Questions: 1. A customary assumption in capital budgeting analysis is that:

a.the desired rate of return includes the effects of compounding.

b.the cash inflows generated by the investment are not reinvestment.

c.annual cash flows occur at the beginning of each period.

d.the time value of money is ignored.

2. Which of the following would be considered a cash inflow in determining the value of a capital investment?

A. Incremental revenues from increased productivity

B. Cost savings from a reduction in labor hours

C. An increase in working capital commitments

D. Both incremental revenues from increased productivity and cost savings from a reduction in labor hours are correct.

3. Cash outflows from a capital investment project include:

A. increases in operating expenses.

B. the reduction in the amount of working capital.

C. terminal salvage value.

D. all of these answers are correct.

4. Darlene projects that she can get $140,000 cash per year for 5 years on a real estate investment project. If Darlene wants to earn a rate of return of 8%, what is the maximum that she should pay for the investment? (Do not round your PV factors. Round your answer to the nearest dollar.)

A. $463,698

B. $95,282

C. $644,000

D. $558,979

5. An investment that costs $31,500 will produce annual cash flows of $10,510 for a period of 4 years. Given a desired rate of return of 8%, the investment will generate a (Do not round your PV factors and intermediate calculations. Round your answer to the nearest whole dollar):

A. positive net present value of $34,810.

B. negative net present value of $34,810.

C. negative net present value of $3,310.

D. positive net present value of $3,310.