sunny Flowers is considering the purchase of a small business that costs $500,000.  Sunny plans to sell stock valued at $250,000.  The stock would pay dividends of $20,000 per year.  Sunny would borrow the remaining $250,000 from a local bank at 12 percent interest.

The business is expected to generate annual cash inflows of $80,000.  Duane plans to operate the business for 15 years and then turn it over to his son.

69) Payback for the project is

A) 6.11 years.

B) 6.25 years.

C) 7.96 years.

D) 8.33 years.

70) If the depreciation is $25,000 per year, the accounting rate of return based on the initial investment is

A) 11%.

B) 12%.

C) 16%.

D) 17.2%.



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