# Various Multiple Choice Questions

Determine the payback period, discounted payback period, NPV, profitability index, IRR from sample #1 attached

Use the following data to for 1,2,3 4,5 below:

Undiscounted

Year Free cash flows

0 (350,000)

1 10,000

2 40,000

3 80,000

4 100,000

5 120,000

6 80,000

7 100,000

Required rate of return = 8%

1. The payback period is:

a. 4 years

b. 3 years

c. 6 years

d. 5 years

e. None is within 0.5 years of the correct answer. (Provide the answer)

2. The discounted payback period is closest to:

a. 4.5 years

b. 3.3 years

c. 6.6 years

d. 5.2 years

e. None is within 0.5 years of the correct answer. . (Provide the answer)

3. The net present value (rounded to the nearest dollar) is:

a. $360

b. $371,000

c. $280

d. $21,000

e. None is within $500 of the correct answer. (Provide the answer)

4. The profitability index is within .05 of:

a. 2.06

b. 2.20

c. 2.10

d. 0.25

e. None of the above is within .05 of the correct answer. (Provide the answer)

5. The internal rate of return (rounded to the nearest half percent) is:

a. 8.5%

b. 9.5%

c. 15 %

d. 5%

e. None is within 0.5% of the correct answer. (Provide the answer)

Sales price for next year, break even point from #2 attached

Use the following data to answer problems 24 and 25.

CD New is a direct marketer of popular music. Following is information about its

revenue and cost structure:

Selling Price $ 13.00 per CD

Variable Costs:

Manufacturing $ 3.00 per CD

Selling and Adminstrative $ 1.00 per CD

Fixed Costs

Production $ 1,000,000 per year

Selling and Administrative $ 3,000,000 per year

24

Assume that sales are expected to fall from 600,000 units this year to 500,000 units next

year. CD New would like to raise the price next year (from the current $13.00) to achieve

the same profits next year as they have this year. What would the sales price have to be

next year, to generate the same profits next year as this year?

Answer

a) Somewhere between $15.00 and $15.99

b) Somewhere between $14.00 and $14.99

c) Somewhere between $13.00 and $13.99

d) Somewhere between $16.00 and $16.99

e) None of the above (provide the answer)

25

In which range does the break-even point fall? (Use the original data.)

Answer

a.) Between 300,000 and 350,000 units

b) Between 350,001 and 400,000 units

c) Between 400,001 and 450,000 units

d) Between 450,001 and 500,000 units

e) None of the above (provide the answer)

Debt ratio, current ratio, fixed asset turnover from #3 attached

Use the information below, to answer questions7, 8 and 9:

Cash 12

Marketable securities 15

Accounts receivable 19

Inventory 14

Plant & equipment 18

Current liabilities 20

Total owners' equity 15

Sales 35

(All assets are listed)

7. Determine the debt ratio:

a. 35%

b. 26%

c. 38%

d. 15%

e. None of the above. (Provide the answer.)

8. Determine the current ratio:

a. 2.95

b. 3.00

c. 1.75

d. 2.00

e. None of the above. (Provide the answer.)

f.

9. Determine fixed asset turnover

a. 1.75

b. 2.45

c. 1.94

d. 3.00

e. None of the above (Provide the answer.)

#### Solution Preview

1. Payback period is the time taken to recover the intial investment. It is found by cumulating the cash flows till the sum is equal to the initial investment. The time period is the payback period. In this case the initial investment is 350,000 and the sum of cah flows till the year 5 equals to 350,000. The payback period is 5 years.

2. In discounted payback, we use the discounted cash flows. The cash flows are discounted using the discount rate given. Here it is 8%. We do the same procedure as above. We find the sum till year 6 is 312,646. We need 350,000. The difference is 37,354. In the year 7, the discounted cash flow is 58,349. We find ...

#### Solution Summary

The posting has various multiple choice questions relating to capital budgeting, break-even analysis and ratios