Q&A Hero

Q: If the government wanted to give people a negative direct incentive not to save money, what would be the appropriate policy? a. providing individuals a subsidy to save their money b. providing funding for an advertising campaign encouraging people to spend more money c. informing individuals that saving money causes people not to spend money, which will cause them to lose their jobs d. imposing a tax on individuals for saving their money e. informing consumers about all that they could buy with their money with the hope that they spend more

Q: Public buildings in the United States are required to be accessible to the disabled and, as a result, almost all have an elevator. What would be an example of a positive direct incentive for those who can to use stairs? a. Using the stairs will make it seem that they care about their health and that they arent lazy. b. Using the stairs will increase the risk of tripping and falling. c. Using the stairs will take more time than taking the elevator and will increase the risk of missing an important meeting. d. Using the stairs will give them some exercise and make them healthier. e. Using the stairs will put elevator repair professionals out of work.

Q: Entrepreneurs are willing to take risks becausea. technology provides a way to sidestep the patent and copyright system.b. the patent and copyright system provides an exclusive right to sell the product for a period of time.c. the patent and copyright system guarantees a certain level of profit.d. technology always increases costs and prevents competitors from entering the market.e. the patent and copyright system guarantees that the risks taken will be rewarded.

Q: On which of the following concepts do economists focus their study when explaining how humans behave?a. fairness b. money c. emotionsd. incentivese. justice

Q: The patent system a. acts as a direct positive incentive. b. acts as a direct negative incentive. c. acts as an indirect positive incentive. d. acts as an indirect negative incentive. e. does not provide an incentive.

Q: Which of the following is NOT a type of incentive?a. positive b. negative c. complementaryd. indirecte. direct

Q: Which of the following is a microeconomic question? a. What are the total production levels in the economy? b. How can we best encourage economic growth? c. What is the overall price level in the economy? d. What are the variables that determine the price of a specific good? e. How can we reduce the unemployment rate among Hispanic men?

Q: Microeconomics is the branch of economics that focuses on the a. entire economy. b. production side of the economy. c. consumption side of the economy. d. involvement of the government in the entire economy. e. choices and decision making of individuals and firms.

Q: Microeconomics is the study of a. how government activities affect the economy. b. individual decision-making units. c. collective decision making. d. the operation of the economy as a whole. e. the interaction between the government and businesses.

Q: Which of the following is a macroeconomic question? a. How many textbooks should be published by a publisher? b. How much should English majors earn after college? c. How do members of a household decide whether to clean their own houses or hire someone else to do it? d. What is the rate of unemployment? e. What is the price of a new 40-inch television?

Q: Macroeconomics is the study of a. the economic motives of voters and elected officials. b. individual decision-making units such as households and businesses. c. how government purchases affect specific markets. d. the operation of the economy as a whole. e. the interaction between the government and businesses.

Q: What is the strongest argument for why we need more economists today than ever before? a. We have a need for more wealth given the higher standard of living that individuals demand. b. Economists are needed to address the allocation of scarce resources as a result of the worlds growing population. c. Economists are needed to make sure that firms continue to make profits. d. Economists are needed to make sure that consumers are well informed about their possible purchase options and that they budget their finances appropriately. e. Economists are needed to make sure that the government doesnt involve itself too much in the economy.

Q: Which scenario describes studying for an economics course without applying the scarcity principle? a. Mary studies two hours for every one hour she is in the classroom. b. Jonah studies three afternoons a week until he understands the material or until dinner, whichever comes first. c. Lucy studies with her roommate who is also taking the course, and they discuss economic concepts during any free time they can find. d. Chloe studies for this course and does nothing else. e. Rafael talks to an economist whenever he has a chance to do so.

Q: Which of the following statements best represents the fact that Logan cannot put in extra hours of work because of scarcity? a. He doesnt have enough time for additional work because he needs to spend time with his family and there are only so many hours in the day. b. He doesnt like going to work, so why would he work more than he has to? c. He doesnt think that overtime pay is high enough. d. He is worried that if he works extra hours, he will get bored with his job. e. He doesnt want his coworkers to feel pressure to work more because he is working additional hours.

Q: Because of scarcity a. individuals and societies are allowed no choice about which wants and needs to satisfy. b. individuals and societies must choose which wants and needs to satisfy. c. all choices about wants and using resources must be made by the government. d. choices can be made about which wants to satisfy, but not about which resources to use. e. choices must be made about which resources to use, but not about which wants to satisfy.

Q: A good is ________ if it takes even a small amount of time, energy, or money to acquire.a. abundant b. in shortage c. cheapd. scarcee. virtually free

Q: As a new firm in the apple-picking business, Nicolette has considered adding an economist to her management team. This economist would be unable to help her managerial team determine a. the lowest cost way of picking apples. b. how many apples consumers will purchase at different prices. c. why people eat apples. d. the effect government regulations would have on the price of apples. e. the lowest cost way of distributing apples.

Q: When consumers discard their gasoline-powered automobiles for electric-powered ones, this partially reflects the ________ of gasoline.a. scarcity b. luxury c. necessityd. specializatione. incentive

Q: When Noahs parent tells him not to study economics because it is a pointless discipline, why is he or she INCORRECT? a. The government continues to play a role in our daily lives. b. People have the freedom to do whatever they want, and economists have nothing to add to their decision-making process. c. Economics is a tool used to understand what happens in a world where there are not enough resources to produce all the goods and services that are wanted and needed. d. Economics has nothing to offer in terms of understanding the stock market. e. Economics has nothing to offer in terms of understanding government programs like Social Security.

Q: As a discipline, economics is best described by which of the following? a. the study of how to control the effects of government actions b. the study of how to control the preferences of consumers so that there will be enough resources to produce all the goods and services that consumers want c. the study of how to use scarce resources to satisfy unlimited wants and needs d. the study of how to dispose of excess goods and services that nobody wants e. the study of how to maximize profits for firms

Q: The need to study economics would cease to exist if a. the government stopped controlling peoples actions. b. people were free to make decisions on their own. c. people put forth the effort required to attain the goods and services they wanted. d. people earned more than they spent. e. there were enough resources to produce all the goods and services people would like to obtain.

Q: An economist is an individual who would be LEAST able to answer which research question? a. how much of a product is purchased at a specific price b. how the tastes and preferences of consumers are determined c. what firms decide to produce d. how goods and services are distributed to the population e. how firms decide to produce a good or service

Q: The basic goal of economics is to a. control the effects of government action. b. determine how to distribute all that is produced in an economy. c. address the scarcity problem created because the populations desire for goods exceeds the ability to produce them. d. match limited resources to peoples limited wants and needs. e. control tastes and wishes so that there will be enough resources to produce all the goods and services that people want.

Q: Thomas Malthuss prediction of mass starvation failed to come true because of increases ina. population. b. productivity. c. temperature.d. government involvement.e. income.

Q: Economics is the study of a. how to make money. b. how to allocate resources to satisfy wants and needs. c. capitalism. d. how to make workers more productive and firms more profitable. e. markets.

Q: In economics, choices are necessary because of the presence ofa. luxuries. b. inefficiency. c. needs.d. scarcity.e. incentives.

Q: The __________________________ is the rate that yields a net present value of zero for an investment.

Q: The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the project should be ____________________.

Q: The _______________________________ is computed by discounting the future net cash flows from the investment at the project's required rate of return and then subtracting the initial amount invested.

Q: The _______________________________ is computed by dividing a project's after-tax net income by the average amount invested in it.

Q: In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are _______________ and __________________. There are also two primary methods that consider the time value of money; these are ___________________ and _______________________.

Q: A capital budgeting method that considers how quickly a project recovers costs is known as ______________________. An enhancement to this method that considers the time value of money is called _________________.

Q: Internal rate of return is expressed as a _________________.

Q: Lower-risk investments require a _________________ rate of return compared with higher-risk investments.

Q: For projects financed from borrowed funds, the hurdle rate must exceed the _________________ paid on these funds.

Q: The minimum acceptable rate of return on an investment is called the _________________.

Q: The _____________________ is the simplest capital budgeting method studied in this chapter.

Q: The process of restating future cash flows in terms of their present value is called _____________________.

Q: _____________________ is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Q: A company is considering a five-year project. It plans to invest $80,000 now and it forecasts cash inflows for each year of $22,857. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below: Interest Rate Present Value of an Annuity of 1 factor 10% 3.7908 12% 3.6048 14% 3.4331

Q: A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?

Q: A company purchases a machine for $62,000. The machine has an expected life of 15 years and no salvage value. The company anticipates a yearly net income of $15,000 after taxes of 29% to be received uniformly throughout each year. What is the accounting rate of return?

Q: A company purchases a machine for $84,000. The machine has an expected life of 12 years and no salvage value. The company anticipates a yearly net income of $41,000 after taxes of 32% to be received uniformly throughout each year. What is the accounting rate of return?

Q: A company purchases a machine for $1,000,000. The machine has an expected life of nine years and no salvage value. The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year. What is the accounting rate of return?

Q: A company is evaluating the purchase of a machine for $750,000 with a nine-year useful life and no salvage value. The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is the company's average investment?

Q: A company is evaluating the purchase of a machine for $900,000 with a six-year useful life and no salvage value. The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is the company's average investment?

Q: . A company is considering a proposal to invest $73,000 in a project that would provide the following net cash flows: Year 1 $ 5,000 Year 2 12,000 Year 3 25,000 Year 4 29,000 Year 5 8,000 Compute the project's payback period

Q: A company is considering purchasing a machine for $123,000. The machine is expected to generate a net after-tax income of $8,200 per year. Depreciation expense would be $12,300. What is the payback period for this machine?

Q: A company is considering purchasing a machine for $75,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $7,500. What is the payback period for this machine?

Q: For each of the capital budgeting methods listed below, place an X in the correct column, indicating the measurement basis of each, the ability to make comparison among projects, and whether each method reflects or ignores the time value of money. Measurement Basis Comparison among Projects Time Value of Money Cash Flows Accrual Income Allows Comparison Difficult to Compare Reflects Time Value of Money Ignores Time Value of Money Payback period Accounting rate of return Net present value Internal rate of return

Q: Identify at least three reasons for managers to favor the internal rate of return (IRR) over other capital budgeting approaches.

Q: You have evaluated three projects using the net present value (NPV) method. How would you decide which one of the projects to select?

Q: What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

Q: Briefly describe both the payback period method and the net present value method of comparing investment alternatives.

Q: How does the calculation of break-even time (BET) differ from the calculation of payback period (PBP)?

Q: In using the internal rate of return method, management must consider a hurdle rate in making its decisions. What is a hurdle rate? What factors does management have to consider in selecting a hurdle rate?

Q: How can management evaluate the risk of an investment?

Q: What is discounting?

Q: What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

Q: Presented below are terms preceded by letters (a) through (f) and followed by a list of definitions (1) through (6). Match the letter of the terms with the definitions. Use the space provided preceding each definition. (a) Discounting (b) Break-even time (c) Return on average investment (d) Net present value (e) Uneven cash flows (f) Accounting rate of return __________ (1) Annual after-tax net income divided by annual average investment. __________ (2) A rate used to evaluate the acceptability of an investment; equals the after-tax periodic income divided by the average investment in the asset. __________ (3) An estimate of an asset's value to the company; calculated by discounting the future cash flows from the investment at a satisfactory rate and then subtracting the initial cost of the investment. __________ (4) Cash flows that are not all equal in amount. __________ (5) The process of restating future cash flows in terms of their present value. __________ (6) A measure of the amount of time needed for the present value of the net cash flows to equal the initial cost of an investment.

Q: Presented below are terms preceded by letters (a) through (g) and followed by a list of definitions (1) through (7). Match the letter of the term with the definition. Use the space provided preceding each definition. (a) Net present value (b) Capital budgeting (c) Accounting rate of return (d) Net cash flow (e) Internal rate of return (f) Payback period (g) Hurdle rate __________ (1) A discount rate that results in a net present value of zero. __________ (2) Cash inflows minus cash outflows for the period. __________ (3) A minimum acceptable rate of return. __________ (4) The time expected to pass before the net cash flows from an investment equals its initial cost. __________ (5) Annual after-tax net income divided by annual average investment. __________ (6) A process of analyzing alternative long-term investments. __________ (7) Initial cost of an investment subtracted from discounted future cash flows from the investment.

Q: There are two basic steps in calculating the internal rate of return. Which of the following represents those two steps? A. (1) Compute the PV factor for the project and (2) compare it to the hurdle rate. B. (1) Compute the PV factor for the project and (2) identify the discount rate. C. (1) Identify the discount rate and (2) compare the IRR to the hurdle rate. D. (1) Compare IRR to the hurdle rate and (2) accept or reject the project. E. (1) Select the hurdle rate and (2) compute the PV factor for the project.

Q: The rate that yields a net present value of zero for an investment is the: A. Internal rate of return. B. Accounting rate of return. C. Net present value rate of return. D. Zero rate of return. E. Payback rate of return.

Q: Holder Manufacturing is considering purchasing two machines. Each machine costs $8,000 and will produce cash flows as follows: End of Machine Year A B 1 $5,000 $1,000 2 4,000 2,000 3 2,000 11,000 Holder Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Holder purchase? A. Only Machine A is acceptable. B. Only Machine B is acceptable. C. Both machines are acceptable, but A should be selected because it has the greater net present value. D. Both machines are acceptable, but B should be selected because it has the greater net present value. E. Neither machine is acceptable.

Q: Saxon Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: End of Machine Year A B 1 $5,000 $1,000 2 4,000 2,000 3 2,000 11,000 Saxon Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Saxon purchase? A. Only Machine A is acceptable. B. Only Machine B is acceptable. C. Both machines are acceptable, but A should be selected because it has the greater net present value. D. Both machines are acceptable, but B should be selected because it has the greater net present value. E. Neither machine is acceptable.

Q: Periods 12 Percent 1 8929 2 1.6901 3 2.4018 4 3.0373 Assuming all revenue is to be received at the end of each year, what are the net cash flows for this investment if net present value equals ($11,790)? A. $78,210 B. $10,920 C. $25,750 D. $237,547 E. $33,513

Q: A company is considering the purchase of new equipment costing $91,000. The machine has a useful life of four years and no salvage value. The company requires a 12% return on its investments. The factors for the present value of an annuity of 1 for different periods follow:

Q: Scott Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of three years and a $4,000 salvage value. Scott requires a 12% return on its investments. The factors for the present value of $1 for different periods follow: Periods 12 Percent 1 8929 2 0.7972 3 0.7118 4 0.6355 What is the net present value of the machine and what is the maximum Scott would have been willing to pay for it? A. $(251.52) but Scott would not pay any amount to acquire the machine because the NPV is negative. B. $(251.52) and Scott would be willing to pay $29,748.48 for the machine. C. $(251.52) but the price Scott would pay cannot be determined. D. $900 and Scott would be willing to pay $30,900 to acquire the machine E. $900 but Scott would not be willing to acquire the machine.

Q: Peng Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of four years and no salvage value. Peng requires a 12% return on its investments. The factors for the present value of $1 for different periods follow: Periods 12 Percent 1 8929 2 0.7972 3 0.7118 4 0.6355 Calculate the break-even time for this equipment. A. Break-even time is longer than four years. B. Break-even time is between three and four years. C. Break-even time is between two and three years. D. Break-even time is between one and two years. E. This project will never break even.

Q: Periods 12 Percent 1 8929 2 0.7972 3 0.7118 4 0.6355 What is the net present value of the machine? A. $24,018 B. $(3,100) C. $30,000 D. $26,900 E. $(29,520)

Q: Daniels Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of three years and no salvage value. Daniels requires a 12% return on its investments. The factors for the present value of $1 for different periods follow:

Q: Which one of the following methods considers the time value of money in evaluating alternative capital expenditures? A. Accounting rate of return. B. Net present value. C. Payback period. D. Cash flow method. E. Return on average investment.

Q: An estimate of an asset's value to the company, calculated by discounting the future cash flows from the investment at an appropriate rate and then subtracting the initial cost of the investment, is known as: A. Annual net cash flows. B. Rate of return on investment. C. Net present value. D. Payback period. E. Unamortized carrying value.

Q: Which of the following cash flows is not considered when using the net present value method? A. Future cash inflows. B. Future cash outflows. C. Past cash outflows. D. Nonuniform cash inflows. E. Cash inflow from the sale of the asset.

Q: A company bought a machine that has an expected life of six years and no salvage value. Management estimates that this machine will generate annual after-tax net income of $700. If the accounting rate of return is 10%, what was the purchase price of the machine? A. $7,000 B. $700 C. $28,000 D. $14,000 E. $3,500

Q: A company bought a machine that has an expected life of seven years and no salvage value. Management estimates that this machine will generate annual after-tax net income of $540. If the accounting rate of return is 12%, what was the purchase price of the machine? A. $4,500 B. $540 C. $31,500 D. $9,000 E. $2,250

Q: The following data concerns a proposed equipment purchase: Cost $58,000 Salvage value $ 3,000 Estimated useful life 5 years Annual net cash flows $18,000 Depreciation method Straight-line Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is: A. 24.13% B. 20.98% C. 22.95% D. 59.00% E. 25.45%

Q: The accounting rate of return is calculated as: A. The after-tax income divided by the total investment. B. The after-tax income divided by the average investment. C. The cash flows divided by the average investment. D. The cash flows divided by the total investment. E. The average investment divided by the after-tax income.

Q: The following data concerns a proposed equipment purchase: Cost $278,000 Salvage value $ 6,000 Estimated useful life 8 years Annual net cash flows $ 46,360 Depreciation method Straight-line Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is: A. 34.09% B. 32.64% C. 8.35% D. 8.70% E. 16.67%

Q: The following data concerns a proposed equipment purchase: Cost $144,000 Salvage value $4,000 Estimated useful life 4 years Annual net cash flows $46,100 Depreciation method Straight-line Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is: A. 62.3% B. 32.0% C. 15.0% D. 7.7% E. 5.0%