Chapter 14 Capital Budgeting Decisions: Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

True/False Questions

  1. When cash flows are uneven and vary from year to year, the internal rate of return method is easier to use than the net present value method.
  1. For capital budgeting decisions, the net present value method is superior to the simple rate of return method.
  1. Depreciation is included as a cash flow in capital budgeting decisions to ensure that the original cost of the asset is fully recovered.
  1. Even when done properly, the total-cost and incremental-cost approaches to choosing between alternatives will sometimes yield different answers.
  1. An increase in the expected salvage value at the end of a capital budgeting project will have no effect on the internal rate of return for that project.
  1. The intangible benefits of automation cannot be estimated with any accuracy and therefore should be ignored in capital budgeting decisions.
  1. When making preference decisions about competing investment proposals, the project profitability index is superior to the internal rate of return.
  2. The project profitability index is computed by dividing the net present value of the project by the investment required by the project.
  1. In calculating the “investment required” for the project profitability index, the amount invested should be reduced by any salvage recovered from the sale of old equipment.
  1. The payback method is most appropriate for projects whose cash flows extend far into the future.
  1. When using the payback method, any cash flows for a project that occur after the payback period are not considered in computing the payback period for that project.
  1. The present value of a given future cash flow will increase as the discount rate decreases.
  1. If a company is operating at a profit, the cash inflow resulting from the depreciation tax shield is computed by multiplying the depreciation deduction by one minus the tax rate.
  1. All cash inflows are taxable.
  2. The after-tax benefit, or net cash inflow, realized from a particular taxable cash receipt can be obtained by multiplying the cash receipt by one minus the tax rate

Multiple Choice Questions

  1. Suture Corporation’s discount rate is 12%. If Suture has a 5-year investment project that has a project profitability index of zero, this means that:
  2. A) the net present value of the project is equal to zero.
  3. B) the internal rate of return of the project is equal to the discount rate.
  4. C) the payback period of the project is equal to the project’s useful life.
  5. D) both A and B above are true.
  1. Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project’s:
Payback Net Present Value Internal Rate of Return
A) No No No
B) Yes Yes Yes
C) No Yes Yes
D) No Yes No
  1. If income taxes are ignored, how is depreciation used in the following capital budgeting techniques?
Internal Rate of Return Net Present Value
A) Excluded Excluded
B) Excluded Included
C) Included Excluded
D) Included Included
  1. If the net present value of a project is zero based on a discount rate of 16%, then the internal rate of return is:
  2. A) equal to 16%.
  3. B) less than 16%.
  4. C) greater than 16%.
  5. D) cannot be determined from this data.
  1. Three potential investment projects (A, B, and C) at Nit Corporation all require the same initial investment, have the same useful life (3 years), and have no expected salvage value. Expected net cash inflows from these three projects each year is as follows:
A B C
Year 1…….. $1,000 $2,000 $3,000
Year 2…….. $2,000 $2,000 $2,000
Year 3…….. $3,000 $2,000 $1,000

            What can be determined from the information provided above?

  1. A) the net present value of project C will be the highest.
  2. B) the internal rate of return of projects A and C cannot be computed.
  3. C) the net present value and the internal rate of return will be the same for all three projects.
  4. D) both A and B above.
  1. A project’s net present value, ignoring income taxes, is affected by:
  2. A) the net book value of an asset that is replaced.
  3. B) the depreciation on an asset that is replaced.
  4. C) the depreciation to be taken on assets used directly on the project.
  5. D) proceeds from the sale of an asset that is replaced.
  1. A company has unlimited funds to invest at its discount rate. The company should invest in all projects having:
  2. A) an internal rate of return greater than zero.
  3. B) a net present value greater than zero.
  4. C) a simple rate of return greater than the discount rate.
  5. D) a payback period less than the project’s estimated life.
  1. When the cash flows are the same every period after the initial investment in a project, the payback period is equal to:
  2. A) the net present value.
  3. B) the simple rate of return.
  4. C) the factor of the internal rate of return.
  5. D) the payback rate of return.
  1. The internal rate of return method assumes that a project’s cash flows are reinvested at the:
  2. A) internal rate of return.
  3. B) simple rate of return.
  4. C) required rate of return.
  5. D) payback rate of return.
  1. (Ignore income taxes in this problem.) Which of the following would be used in the calculation of the internal rate of return of an investment in new machinery to replace old machinery?
  2. A) The annual depreciation expense on the new machinery.
  3. B) The cost of an overhaul that would be needed on the old machinery in three years.
  4. C) The salvage value of the old machinery in ten years.
  5. D) both B and C above.
  6. The project profitability index and the internal rate of return:
  7. A) will always result in the same preference ranking for investment projects.
  8. B) will sometimes result in different preference rankings for investment projects.
  9. C) are less dependable than the payback method in ranking investment projects.
  10. D) are less dependable than net present value in ranking investment projects.
  1. Zonifugal Corporation needs to purchase a new conveyor system for its factory. Four different conveyor systems have been proposed. Which calculation would be the best one for Zonifugal to use to determine which system to purchase?
  2. A) payback period
  3. B) simple rate of return
  4. C) net present value
  5. D) project profitability index
  1. A preference decision:
  2. A) is concerned with whether a project clears the minimum required rate of return hurdle.
  3. B) comes before the screening decision.
  4. C) is concerned with determining which of several acceptable alternatives is best.
  5. D) responses A, B, and C are all correct.
  1. In an equipment investment decision, which of the following amounts would be unaffected by a change in the tax rate?
  2. A) the present value of the initial investment in the equipment.
  3. B) the present value of the increase in working capital needed.
  4. C) the present value of the salvage value of the equipment.
  5. D) both A and B above.
  1. When evaluating a project, the portion of the fixed corporate headquarters expense that would be allocated to the project should be:
  2. A) included as a cash outflow on an after-tax basis by multiplying the expense by one minus the tax rate.
  3. B) included as a cash outflow on an after-tax basis by multiplying the expense by the tax rate.
  4. C) included as a cash outflow on a before-tax basis.
  5. D)
  1. (Ignore income taxes in this problem.) Given the following data:
Cost of equipment…………. $55,750
Annual cash inflows………. $10,000
Internal rate of return……… 16%

            The life of the equipment must be:

  1. A) it is impossible to determine from the data given
  2. B) 15 years
  3. C) 5 years
  4. D) 75 years
  1. (Ignore income taxes in this problem.) Heap Company is considering an investment in a project that will have a two year life. The project will provide a 10% internal rate of return, and is expected to have a $40,000 cash inflow the first year and a $50,000 cash inflow in the second year. What investment is required in the project?
  2. A) $74,340
  3. B) $77,660
  4. C) $81,810
  5. D) $90,000
  1. (Ignore income taxes in this problem.) Congener Beverage Corporation is considering an investment in a capital budgeting project that has an internal rate of return of 20%. The only cash outflow for this project is the initial investment. The project is estimated to have an 8 year life and no salvage value. Cash inflows from this project are expected to be $100,000 per year in each of the 8 years. Congener’s discount rate is 16%. What is the net present value of this project?
  2. A) $5,215
  3. B) $15,464
  4. C) $50,700
  5. D) $55,831
  1. (Ignore income taxes in this problem.) The Able Company is considering buying a new donut maker. This machine will replace an old donut maker that still has a useful life of 2 years. The new machine will cost $2,500 a year to operate, as opposed to the old machine, which costs $2,700 per year to operate. Also, because of increased capacity, an additional 10,000 donuts a year can be produced. The company makes a contribution margin of $0.02 per donut. The old machine can be sold for $5,000 and the new machine costs $25,000. The incremental annual net cash inflows provided by the new machine would be:
  2. A) $200
  3. B) $400
  4. C) $5,200
  5. D) $5,400
  1. (Ignore income taxes in this problem.) Given the following data:
Initial investment…………… $80,000
Annual cash inflow………… ?
Salvage value………………… $0
Net present value…………… $13,600
Life of the project………….. 6 years
Discount rate…………………. 16%

            Based on the data given above, the annual cash inflow from the project after the initial investment is closest to:

  1. A) $50,116
  2. B) $21,710
  3. C) $25,400
  4. D) $38,376
  1. (Ignore income taxes in this problem.) Virginia Company invested in a four-year project. Virginia’s discount rate is 10%. The cash inflows from this project are:
Year Cash Inflow
1 $4,000
2 $4,400
3 $4,800
4 $5,200

            Assuming a positive net present value of $1,000, the amount of the original investment was closest to:

  1. A) $2,552
  2. B) $4,552
  3. C) $13,427
  4. D) $17,400
  1. (Ignore income taxes in this problem.) Para Corporation is reviewing the following data relating to an energy saving investment proposal:
Initial investment…………… $50,000
Life of the project………….. 5 years
Salvage value………………… $10,000
Annual cash savings……….. ?

            What annual cash savings would be needed in order to satisfy the company’s 12% required rate of return (rounded to the nearest one hundred dollars)?

  1. A) $10,600
  2. B) $11,100
  3. C) $12,300
  4. D) $13,900
  1. (Ignore income taxes in this problem.) Nevus Tattoo Parlor is considering a capital budgeting project. This project will initially require a $25,000 investment in equipment and a $3,000 working capital investment. The useful life of this project is 5 years with an expected salvage value of zero on the equipment. The working capital will be released at the end of the 5 years. The new system is expected to generate net cash inflows of $9,000 per year in each of the 5 years. Nevus’ discount rate is 14%. The net present value of this project is closest to:
  2. A) $(3,088)
  3. B) $3,383
  4. C) $4,454
  5. D) $5,897
  1. (Ignore income taxes in this problem.) The Malaise Prevention Agency is a non-profit organization that does all of its own informational printing. The printing press that Malaise currently is using needs a $20,000 overhaul. This will extend the useful life of the press by 8 years. As an alternative, Malaise could buy a brand new modern press for $45,000. The new press would also last 8 years. The annual operating expenses of the old press are $12,000. The annual operating expenses of the new press will only be $7,000. The old press is not expected to have a salvage value in 8 years. The new press is expected to have a $6,000 salvage value in 8 years. Malaise’s discount rate is 14%. The net present value of the decision to buy the new press instead of overhauling the old press is closest to:
  2. A) $301
  3. B) $(301)
  4. C) $4,195
  5. D) $(46,089)
  1. (Ignore income taxes in this problem.) Nevland Corporation is considering the purchase of a machine that would cost $130,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $44,000. The company requires a minimum pretax return of 19% on all investment projects. The net present value of the proposed project is closest to:
  2. A) $38,040
  3. B) $26,376
  4. C) $74,902
  5. D) $20,040
  6. (Ignore income taxes in this problem) The management of Penfold Corporation is considering the purchase of a machine that would cost $440,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $102,000 per year. The company requires a minimum pretax return of 16% on all investment projects. The net present value of the proposed project is closest to:
  7. A) -$28,022
  8. B) $96,949
  9. C) -$79,196
  10. D) $274,000
  1. (Ignore income taxes in this problem.) Dowlen, Inc., is considering the purchase of a machine that would cost $150,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $23,000. The machine would reduce labor and other costs by $36,000 per year. Additional working capital of $6,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 12% on all investment projects. The net present value of the proposed project is closest to:
  2. A) $9,657
  3. B) -$2,004
  4. C) $6,699
  5. D) $13,223
  1. (Ignore income taxes in this problem.) The Poteran Company is considering a machine that will save $3,000 a year in cash operating costs each year for the next six years. At the end of six years it would have no salvage value. If this machine costs $9,060 now, the machine’s internal rate of return is closest to:
  2. A) 18%
  3. B) 20%
  4. C) 22%
  5. D) 24%
  1. (Ignore income taxes in this problem) The management of Elamin Corporation is considering the purchase of a machine that would cost $365,695 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $61,000 per year. The internal rate of return on the investment in the new machine is closest to:
  2. A) 9%
  3. B) 11%
  4. C) 12%
  5. D) 10%
  1. (Ignore income taxes in this problem.) Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $281,656, would have a useful life of 7 years, and would have no salvage value. The tractor-trailer would be used in the company’s hauling business, resulting in additional net cash inflows of $76,000 per year. The internal rate of return on the investment in the tractor-trailer is closest to:
  2. A) 19%
  3. B) 18%
  4. C) 21%
  5. D) 16%
  1. (Ignore income taxes in this problem.) Golab Roofing is considering the purchase of a crane that would cost $69,846, would have a useful life of 6 years, and would have no salvage value. The use of the crane would result in labor savings of $21,000 per year. The internal rate of return on the investment in the crane is closest to:
  2. A) 18%
  3. B) 20%
  4. C) 19%
  5. D) 17%
  1. (Ignore income taxes in this problem) Boe Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 9 years. The company uses a discount rate of 10% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is -$439,527. Management is having difficulty estimating the salvage value of the aircraft. To the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?
  2. A) $439,527
  3. B) $43,953
  4. C) $4,395,270
  5. D) $1,036,620
  1. (Ignore income taxes in this problem) The management of Byrge Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines. The aircraft would have a useful life of 8 years. The company uses a discount rate of 10% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is -$448,460. To the nearest whole dollar how large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive?
  2. A) $44,846
  3. B) $56,058
  4. C) $84,060
  5. D) $448,460
  1. (Ignore income taxes in this problem) The management of Osborn Corporation is investigating an investment in equipment that would have a useful life of 8 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is -$401,414. To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?
  2. A) $48,170
  3. B) $50,177
  4. C) $80,800
  5. D) $401,414
  1. (Ignore income taxes in this problem.) Croce, Inc., is investigating an investment in equipment that would have a useful life of 7 years. The company uses a discount rate of 8% in its capital budgeting. The net present value of the investment, excluding the salvage value, is -$515,967. To the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive?
  2. A) $41,277
  3. B) $885,021
  4. C) $515,967
  5. D) $6,449,588
  1. A project has an initial investment of $100,000 and a project profitability index of 0.15. The discount rate is 12%. The net present value of the project is closest to:
  2. A) $15,000
  3. B) $115,000
  4. C) $112,000
  5. D) $12,000
  1. A company is pondering an investment project that has an internal rate of return which is equal to the company’s discount rate. The project profitability index of this investment project is:
  2. A) 0
  3. B) 5
  4. C) 0
  5. D) 5
  1. (Ignore income taxes in this problem.) The management of Solar Corporation is considering the following three investment projects:
Project L Project M Project N
Investment required………………….. $37,000 $55,000 $82,000
Present value of cash inflows…….. $38,480 $62,150 $90,200

            Rank the projects according to the profitability index, from most profitable to least profitable.

  1. A) M,N,L
  2. B) L,N,M
  3. C) N,L,M
  4. D) N,M,L
  1. (Ignore income taxes in this problem.) Trovato Corporation is considering a project that would require an investment of $48,000. No other cash outflows would be involved. The present value of the cash inflows would be $51,840. The profitability index of the project is closest to:
  2. A) 07
  3. B) 08
  4. C) 92
  5. D) 08
  1. (Ignore income taxes in this problem.) Ryner Corporation is considering three investment projects-S, T, and U. Project S would require an investment of $20,000, Project T of $69,000, and Project U of $83,000. No other cash outflows would be involved. The present value of the cash inflows would be $23,200 for Project S, $77,970 for Project T, and $94,620 for Project U. Rank the projects according to the profitability index, from most profitable to least profitable.
  2. A) U,T,S
  3. B) T,S,U
  4. C) U,S,T
  5. D) S,U,T
  1. (Ignore income taxes in this problem.) The management of Leitheiser Corporation is considering a project that would require an initial investment of $51,000. No other cash outflows would be required. The present value of the cash inflows would be $57,630. The profitability index of the project is closest to:
  2. A) 13
  3. B) 87
  4. C) 13
  5. D) 12
  1. (Ignore income taxes in this problem.) Olinick Corporation is considering a project that would require an investment of $343,000 and would last for 8 years. The incremental annual revenues and expenses generated by the project during those 8 years would be as follows:
Sales…………………………….. $227,000
Variable expenses…………..     52,000
Contribution margin………..   175,000
Fixed expenses:
Salaries………………………. 27,000
Rents…………………………. 41,000
Depreciation………………..     40,000
Total fixed expenses……….   108,000
Net operating income……… $  67,000

            The scrap value of the project’s assets at the end of the project would be $23,000. The payback period of the project is closest to:

  1. A) 0 years
  2. B) 1 years
  3. C) 2 years
  4. D) 8 years
  1. (Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $263,000 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project’s assets at the end of the project would be $15,000. The payback period of the project is closest to:
  2. A) 8 years
  3. B) 6 years
  4. C) 7 years
  5. D) 0 years
  1. (Ignore income taxes in this problem.) Slomkowski Corporation is contemplating purchasing equipment that would increase sales revenues by $298,000 per year and cash operating expenses by $143,000 per year. The equipment would cost $712,000 and have a 8 year life with no salvage value. The annual depreciation would be $89,000. The simple rate of return on the investment is closest to:
  2. A) 3%
  3. B) 8%
  4. C) 1%
  5. D) 5%
  1. (Ignore income taxes in this problem.) The management of Plotnik Corporation is investigating purchasing equipment that would increase sales revenues by $269,000 per year and cash operating expenses by $156,000 per year. The equipment would cost $294,000 and have a 6 year life with no salvage value. The simple rate of return on the investment is closest to:
  2. A) 7%
  3. B) 4%
  4. C) 8%
  5. D) 8%
  1. (Ignore income taxes in this problem.) An expansion at Fey, Inc., would increase sales revenues by $150,000 per year and cash operating expenses by $47,000 per year. The initial investment would be for equipment that would cost $328,000 and have a 8 year life with no salvage value. The annual depreciation on the equipment would be $41,000. The simple rate of return on the investment is closest to:
  2. A) 3%
  3. B) 9%
  4. C) 5%
  5. D) 4%
  1. (Ignore income taxes in this problem.) Crowl Corporation is investigating automating a process by purchasing a machine for $792,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $132,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $21,000. The annual depreciation on the new machine would be $88,000. The simple rate of return on the investment is closest to:
  2. A) 1%
  3. B) 7%
  4. C) 7%
  5. D) 6%
  1. (Ignore income taxes in this problem.) The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of return on the investment is closest to:
  2. A) 1%
  3. B) 1%
  4. C) 4%
  5. D) 3%
  1. (Ignore income taxes in this problem.)     A company wants to have $20,000 at the end of a ten-year period by investing a single sum now. How much needs to be invested in order to have the desired sum in ten years, if the money can be invested at 12%?
  2. A) $3,254.68
  3. B) $3,539.82
  4. C) $6,440.00
  5. D) $7,720.00
  1. (Ignore income taxes in this problem.) At an interest rate of 14%, approximately how much would you need to invest today if you wanted to have $2,000,000 in 10 years?
  2. A) $383,436
  3. B) $540,000
  4. C) $740,741
  5. D) $1,043,200
  1. (Ignore income taxes in this problem.) How much would you have to invest today in the bank at an interest rate of 8% to have an annuity of $4,800 per year for 7 years, with nothing left in the bank at the end of the 7 years? Select the amount below that is closest to your answer.
  2. A) $33,600
  3. B) $2,798
  4. C) $24,989
  5. D) $31,111
  1. (Ignore income taxes in this problem.) You have deposited $24,764 in a special account that has a guaranteed interest rate. If you withdraw $4,300 at the end of each year for 9 years, you will completely exhaust the balance in the account. The guaranteed interest rate is closest to:
  2. A) 6%
  3. B) 10%
  4. C) 17%
  5. D) 56%
  1. (Ignore income taxes in this problem.) You have deposited $7,620 in a special account that has a guaranteed interest rate of 19% per year. If you are willing to completely exhaust the account, what is the maximum amount that you could withdraw at the end of each of the next 7 years? Select the amount below that is closest to your answer.
  2. A) $1,295
  3. B) $2,056
  4. C) $2,219
  5. D) $1,089
  1. (Ignore income taxes in this problem.) Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. What is the present value of the lease payments if the discount rate is 5%?
  2. A) $12,528
  3. B) $14,103
  4. C) $14,808
  5. D) $11,050
  1. (Ignore income taxes in this problem.) Domebo Corporation has entered into a 7 year lease for a piece of equipment. The annual payment under the lease will be $3,400, with payments being made at the beginning of each year. If the discount rate is 14%, the present value of the lease payments is closest to:
  2. A) $9,511
  3. B) $16,623
  4. C) $20,877
  5. D) $23,800
  1. Wedge Corporation uses a discount rate of 14% and has a tax rate of 30%. The following cash flows occur in the last year of a 10-year equipment selection investment project:
Cost savings for the year……………………… $180,000
Working capital released………………………. $120,000
Salvage value from sale of equipment……. $25,000

            At the end of the ten years when the equipment is sold, its net book value for tax purposes is zero. The total after-tax present value of the cash flows above is closest to:

  1. A) $45,765
  2. B) $48,465
  3. C) $61,425
  4. D) $71,145
  1. A company anticipates a taxable cash receipt of $80,000 in year 3 of a project. The company’s tax rate is 30% and its discount rate is 10%. The present value of this future cash flow is closest to:
  2. A) $42,056
  3. B) $56,000
  4. C) $24,000
  5. D) $18,032
  1. A company anticipates a taxable cash expense of $30,000 in year 4 of a project. The company’s tax rate is 30% and its discount rate is 14%. The present value of this future cash flow is closest to:
  2. A) $(21,000)
  3. B) $(5,329)
  4. C) $(9,000)
  5. D) $(12,432)
  1. A company anticipates a depreciation deduction of $70,000 in year 4 of a project. The company’s tax rate is 30% and its discount rate is 12%. The present value of the depreciation tax shield resulting from this deduction is closest to:
  2. A) $31,140
  3. B) $49,000
  4. C) $21,000
  5. D) $13,356
  1. A company needs an increase in working capital of $50,000 in a project that will last 4 years. The company’s tax rate is 30% and its discount rate is 14%. The present value of the release of the working capital at the end of the project is closest to:
  2. A) $15,000
  3. B) $20,723
  4. C) $29,600
  5. D) $35,000
  1. Dunn Construction, Inc., has a large crane that cost $35,000 when purchased ten years ago. Depreciation taken to date totals $25,000. The crane can be sold now for $6,000. Assuming a tax rate of 40%, if the crane is sold the total after-tax cash inflow for capital budgeting purposes will be:
  2. A) $8,400
  3. B) $12,000
  4. C) $7,600
  5. D) $10,000
  1. If an investment of $90,000 made now has annual cash operating inflows of $5,000, and if the tax rate is 40%, then the after-tax cash operating inflow each year would be:
  2. A) $2,000
  3. B) $36,000
  4. C) $3,000
  5. D) $54,000

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     Appendix:  14C     LO:  8     Level:  Easy

            Solution:

            After-tax cash operating inflow = $5,000 × (1 – 0.40) = $3,000

  1. If a company’s income tax rate is 30% and its annual depreciation deduction is $80,000, then the annual tax savings from the depreciation tax shield is:
  2. A) $56,000
  3. B) $24,000
  4. C) $80,000
  5. D) $32,000
  1. Garfield, Inc., is considering a ten-year investment project with forecasted cash revenues of $40,000 per year and forecasted cash expenses of $29,000 per year. The initial cost of the equipment for the project is $23,000. The salvage value of the equipment is $9,000 at the end of the ten years of the project. The net book value of the equipment for tax purposes will be zero at the end of the ten years. The project requires a working capital investment of $7,000 at its inception and another working capital infusion of $5,000 at the end of year five. All of this working capital would be released for use elsewhere at the end of the project. The company’s tax rate is 40%. What is the after-tax net cash flow in the tenth year of the project?
  2. A) $32,000
  3. B) $24,000
  4. C) $20,000
  5. D) $11,000

Use the following to answer questions 80-81:

The Golden Company is analyzing projects A, B, and C as possible investment opportunities. Each of these projects has a useful life of eight years. The following information has been obtained:

Project A Project B Project C
Initial investment………………………………… $250,000 $475,000 $380,000
Present value of future net cash inflows…. $290,000 $503,000 $422,000
Internal rate of return…………………………… 16% 20% 18%
  1. Consider the following statements:
  1. Project A is preferred to Project B according to a net present value ranking.
  2. Project A is preferred to Project B according to an internal rate of return ranking.
  • Project A is preferred to Project B according to a project profitability index ranking.

            Which is true?

  1. A) Only I
  2. B) Only II
  3. C) Only I and II
  4. D) Only I and III
  1. Consider the following statements:
  1. Project A has the highest ranking according to the project profitability index criterion.
  2. Project B has the highest ranking according to the internal rate of return criterion.
  • Project C has the highest ranking according to the net present value criterion.

            Which is true?

  1. A) Only II
  2. B) Only I and III
  3. C) Only II and III
  4. D) I, II and III
  1. The payback period for the investment is closest to:
  2. A) 2 years
  3. B) 5 years
  4. C) 8 years
  5. D) 0 years
  1. The simple rate of return on the investment is closest to:
  2. A) 5%
  3. B) 0%
  4. C) 8%
  5. D) 3%
  1. The net present value on this investment is closest to:
  2. A) $160,000
  3. B) $240,024
  4. C) $58,800
  5. D) $26,750
  1. The internal rate of return on the investment is closest to:
  2. A) 11%
  3. B) 13%
  4. C) 15%
  5. D) 17%

Use the following to answer questions 86-87:

(Ignore income taxes in this problem.) The Rapp Company is considering buying a new machine which will require an initial outlay of $15,000. The company estimates that over the next four years this machine would save $6,000 per year in cash operating expenses. At the end of four years, the machine would have no salvage value. The company’s required rate of return is 14%.

  1. The net present value of this investment is closest to:
  2. A) $(12,632)
  3. B) $17,484
  4. C) $2,484
  5. D) $3,612
  1. The machine’s internal rate of return is closest to:
  2. A) 16%
  3. B) 18%
  4. C) 20%
  5. D) 22%

Use the following to answer questions 88-89:

(Ignore income taxes in this problem.) Allo Foundation, a tax-exempt organization, invested $200,000 in cost-saving equipment. The equipment has a five-year useful life with no salvage value. Allo estimates that the annual cash savings from this project will amount to $65,000. On investments of this type, Allo’s required rate of return is 12%.

  1. The net present value of the project is closest to:
  2. A) $34,300
  3. B) $36,400
  4. C) $90,000
  5. D) $125,000
  1. Allo’s internal rate of return on this project is closest to:
  2. A) 13%
  3. B) 15%
  4. C) 17%
  5. D) 19%

Use the following to answer questions 90-91:

(Ignore income taxes in this problem.) Dumora Corporation is considering an investment project that will require an initial investment of $9,400 and will generate the following net cash inflows in each of the five years of its useful life:

Year 1 Year 2 Year 3 Year 4 Year 5
Net cash inflows…. $1,000 $2,000 $4,000 $6,000 $5,000

Dumora’s discount rate is 16%.

  1. Dumora’s payback period for this investment project is closest to:
  2. A) 91 years
  3. B) 61 years
  4. C) 89 years
  5. D) 40 years
  1. Dumora’s net present value for this investment project is closest to:
  2. A) $(832)
  3. B) $1,204
  4. C) $1,376
  5. D) $2,386

Use the following to answer questions 92-93:

(Ignore income taxes in this problem.) Vandezande Inc. is considering the acquisition of a new machine that costs $370,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are:

Incremental net operating income Incremental net cash flows
Year 1….. $54,000 $128,000
Year 2….. $31,000 $105,000
Year 3….. $52,000 $126,000
Year 4….. $49,000 $123,000
Year 5….. $48,000 $122,000
  1. If the discount rate is 10%, the net present value of the investment is closest to:
  2. A) $370,000
  3. B) $457,479
  4. C) $234,000
  5. D) $87,479
  1. The payback period of this investment, rounded off to the nearest tenth of a year, is closest to:
  2. A) 9 years
  3. B) 9 years
  4. C) 1 years
  5. D) 0 years

Use the following to answer questions 94-95:

(Ignore income taxes in this problem.) Oriol Inc. is considering the acquisition of equipment that costs $360,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are:

Incremental net cash flows
Year 1…….. $115,000
Year 2…….. $138,000
Year 3…….. $95,000
Year 4…….. $91,000
Year 5…….. $133,000
Year 6…….. $134,000
  1. If the discount rate is 19%, the net present value of the investment is closest to:
  2. A) $346,000
  3. B) $398,667
  4. C) $38,667
  5. D) $121,841
  1. The payback period of this investment is closest to:
  2. A) 1 years
  3. B) 9 years
  4. C) 0 years
  5. D) 1 years

Use the following to answer questions 96-98:

(Ignore income taxes in this problem.) Morrel University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhauled now or replaced with a new shuttle bus. The following data have been gathered concerning these two alternatives:

Present Bus New Bus
Purchase cost new…………………….. $32,000 $40,000
Remaining net book value…………. $21,000
Major repair needed now…………… $9,000
Annual cash operating costs………. $12,000 $8,000
Salvage value now……………………. $10,000
Trade-in value in seven years……… $2,000 $5,000

The University could continue to use the present bus for the next seven years. Whether the present bus is used or a new bus is purchased, the bus would be traded in for another bus at the end of seven years. The University uses a discount rate of 12% and the total cost approach to net present value analysis in evaluating its investment decisions.

  1. If the new bus is purchased, the present value of the annual cash operating costs associated with this alternative is (rounded off to the nearest hundred dollars):
  2. A) $(54,800)
  3. B) $(36,500)
  4. C) $(16,200)
  5. D) $(42,800)
  1. If the present bus is repaired, the present value of the annual cash operating costs associated with this alternative is (rounded off to the nearest hundred dollars):
  2. A) $(36,500)
  3. B) $(16,200)
  4. C) $(47,200)
  5. D) $(54,800)
  1. If the present bus is repaired, the present value of the salvage received on sale of the bus seven years from now is:
  2. A) $(2,260)
  3. B) $2,260
  4. C) $904
  5. D) $(904)

Use the following to answer questions 99-100:

(Ignore income taxes in this problem.) Becker Billing Systems, Inc., has an antiquated high-capacity printer that needs to be upgraded. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:

Overhaul Present System Purchase New System
Purchase cost when new…………. $300,000 $400,000
Accumulated depreciation………. $220,000
Overhaul costs needed now…….. $250,000
Annual cash operating costs……. $120,000 $90,000
Salvage value now…………………. $90,000
Salvage value in ten years……….. $30,000 $80,000
Working capital required………… $50,000

The company uses a 10% discount rate and the total-cost approach to capital budgeting analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of ten years.

  1. The net present value of the overhaul alternative (rounded to the nearest hundred dollars) is:
  2. A) $(750,300)
  3. B) $(725,800)
  4. C) $(975,800)
  5. D) $(987,400)
  1. The net present value of the new system alternative (rounded to the nearest hundred dollars) is:
  2. A) $(862,900)
  3. B) $(552,900)
  4. C) $(758,400)
  5. D) $(987,400)

Use the following to answer questions 101-102:

(Ignore income taxes in this problem.) Almendarez Corporation is considering the purchase of a machine that would cost $320,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $51,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $72,000. The company requires a minimum pretax return of 18% on all investment projects.

  1. The present value of the annual cost savings of $72,000 is closest to:
  2. A) $22,608
  3. B) $874,298
  4. C) $504,000
  5. D) $274,464
  1. The net present value of the proposed project is closest to:
  2. A) -$29,522
  3. B) -$45,536
  4. C) $5,464
  5. D) -$94,042

Use the following to answer questions 103-104:

(Ignore income taxes in this problem.) The management of Opray Corporation is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% on all investment projects.

  1. The present value of the annual cost savings of $78,000 is closest to:
  2. A) $763,064
  3. B) $177,027
  4. C) $546,000
  5. D) $367,536
  1. The net present value of the proposed project is closest to:
  2. A) $15,646
  3. B) $89,588
  4. C) $7,536
  5. D) $186,000

Use the following to answer questions 105-106:

(Ignore income taxes in this problem.) Paragas, Inc., is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 19% on all investment projects.

  1. The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:
  2. A) -$3,004
  3. B) $0
  4. C) -$12,080
  5. D) $11,816
  1. The net present value of the proposed project is closest to:
  2. A) $9,584
  3. B) $78,530
  4. C) $22,532
  5. D) $19,528

Use the following to answer questions 107-108:

(Ignore income taxes in this problem.) Undersymington Company has an opportunity to invest in a machine that would cost $28,000, and that would produce cost savings of $8,000 each year for the next five years.

  1. If the machine has zero salvage value, then the internal rate of return is closest to:
  2. A) 4%
  3. B) 9%
  4. C) 8%
  5. D) 2%
  1. If the machine’s salvage value at the end of the project is $4,000, then the internal rate of return is:
  2. A) less than 11%
  3. B) less than 12%, but greater than 11%
  4. C) less than 13%, but greater than 12%
  5. D) greater than 13%

Use the following to answer questions 109-110:

(Ignore income taxes in this problem.) Cabe Corporation uses a discount rate of 18% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 7 years has thus far yielded a net present value of -$155,606. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment.

  1. Ignoring any salvage value, to the nearest whole dollar how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?
  2. A) $40,820
  3. B) $22,229
  4. C) $28,009
  5. D) $155,606
  1. Ignoring any cash flows from intangible benefits, to the nearest whole dollar how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?
  2. A) $495,561
  3. B) $28,009
  4. C) $155,606
  5. D) $864,478

Use the following to answer questions 111-112:

(Ignore income taxes in this problem.) The management of Hansley Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 18% in its capital budgeting. Good estimates are available for the initial investment and the annual cash operating outflows, but not for the annual cash inflows and the salvage value of the equipment. The net present value of the initial investment and the annual cash outflows is -$273,300.

  1. Ignoring any salvage value, to the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?
  2. A) $54,660
  3. B) $49,194
  4. C) $87,400
  5. D) $273,300
  1. Ignoring the cash inflows, to the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive?
  2. A) $625,400
  3. B) $1,518,333
  4. C) $273,300
  5. D) $49,194

Use the following to answer questions 113-114:

(Ignore income taxes in this problem.) Lem Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 11% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is -$317,966. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft.

  1. Ignoring the annual benefit, to the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?
  2. A) $2,890,600
  3. B) $317,966
  4. C) $34,976
  5. D) $659,680
  1. Ignoring any salvage value, to the nearest whole dollar how large would the annual benefit have to be to make the investment in the aircraft financially attractive?
  2. A) $67,480
  3. B) $317,966
  4. C) $34,976
  5. D) $45,424

Use the following to answer questions 115-116:

(Ignore income taxes in this problem.) Eddie Corporation is considering the following three investment projects:

Project C Project D Project E
Investment required………………….. $36,000 $41,000 $85,000
Present value of cash inflows…….. $39,960 $47,560 $92,650
  1. The profitability index of investment project D is closest to:
  2. A) 16
  3. B) 84
  4. C) 14
  5. D) 16
  1. Rank the projects according to the profitability index, from most profitable to least profitable.
  2. A) E,C,D
  3. B) E,D,C
  4. C) D,C,E
  5. D) C,E,D

Use the following to answer questions 117-118:

(Ignore income taxes in this problem.) The management of Hibert Corporation is considering three investment projects-W, X, and Y. Project W would require an investment of $21,000, Project X of $66,000, and Project Y of $95,000. The present value of the cash inflows would be $22,470 for Project W, $73,920 for Project X, and $98,800 for Project Y.

  1. The profitability index of investment project X is closest to:
  2. A) 11
  3. B) 88
  4. C) 12
  5. D) 12
  1. Rank the projects according to the profitability index, from most profitable to least profitable.
  2. A) Y,W,X
  3. B) X,Y,W
  4. C) X,W,Y
  5. D) W,Y,X

Use the following to answer questions 119-123:

(Appendix 14C) Gibboney Inc. has provided the following data to be used in evaluating a proposed investment project:

Initial investment…………… $880,000
Annual cash receipts………. $660,000
Life of the project………….. 8 years
Annual cash expenses…….. $330,000
Salvage value………………… $88,000
Tax rate………………………… 30%

For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 7 years. The company uses a discount rate of 12%.

  1. When computing the net present value of the project, what are the annual after-tax cash receipts?
  2. A) $462,000
  3. B) $396,000
  4. C) $198,000
  5. D) $69,300
  1. When computing the net present value of the project, what are the annual after-tax cash expenses?
  2. A) $429,000
  3. B) $242,000
  4. C) $99,000
  5. D) $231,000
  1. When computing the net present value of the project, what is the annual amount of the depreciation tax shield? In other words, by how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken?
  2. A) $37,714
  3. B) $88,000
  4. C) $77,000
  5. D) $33,000
  1. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?
  2. A) $0
  3. B) $88,000
  4. C) $26,400
  5. D) $61,600
  1. The net present value of the project is closest to:
  2. A) $464,622
  3. B) $439,736
  4. C) $292,494
  5. D) $267,608

Use the following to answer questions 124-127:

(Appendix 14C) Shufflebarger Inc. has provided the following data to be used in evaluating a proposed investment project:

Initial investment…………… $280,000
Annual cash receipts………. $196,000
Life of the project…………. 6 years
Annual cash expenses…….. $78,000
Salvage value………………… $28,000

The company’s tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 16%.

  1. When computing the net present value of the project, what are the annual after-tax cash receipts?
  2. A) $112,000
  3. B) $137,200
  4. C) $29,400
  5. D) $58,800
  1. When computing the net present value of the project, what are the annual after-tax cash expenses?
  2. A) $101,400
  3. B) $50,000
  4. C) $54,600
  5. D) $23,400
  1. When computing the net present value of the project, what is the annual amount of the depreciation tax shield? In other words, by how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken?
  2. A) $16,800
  3. B) $39,200
  4. C) $14,000
  5. D) $32,667
  1. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?
  2. A) $28,000
  3. B) $8,400
  4. C) $19,600
  5. D) $0

Use the following to answer questions 128-129:

(Appendix 14C) Valentin Inc. has provided the following data concerning an investment project that has been proposed:

Initial investment…………… $890,000
Annual cash receipts………. $534,000
Life of the project………….. 5 years
Annual cash expenses…….. $267,000
Salvage value………………… $45,000

The company’s tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 3 years without any reduction for salvage value. The company uses a discount rate of 10%.

  1. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?
  2. A) $13,500
  3. B) $45,000
  4. C) $0
  5. D) $31,500
  1. The net present value of the project is closest to:
  2. A) $39,881
  3. B) $59,442
  4. C) -$181,462
  5. D) -$161,901

Use the following to answer questions 130-131:

(Appendix 14C) Nunoz Inc. is considering an investment project that would require an initial investment of $250,000 and that would last for 9 years. The annual cash receipts from the project would be $175,000 and the annual cash expenses would be $79,000. The equipment used in the project could be sold at the end of the project for a salvage value of $13,000. The company’s tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 7 years without any reduction for salvage value. The company uses a discount rate of 10%.

  1. When computing the net present value of the project, what are the annual after-tax cash receipts?
  2. A) $52,500
  3. B) $122,500
  4. C) $139,286
  5. D) $96,000
  1. The net present value of the project is closest to:
  2. A) $140,863
  3. B) $137,005
  4. C) $193,020
  5. D) $189,162

Essay Questions

  1. (Ignore income taxes in this problem.) Cooney Inc. has provided the following data concerning a proposed investment project:
Initial investment…………… $160,000
Life of the project…………. 7 years
Annual net cash inflows…. $40,000
Salvage value………………… $16,000

            The company uses a discount rate of 17%.

            Required:

            Compute the net present value of the project.

  1. (Ignore income taxes in this problem.) Strausberg Inc. is considering investing in a project that would require an initial investment of $270,000. The life of the project would be 6 years. The annual net cash inflows from the project would be $81,000. The salvage value of the assets at the end of the project would be $27,000. The company uses a discount rate of 10%.

            Required:

            Compute the net present value of the project.

  1. (Ignore income taxes in this problem.) Tiff Corporation has provided the following data concerning a proposed investment project:
Initial investment……………… $960,000
Life of the project…………….. 6 years
Working capital required…… $20,000
Annual net cash inflows……. $288,000
Salvage value…………………… $144,000

            The company uses a discount rate of 16%. The working capital would be released at the end of the project.

            Required:

            Compute the net present value of the project.

  1. (Ignore income taxes in this problem.) Mattice Corporation is considering investing $490,000 in a project. The life of the project would be 7 years. The project would require additional working capital of $34,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $123,000. The salvage value of the assets used in the project would be $49,000. The company uses a discount rate of 11%.

            Required:

            Compute the net present value of the project.

  1. (Ignore income taxes in this problem.) Wary Corporation is considering the purchase of a machine that would cost $240,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $29,000. The machine would reduce labor and other costs by $63,000 per year. The company requires a minimum pretax return of 19% on all investment projects.

            Required:

            Determine the net present value of the project. Show your work!

  1. (Ignore income taxes in this problem.) The management of Kinion Corporation is considering the purchase of a machine that would cost $170,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $50,000 per year. The company requires a minimum pretax return of 17% on all investment projects.

            Required:

            Determine the net present value of the project. Show your work!

  1. (Ignore income taxes in this problem.) Joanette, Inc., is considering the purchase of a machine that would cost $240,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $48,000. The machine would reduce labor and other costs by $62,000 per year. Additional working capital of $7,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company requires a minimum pretax return of 17% on all investment projects.

            Required:

            Determine the net present value of the project. Show your work!

  1. (Ignore income taxes in this problem.) The management of Harling Corporation is considering the purchase of a machine that would cost $90,504 and would have a useful life of 5 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $27,000 per year.

            Required:

            Determine the internal rate of return on the investment in the new machine. Show your work!

  1. (Ignore income taxes in this problem.) Maxcy Limos, Inc., is considering the purchase of a limousine that would cost $187,335, would have a useful life of 9 years, and would have no salvage value. The limousine would bring in cash inflows of $45,000 per year in excess of its cash operating costs.

            Required:

            Determine the internal rate of return on the investment in the new limousine. Show your work!

  1. (Ignore income taxes in this problem.) The management of Zachery Corporation is considering the purchase of a automated molding machine that would cost $203,255, would have a useful life of 5 years, and would have no salvage value. The automated molding machine would result in cash savings of $65,000 per year due to lower labor and other costs.

            Required:

            Determine the internal rate of return on the investment in the new automated molding machine. Show your work!

  1. (Ignore income taxes in this problem.) The management of an amusement park is considering purchasing a new ride for $60,000 that would have a useful life of 15 years and a salvage value of $8,000. The ride would require annual operating costs of $26,000 throughout its useful life. The company’s discount rate is 10%. Management is unsure about how much additional ticket revenue the new ride would generate-particularly since customers pay a flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence of the ride would attract new customers.

            Required:

            How much additional revenue would the ride have to generate per year to make it an attractive investment?

  1. (Ignore income taxes in this problem.) Devon Corporation uses a discount rate of 8% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -$496,541. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment.

            Required:

  1. Ignoring any salvage value, how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?
  2. Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?
  1. (Ignore income taxes in this problem.) The management of Crosson Corporation is investigating the purchase of a new satellite routing system with a useful life of 9 years. The company uses a discount rate of 17% in its capital budgeting. The net present value of the investment, excluding its intangible benefits, is -$173,055.

            Required:

            How large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

  1. (Ignore income taxes in this problem.) Chipps Corporation uses a discount rate of 9% in its capital budgeting. Management is considering an investment in telecommunications equipment with a useful life of 5 years. Excluding the salvage value of the equipment, the net present value of the investment in the equipment is -$530,985.

            Required:

            How large would the salvage value of the telecommunications equipment have to be to make the investment in the telecommunications equipment financially attractive?

  1. (Ignore income taxes in this problem.) Choudhury Corporation is considering the following three investment projects:
Project H Project I Project J
Investment required…………………. $11,000 $53,000 $89,000
Present value of cash inflows…….. $12,980 $61,480 $96,120

            Required:

            Rank the investment projects using the project profitability index. Show your work

  1. (Ignore income taxes in this problem.) The management of Winstead Corporation is considering the following three investment projects:
Project Q Project R Project S
Investment required………………….. $14,000 $48,000 $74,000
Present value of cash inflows…….. $14,140 $54,720 $82,140

            The only cash outflows are the initial investments in the projects.

            Required:

            Rank the investment projects using the project profitability index. Show your work

  1. (Ignore income taxes in this problem.) Hady Company is considering purchasing a machine that would cost $688,800 and have a useful life of 7 years. The machine would reduce cash operating costs by $118,759 per year. The machine would have no salvage value.

            Required:

  1. Compute the payback period for the machine.
  2. Compute the simple rate of return for the machine.
  1. (Ignore income taxes in this problem.) Ramson Company is considering purchasing a machine that would cost $756,000 and have a useful life of 8 years. The machine would reduce cash operating costs by $132,632 per year. The machine would have a salvage value of $151,200 at the end of the project.

            Required:

  1. Compute the payback period for the machine.
  2. Compute the simple rate of return for the machine.
  1. (Ignore income taxes in this problem.) Ostermeyer Corporation is considering a project that would require an initial investment of $247,000 and would last for 7 years. The incremental annual revenues and expenses for each of the 7 years would be as follows:
Sales…………………………….. $198,000
Variable expenses…………..    46,000
Contribution margin………..  152,000
Fixed expenses:
Salaries………………………. 22,000
Rents…………………………. 32,000
Depreciation………………..   33,000
Total fixed expenses……….   87,000
Net operating income……… $ 65,000

            At the end of the project, the scrap value of the project’s assets would be $16,000.

            Required:

            Determine the payback period of the project. Show your work!

  1. (Ignore income taxes in this problem.) The management of Truelove Corporation is considering a project that would require an initial investment of $321,000 and would last for 7 years. The annual net operating income from the project would be $28,000, including depreciation of $42,000. At the end of the project, the scrap value of the project’s assets would be $27,000.

            Required:

            Determine the payback period of the project. Show your work!

  1. (Ignore income taxes in this problem.) Ducey Corporation is contemplating purchasing equipment that would increase sales revenues by $79,000 per year and cash operating expenses by $27,000 per year. The equipment would cost $150,000 and have a 6 year life with no salvage value. The annual depreciation would be $25,000.

            Required:

            Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!

  1. (Ignore income taxes in this problem.) The management of Nixon Corporation is investigating purchasing equipment that would cost $518,000 and have a 7 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $364,000 per year and cash operating expenses by $211,000 per year.

            Required:

            Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!

  1. (Ignore income taxes in this problem.) Russnak Corporation is investigating automating a process by purchasing a new machine for $198,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $68,000 per year in cash operating costs. The company’s current equipment would be sold for scrap now, yielding $18,000. The annual depreciation on the new machine would be $22,000.

            Required:

            Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!

  1. (Ignore income taxes in this problem.) The management of Schenk Corporation is investigating automating a process by replacing old equipment by a new machine. The old equipment would be sold for scrap now for $13,000. The new machine would cost $648,000, would have a 9 year useful life, and would have no salvage value. By automating the process, the company would save $186,000 per year in cash operating costs.

            Required:

            Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!

  1. A company is considering purchasing an asset for $70,000 that would have a useful life of 5 years and would have a salvage value of $12,000. For tax purposes, the entire original cost of the asset would be depreciated over 5 years using the straight-line method and the salvage value would be ignored. The asset would generate annual net cash inflows of $22,000 throughout its useful life. The project would require additional working capital of $8,000, which would be released at the end of the project. The company’s tax rate is 40% and its discount rate is 9%.

            Required:

            What is the net present value of the asset?

  1. Management is considering purchasing an asset for $40,000 that would have a useful life of 8 years and no salvage value. For tax purposes, the entire original cost of the asset would be depreciated over 8 years using the straight-line method. The asset would generate annual net cash inflows of $20,000 throughout its useful life. The project would require additional working capital of $5,000, which would be released at the end of the project. The company’s tax rate is 40% and its discount rate is 12%.

            Required:

            What is the net present value of the asset?

  1. Belling Inc. has provided the following data concerning a proposed investment project:
Initial investment…………… $168,000
Annual cash receipts………. $126,000
Life of the project………….. 9 years
Annual cash expenses…….. $50,000
Salvage value………………… $8,000

            The company’s tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 7 years. The company uses a discount rate of 14%.

            Required:

            Compute the net present value of the project.

  1. Camel Inc. is considering a project that would require an initial investment of $210,000 and would have a useful life of 6 years. The annual cash receipts would be $126,000 and the annual cash expenses would be $57,000. The salvage value of the assets used in the project would be $32,000. The company’s tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 5 years. The company uses a discount rate of 10%.

            Required:

            Compute the net present value of the project.

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The Effects Of Parental Involvement In The Education

The Effects Of Parental Involvement In The Education Essay

Parent involvement is a valuable component of any students education. It is a well-established fact that parental involvement is linked to childrens success at school. When parents are involved in their children’s education at home, they do better in school. (Henderson and Berla, 1994) The level of parent-school involvement is a better predictor of grades than are standardized test scores. (Desimone, 1999) The 12 years of 180 six-hour days spent in school add up to only 13% of a student’s waking, learning time during the first 18 years of life. The rest, 87% is spent out of school, primarily at home. (Walberg) What is important is not the type of school, or who goes there, but the quality of its relationship with the families. (Henderson and Map, 2002)

Research indicates that there are positive academic outcomes stemming from parental involvement with benefits beginning in early childhood, throughout adolescence and beyond. (Henderson and Mapp, 2002; Patrikakou, Weisberg, Redding, and Walberg, 2005)

Henderson and Berla (1994) in an article A New generation of Evidence, state that the family is critical to student achievement. When parents are involved in school, children go farther in school and the schools they go to are better. There is a strong correlation between parental involvement and increased academic achievement.

2.2 Conceptual Underpinnings of the study

Parental involvement was defined as including several different forms of parent participation in education and with the schools. Parents can support their children’s schooling by attending school functions, responding to school obligations (parent-teacher conferences, for example), and becoming involved in their children’s schoolwork. They provide encouragement, arrange for appropriate study time and space, model desired behavior (such as reading for pleasure), monitor homework, and actively tutor their children. (Henderson and Berla, 1994)

Parent is used in this study to include guardians, grand-parents, foster parents and anybody who takes care of the children. (Kathleen & Karen, 1989)

In the 1980s, the United States became particularly concerned with the quality of its educational system. Parental involvement in schools became a major issue.

Communities also become more watchful of the expense of public education, while local schools became concerned with continuous provision of high-quality teaching and other services. All of this occurred in a time of dwindling resources. Additionally, parents wanted assurance that their children were receiving preparation adequate to lead rewarding adult lives (Kathleen & Karen, 1989).

Riley (as cited in Moles, 2000) explained that “parents are the essential link in improving American education, and schools simply have to do a better job of reaching out to them” (p. vii). Parental expectations regarding their children appear to be a constant in children’s academic achievement and social adjustment. Although many parents may not be certain how to help their children with assignments, with guidance and support they can become actively involved in home learning activities, have an opportunity to teach, be models, and guide their children (Michigan Department of Education, 2001).

He became interested in how schools in the U.S. involve parents in the education of their children because of the situation in my home country, Cameroon. During his education in Africa, I observed that students whose parents were not involved in their education did not perform well. Many dropped out of school or failed to further their education. In the United States, parental involvement is discussed as a major focus. That is not the case in Cameroon. There, parents have little voice in pedagogy and content.

According to Keane (2007), parental involvement improves the chances of children’s success at school, yet research suggests that parent participation may be on the decline. Keane further asserted that student achievement represents more than just grades.

Attendance, students’ attitudes toward school, student behavior, and the drop-out rate all connect with student achievement. A report conducted by Desforges and Abouchaar (2003), showed that enhanced parental involvement leads to better academic performance, better attendance, and improved behavior at home and school (p. 44).

2.3 Context of Parental Involvement

In the post-World War II Era (1945-1950s), parental involvement included participation in parent conferences, monitoring of homework, signing of report cards, attending PTA meetings, and fundraising events. In the 1960s educators and policy makers focused on parental involvement as a way to improve educational success for the poor and underachieving students. This led to the development of a variety of models and strategies to promote such parental involvement (Milbrey & Shields, 1987).

In 1965, Haiman began experimenting with parent involvement program strategies. He designed and wrote the Parental Involvement Performance Standards for the National Head Start and this was used as a consultant to Head Start throughout the nation (Haiman, 1965). In 1968 he spoke on the relevance of curriculum, administration and community involvement (Chicago Tribune, 1968). By 1979, many schools had started incorporating parental involvement into their school programs. Parental involvement in special education programs also increased (Los Angeles Times, 1979).

By 1989, the National Education Organization had started incorporating parental involvement programs in their agendas. They provided training to school staff and parents on parental involvement. The School Board Association produced sample school policies on parental involvement which they believed would make schools more secure and more likely, academic development would take place. Best practices and models to support parental involvement were developed. Many reports were written to recommend the necessity of parental involvement in school improvement (USA Today, 1989). In the 1990s, studies demonstrated that parental involvement could predict academic achievement. Parental involvement was considered an integral part of the school curriculum. The level of parental involvement was increased in most of the school districts across the nation (USA Today, 1990).

Today, laws have been created to enforce parental involvement in schools including provisions of NCLB and School Accountability Teams. Movements for community control of education such as the education of low-income children, special education students, and English Language Learners have been developed to meet the needs of students. Districts focus on implementing strategies to promote parent, family, and community involvement (National Center for School Engagement, 2004). The Family Strengthening Policy Center (2004) established that states can develop a state-wide network to support teachers’ preparation for parental involvement, and also provide technical assistance to local districts and schools on how to get parents involved. School districts must have a written policy for administrative support and training for staff, parents and community members on parent involvement programs. The community should be able to advocate with state education agencies and school districts to promote widespread and effective parental involvement policies and practices.

According to the U.S. Department of Education (1997) a sustained mutual collaboration, support, and participation of school staff and families are required for a successful school-family partnerships and children’s learning. Although the success of school family partnerships is difficult to reach, it is important to note that the benefits to children and their educational success depends on hard work required to sustain the school-family partnerships (Epstein, Coates, Salinas, Sanders, & Simon, 1997).

In line with the mandates of NCLB, the New Mexico Public Education Department (NMPED) has developed statewide standards which establish expectations for all New Mexico public school students. These standards require every district in New Mexico to develop an Education Plan for Student Success (EPSS) — a long-range strategic plan to promote students’ success and continuous school improvement (Parents Searching Out, 2009).

Parent involvement in learning activity is a strategy that was found by Epstein (1995) to increase the educational effectiveness of the time that parents and children spend together at home. Teachers and parents agree on the involvement of parents, seventy one percent of principals and fifty nine percent of teachers called it a priority based on research conducted by. Those schools whose parental involvement is strong provide a lot of benefit to the students. ” How Strong Communication Contributes to Student and School Success: Parent and Family Involvement” shows that improved parental involvement not only leads to academic achievement, but to better attendance and improved behavior at home and school as well. When school and home work together collaboratively, and using a competent approach to education, it can make a huge difference in student achievement. (Padgett 2006) The National School Public Relations Association (NSPRA) suggests that a formal policy be created. Lack of planning was seen as one of the most challenging aspects to more involvement.

Walberg on “Families in Educational Productivity” states that there is no question that parent involvement represents an exceptionally powerful way of making schools more effective, and of dramatically enriching children’s experiences. Some research indicates that achievement among students in primary schools have identified theories and policies which play significant roles in parent involvement in education (Fan and Chen, 2001; Hill and Tyson, 2009). These theories and policies not only closed the education gap in terms of demographics they also maximize student potential. Parent involvement is so important that The No Child Left Behind Act (National PTA, 2006) is a Federal Policy that puts a mandate on parental involvement in education and family-school relations across primary school levels. However, despite the consensus about how important it is for family and school to work together across developmental stages, theories of parent involvement in education have been based on the primary school students in their context and do not focus on the changes that occur with middle school and early adolescent development (Hill and Taylor, 2004; Hill and Tyson, 2009). The Title 1 program is also a government mandated program developed to increase parent involvement and educational services for disadvantaged children. This program placed the emphasis on parental involvement as the primary means of improving the quality of education of low income children (Kim O. Yap and Enoki, 1995).

One may ask the question why parents should become involved in their children’s literacy activities. The evidence about the benefits of parents being involved in their children’s education in general and literacy activities in particular is overwhelming. (Fan and Chen 2001) in their meta-analysis found that parental involvement positively affects academic performance. Feinstein & Symons, 1999 point out in their research that parental involvement leads to academic achievement.

Epstein’s framework of six types of involvement are as follows: parenting which help all families establish home environments to support children as students; Communicating from home to school and school to home about school programs and student progress; Volunteering by organizing parent help and support. Learning at home by providing information and ideas from families about how to help students at home with homework and other curriculum-related activities; decisions and planning; Parents should be included in decision making; involve parent leaders and representatives; Collaborating with the community by identifying and integrating resources and services from the community to strengthen school programs, family practices, and student learning and development.

Students value their education when they see the interest shown by their parents. Barge, & Loges (2003), highlight the fact that government supports parental involvement.

According to Moosa, Karabenick, & Adam (2001), “…the alliance between home and school has dramatically changed throughout the history of formal education, as have the roles and functions that parents and teachers are expected to fulfill” (p. 477). Throughout time, parents have been “portrayed as both friend and foe in the course of educational reform” (Callahan, Rademacher, & Hildreth, 1998). Historically, parental involvement wasn’t always a welcomed addition to the school community, and even today some view parent-school relations as a power struggle. Shaver and Walls, (1998) reported that some research found little to no effect of parental involvement on school achievement for middle age students. For the most part however, teachers and administrators welcome a helping hand in the overcrowded classrooms of the public schools and agree that parental involvement is one way to bridge reading comprehension gaps. Today, it is widely recognized that parents play an essential role in their children’s school life. Numerous types of parental involvement have been shown to develop cognitive growth and success in school (Shaver and Walls, 1998). Schools are working hand in hand with parents, Edwards, and Alldred (2000); describe parents and schools as policy makers with similar functions when it comes to children.

Research indicates that there are positive academic outcomes stemming from parental involvement with benefits beginning in early childhood, throughout adolescence and beyond (Henderson and Mapp, 2002; Patrikakou, Weisberg, Redding, and Walberg, 2005). Shaver and Walls, (1998), are also in support, they point out that the connection between parents and school achievement is real.

The Epstein case studies are another research that supports parent involvement. Epstein (2002), used the Comprehensive School Reform Model (CSR) demonstrates how collaborative work produces positive outcomes. These studies were conducted in certain states, in selected school within the school districts. Educators, parents and community partners worked collaboratively on action teams to plan the curriculum. The programs are evaluated before being implemented in order to assess how well the plans connected family and school-community involvement.

Henderson and Berla (1994) in an article “A New generation of Evidence”, state that the family is critical to student achievement. When parents are involved in school, children go farther in school and the schools they go to are better. “Regardless of socioeconomic status or race, studies show a direct correlation between parental involvement and a child’s academic achievement (Williams 1992).

2.4 Parental Involvement and Achievement

It is well established that parental involvement is correlated with school achievement of both children and adolescents (Long, 2007). Primary school children gain greater academic, language, and social skills (Grolnick & Slowiaczek, 1994), primary school students have greater achievement and future aspirations (Eccles & Harold, 1993) and spend more time doing and completing homework (Epstein & Sanders, 2002). Research shows that parental involvement is more important to children’s academic success than their family’s socioeconomic status, race, ethnicity, or educational background (Amatea & West, 2007).

Parental involvement can encourage children’s and adolescents’ achievement in many ways. One way that parents can contribute positively to their children’s education is to assist them with their academic work at home. Parents who read to their children, assist them with their homework, and provide tutoring using resources provided by teachers tend to do better in school than children whose parents do not assist their children (Izzo et al., 1999). Additionally, in a study conducted by Callahan, Rademacher and Hildreth (1998) on twenty-six lower to middle-class “at risk” sixth and seventh grade white students, students’ mathematics scores increased when parents became involved with assisting them at home. In the Callahan et al. study, parents were trained for duration of ten weeks on how to implement home-based self management and reinforcement strategies. Shaver and Walls (1998) conducted a similar parent training with seventy-four Title I students in second to eighth grade. Their study showed that regardless of gender or socioeconomic status of the child, parent involvement increased the scores of both mathematics and reading. Other parental involvement strategies that are said to assist children academically are for parents to have books, newspapers, and computers in their homes (Suizzo, 2007).

This is not to say that just because there are books and newspapers in the home that children will read them; children do, however, fare better with their reading when there are books and computers in the home.

Research shows that the level of parental involvement is associated with academic success. Children whose parents are actively involved in their schooling benefit better than children whose parents are passively involved. Specifically, if parents attend teacher conferences, accept phone calls from the school, and read and sign communications from the school, their children will benefit academically more than children whose parents do none of the above. Furthermore, children excel even more when their parents assist them at home with their homework, attend school sponsored events, and volunteer at their children’s schools (Suizzo, 2007).

Children’s academic success also may be related to school-level parental involvement. Parental involvement can be defined as participation by a child’s mother and/or father, or legal guardian in a child’s education. Children who attend schools where there is a high level of parental involvement evidence greater achievement. School-level parental involvement seems to benefit children and adolescents academically and behaviorally by promoting information sharing and control over children’s behavior. Coleman (1990) asserted that children whose parents know each other promote school identification and success for their children. Broh (2000) also mentioned that students at school-level parental involvement schools were more likely to do their homework because completing their homework was considered the norm at these schools.

2.5 What is Parental Involvement?

Parental involvement means different things to different people. A recent newsletter published by The Center for Comprehensive School Reform and Improvement (2006) explained that some people equate involvement to chaperoning field trips or volunteering for PTA committees while others define it as attending an open house or signing off on homework folders. National PTA (2006) described parental involvement as regular participation of parents, a two-way process, and meaningful communication involving student academic learning and other school activities. National PTA pays particular attentions to parents, who are economically disadvantaged, disabled, have limited English proficiency, have limited literacy, or are of any racial or ethnic minority background. Under National PTA, schools are required to do evaluation and design strategies for more effective parental involvement, and also to revise, if necessary, the parental involvement policies. It also places the responsibility for schools to be certain that parent involvement initiatives are properly developed and evaluated.

National PTA reauthorized the Elementary and Secondary Education Act (ESEA, 1965) with four principles to frame ways in which families, educators, and communities can work together to improve teaching and learning. These principles include: accountability for results, local control and flexibility, expanded parental choice, and effective and successful programs that reflect scientifically based research. Enhancing connections within families, between families, and with their communities and the institutions that affect them should result in better outcomes for children and their families. These principles stress that parents and schools should be accountable for students’ achievement. In addition, plans for parental involvement should be flexible to address the local needs and build parents’ capacity to improve on their children’s achievement (U.S Department of Education, 2004; Family Strengthening Policy Center, FSPC, 2004). The Family Strengthening Policy Center, FSPC (2004), observed that there is no universal definition of what parental involvement in education entails. Some definitions include greater participation in the life of a school, while others are focused on the increased contributions to an individual child’s learning process. Still others incorporate the family into the learning process through adult education, parenting, and after school activities. Reenay et al., (2007) defined parental involvement as encompassing three areas: a) direct contact with teachers, b) parental actions at school, and c) parental actions at home. In many schools, parents are engaged in the governance and planning processes in building students’ achievement goals (FSPC, 2004). Nonetheless, parental involvement takes place when parents actively, resourcefully and responsibly contribute to promote and develop the well being of their communities (Northwest Regional Education, 2001; Jesse, 2009)

Davies (1991) defined parental involvement from a shifting perspective. Restructuring the society, communities, and schools leads to the transformation of parental involvement. The following evolving definition illustrates this paradigm shift.

2.5.1 Evolving Definition

Parental involvement shifts from “parent focus to family focus, family to community agencies, school to home/neighborhood setting, eager parents to hard-to reach families, teachers/administrators agendas to family priorities, and deficit view of urban families to emphasis on inherent strengths of families” (Davies, 1991). He further explained that even though non-traditional families are much more common nowadays than they were in the 1950s, alternative family structures are effective and should be recognized by the school.

Liontos (1992) mentioned recent beliefs about parents and families that schools should consider when involving them in their children’s’ education: “1) All families have strengths, 2) parents can learn new techniques, 3) parents have important perspectives about their children, 4) most parents really care about their children, 5) cultural differences are both valid and valuable, and 6) many family forms exist and are legitimate” (pp. 30-31).

Jesse (2009) noted that parental involvement has two independent components: parents as supporters and parents as active partners. This approach of parental involvement would be insufficient if schools make use of only one of these components. Parents can be active, yet not supportive of the education process and vice versa. He further indicated that parental involvement should take many forms. For example, parental involvement can be reading to children, volunteering at the school, collaborating on decision making committees, and advocating for children. Hewison and Tizard (1980) explained that parental involvement can be focused if the school addresses the following issues: a) define what is meant by parent involvement, b) define what the school means by parental involvement, c) provide examples of parents’ decision making roles, d) remove structural barriers, and e) identify who else has an interest in increasing the parents’ role in the school.

2.6 Why parents help?

Parents, teachers, and administrators should be equally responsible for the education of children. If schools want to truly ensure academic success of children, schools need to make sure that all educational planning passes through parents first (Patrikakou et al., Weissberg, 2005). According to the National Parent Teacher Association (NPTA), although parents often state that they would like to be more involved in their children’s education, they complain that they feel left out of decision-making at their children’s school. Frankly, some school personnel are not comfortable with the idea of having parents involved in more than the traditional fundraisers. These personnel feel that as long as parents stick to traditional fundraiser events, everything else will be okay. Shatkin & Gershberg (2007) and Seeley (1992) found that parental involvement at some schools is seen as a power struggle. When teachers believe that they are the primary person to handle a child’s education, then they create an unbalanced and unequal partnership. Nevertheless, at least theoretically, most teachers welcome the idea of parent involvement. According to a teachers’ perceptions study published by the National Parent Involvement Network, 83% of teachers wanted an increase in parental involvement at their schools, and 95% of inner city teachers felt that parental involvement was lacking (Funkhouser, Gonzales, & Moles, 1997).

Many parental involvement strategies have been used in the past, but schools are still baffled by the lack of parental involvement at the secondary level (Christenson & Sheridan, 2001; Drake, 2000). Antiquated parental and family involvement strategies are often cited as a major problem in research. Schools that update their strategies to accommodate the characteristics of their community benefit more than those schools that only use a standard program (Drake, 2000). Other problems may be that most parental involvement strategies are aimed at helping middle class families (Crozier, 2001), focus mostly on primary schools, and do not place much emphasis on minority families. The increased diversity of students and their families presents an even greater challenge to schools and teachers (Lewis, 1992; Wanders et al., 2007).

Teachers recognize the benefits of including parents, but consistently complain that parents do not assist in their children’s education (Lewis, 1992). Administrators and educators should not assume that parents automatically know how to involve themselves at school or home. Parents need to be taught how to effectively involve themselves in their children’s schooling. The assumption that every parent knows how to teach their children should be admonished. Parents are not teachers and need to be instructed on how to teach, assist, and encourage their children at home (Quigley, 2000). Ineffective instruction at home by a parent could hinder the academic progress of their children.

The National PTA (2006) gave the following suggestions on how to involve parents: a) schools should host orientation sessions for parents on how to be involved, b) have an onsite family resource center, which will give parents access to materials on parenting, c) give parents handouts on curriculum information and teaching methods, d) encourage parents to volunteer in school and at school events, and e) invite parents to sit on committees to participate in school-decision making.

Likewise, it should not be assumed that teachers automatically know how to effectively involve parents in the classroom and at home. Epstein (1985) pointed out that the majority of teachers have little to no training on how to involve parents in the classroom. Therefore, most teachers lack necessary skills and knowledge on how to effectively work with parents. Kesslar-Sklar and Baker (2000) found that teachers need guidance from school administrators and consultants such as school psychologists to communicate with parents. In-services and workshops could provide guidance on how to effectively engage parents. Parent engagement is important on all levels of school involvement; however, sometimes schools are confused on what is considered parent engagement or involvement. School administrators and teachers feel that parental involvement is important for the academic success of children, but sometimes the definition of what constitutes parent involvement is often misconstrued between parents and teachers. According to Epstein and Sanders (2002), there are six types of involvement: a) parenting- assist families with parenting and child-rearing skills, understanding child and adolescent development, and setting home conditions that support children as students at each age and grade level; b) communicating- communicate with families about school programs and student progress through effective school-to-home and home-to-school communications; c) volunteering improve recruitment, training, work, and schedules to involve families as volunteers and audiences at the school or in other locations to support students and school programs; d) learning at home- involve families with their children in learning activities at home, including homework and other curriculum-linked activities and decisions; e) decision making-include families as participants in school decisions, governance, and advocacy through PTA/PTO, school councils, committees, and other parent organizations; and f) collaborating with the community- coordinate resources and services for families, students, and the school with businesses, agencies, and other groups, and provide services to the community. Schools play an important role in assisting parents with the aforementioned strategies. When these strategies along with parents feeling welcome are in effect, children thrive academically and socially. If parents do not feel welcome at their child’s school, they are less likely to be involved (Constantino, 2003).

2.7 How do Schools Engage Parents?

Hanke (2006) pointed out that lack of parental involvement is due to lack of helpful information to parents. Emails, phone, letters, newsletters and personal contacts can be made by schools to reach out to parents. If schools communicate with parents regularly and consistently using the various means, the gap between school and parental involvement will be reduced. Students’ expectations and achievement will increase if families show high levels of interest (National PTA, 1998). Six different areas of parental involvement are identified by Epstein et al., (1997): parenting, communicating, volunteering, learning at home, decision making, and collaborating with the community. Two types of communication exist (The Pacific Resources for Education and Learning, 2006). These two types include one-way (transmittal) and two-way communication. In one-way communication, the school disseminates information to parents on how they can help their children at home. Examples of this type of communication are newsletters and informational fliers. The two-way communication is considered much more interactive and perceived as a partnership between the school and families. Examples include surveys and questionnaires structured to collect informational data pertaining to students (The Pacific Resources for Education and Learning, 2006).

Reenay and Vivian (2007) explained that even though the invention of new technologies has made it easier for schools to reach out to parents (through emails, cell phones and internet websites), the use of traditional methods in communication has been found to be an effective way for schools to communicate with parents, but this has been limited in use by schools because of time constraints. In addition, it has been assessed that the frequent use of mass communications (newsletters, calendars, letters and handbooks) by school educators has not been effective in changing student behaviors.

However, as Jonson (1999) reported, many parents do not communicate with their children’s schools due to a vast number of reasons. For example, their concerns might not be heard or responded to promptly, or they are busy at work. Despite the fact that technology is a tool providing new channels for communication, studies have shown that parents and teachers find difficulty in using them or lack access to them (Weifeng & Jialing, 2007).

2.7.1 Parental Effect on Academic Performance

According to the New Skills for New Schools (1997) teacher organizations acknowledge the need for teachers to develop skills to involve families in their children’s education. For example the National Board for Professional Teaching Standard integrated parental involvement as a separate standard into the Professional Teaching Certificate (National Board for Professional Teaching Standards, 1991). The aim of these organizations is to provide pre-service and in-service training to teachers on parental involvement. However, little is known about preparing teachers to work with families (New Skills for New Schools, 1997).

The school exists in a society representing people in many walks of life, all of whom have passed through some form of schooling, be it formal or informal. Most people in the community have an interest in, and are willing to contribute to the success of children and their safety in school. The school receives input from the society (e.g., students, staff and resources) and, consequently, graduates students into professions addressing the needs of the society. Thus, it is an open system. It is, therefore, important that members of the community – parents, business companies, seniors, and stake holders – work in partnership with the school for the success of children. Specifically, parents have direct impact on their children’s progress in school.

Zero Tolerance. A constructive way that school personnel could involve parents is to involve them in school policy issues. School policies such as Zero Tolerance, for example, could benefit from parent feedback and parent support. Initially, Zero Tolerance policies were set up in 1989 in three school districts (California, Kentucky, and New York) to punish students for drugs, fighting, and gang related activities. In 1993, schools across the country adopted the policy and eventually added smoking and school disruption to the policy (Skiba & Rausch, 2006). Zero Tolerance arose in response to the increase in violent interactions in some schools; murder, murder suicides, sexual assaults, and other violent crimes have increased in the media and concern for safety on school campuses has increased (National Association of School Psychologists (NASP), 2001). Urban schools and low income schools have seen an even greater increase in the adoption and implementation of Zero Tolerance policies with current Zero Tolerance policies targeting any behavior the district deems punishable.

Schools that follow “Zero Tolerance” policies by suspending and expelling students for minor reasons are at a greater risk for having student’s dropout (Skiba & Rausch, 2006). The prompt to develop and strengthen zero tolerance policies have not gone unnoticed by mental health professionals and researchers. NASP has reviewed these zero tolerance policies and has condemned them to anyone who would listen. NASP (2001) disagrees with this policy because students who are often suspended or expelled because of the Zero Tolerance policies often drop out of school or become part of discriminatory practices. Ensuring that parents are a part of policy making decisions with Zero Tolerance policies and other pertinent school policies will help to keep students in school. When parents are a part of important school decision-making policies, they feel more of an ownership in maintaining the policy. When parents feel included, school climate improves and in turn, student’s achievement improves. Besides involving parents in school policies such as Zero Tolerance, obstacles prohibiting parents from becoming involved must first be fixed. Recently, numerous research findings show that students who have been retained in the ninth grade also are at a higher rate for dropping out of school.

Grade Retention. Another policy issue that should be discussed with parents is that of grade retention versus social promotion. Recently, research findings show students who have been retained in the ninth grade also are at a higher rate for dropping out of school (Gewertz, 2007). Research shows that students transitioning from primary school to middle school to only get retained in the ninth grade are more likely to feel like an outcast. Most of these failing students view primary school completion as an unattainable goal. Some feel that if they cannot complete ninth grade, then they definitely cannot complete the following grades. Supportive staff and faculty at primary schools geared towards assisting students at-risk of failing the ninth grade could definitely assist in stopping students from dropping out of school. Making parents aware of transitional issues for ninth graders could also assist in keeping students on track. Schools could offer parents informational workshops or handouts at open house meetings on how to assist their children with the first year of primary school (Deslandes & Bertrand, 2005).

Schools that have effective transition programs include parents when transitioning students (Phelan, Yu, & Davidson, 1994). Schools can start the transition process by providing information about the new school to the student and the parent. Schools can do this through tours of the school, small-group sessions with counselors, and newsletters and websites that provide information to parents and students. Schools can further include parents with transitioning by using existing 9th grade parents to serve as ambassadors for providing information to new 9th grade parents (Paulson, 1994).

2.7.2 Parental Involvement-Parent Level

Wandersman et al. (2002) found that parents of all ethnic and diverse backgrounds want to participate and feel that it is important to participate in their children’s education. Although research shows that some parents are becoming more educated and want to do more than the traditional fundraiser, there are some parents who do not participate at all. Mostly, parents who do not participate at all in their children’s schooling come from the lower socioeconomic class and ethnic minority groups (Constantino, 2003). Although the U.S Census Bureau found a decrease in the white non-Hispanic population from 76% to 72% and an increase in the Hispanic population from 9% to 13% and the Black population from 12.3% to 12.9% (Constantino, 2003), parental involvement strategies still derive from the majority culture. Davies (1987) proposed that the majority of parental involvement strategies are biased towards the middle-class parent. Kaplan, Liu, and Kaplan (2000) found that parents are more likely to participate when they can communicate with same class personnel. Moles (1987) reinforced the idea of parents being comfortable with others from socioeconomic backgrounds similar to their own by portraying the typical involved parent as being female, white, high-income, and college-educated. Furthermore, Ingram et al. (2007) and Ramsburg (1998) found that parents who view education as part of parenting will be more involved than parents who do not view education as part of their role as parents.

2.7.3 Parent Involvement and Socioeconomic Status

Parent involvement varies from school to school with lower income schools having a difficult time getting parents involved, especially at the secondary level. The National PTA (1998) cited three reasons for parents not participating: a) a lack of time due to employment, b) parents not making themselves available for involvement, and c) inability to obtain a babysitter. In a survey completed by the National PTA (1998), 52% of the parents polled reported that “time constraints” was the main reason for not participating at their children’s school; however, 91% of the parents agreed that parental involvement was important for academic success. Other studies have found similar responses relating to time and employment (e.g., Collins et al, 1995). Other reasons that parents don’t get involved with their children’s school include language barriers and previous horrible school experiences (Delgado, 2007; Finders & Lewis, 1994). With this in mind, Robertson (1998) reported that one way schools can accommodate day working parents is to hold night events.

Antiquated methods of involving parents also play a role in how parents become involved at their children’s school. Epstein (1982) found that while schools used traditional methods of involving parents such as having parents volunteer in the classroom, they rarely used other methods that might work for increasing parental involvement. Methods better preferred by Epstein (1995b) are as follow: (a) help parents increase their child development knowledge; (b) encourage different types of parent involvement; (c) reach out to families through home visits, informal meeting settings, and written correspondence that the parent can understand; (d) communicate with parents using a variety of methods so that they could be kept abreast of their child’s progress; (e) accommodate parents work schedules when hosting school projects; (f) ensure school staff and faculty are accessible to parents; (g) reach out to families whose first language isn’t English by learning about their culture; (h) begin building relationships with parents at the opening conferences of the school year and continue this relationship by making parents comfortable at other teacher-parent conferences; (i) make parents comfortable by allowing them to visit the classroom and give feedback; (j) parent centers also should be established as a way for parents to gain knowledge; and (k) write a school policy statement that ensures a positive school climate for family involvement.

2.7.4 Parent Involvement and Parental Skill Level

At the secondary level, another reason why parents tend to drop off involvement is that the curriculum is more difficult and the students are wanting to be more independent (Collins et al., 1995; Ross, 2006). Some parents reported that they can no longer assist their children with completing their homework assignments due to their own skill limitations. Ballen and Moles (1994) countered this by advising that if parents monitor their children’s homework they can assist them with matriculation.

Furthermore, helping secondary students make postsecondary decisions and assisting them to select courses that will support their postsecondary plans is also good. Also, parents should not forget to regularly correspond with their children’s school by contacting teachers, and reading and signing correspondence sent to them. The positives for being involved at the secondary level outweigh all the negatives of not being involved at all; while parents cited reasons that they could no longer assist secondary level children, research shows that any level of participation is better than none.

2.7.5 Parental Involvement and Ethnicity

Teachers and school administrators need to appreciate the customs and beliefs of culturally and linguistically diverse parents if they truly want them to be involved in their children’s schooling (Wandersman et al., 2002). Parental involvement has long been associated with increased academic achievement; it also has been correlated with a decrease in minority dropouts (Rumberger et al., 1990). Recently, literature has given even more power to parents by stating that parents play a major role in assisting their children with matriculation (Vaden-Kiernan & McManus, 2002-2003). Literature also has shown that teacher’s perceptions of minorities also play a role in minority children matriculating. Teachers must first reflect on their own values and attitudes and see if their attitudes are keeping them from developing a positive relationship with minority parents (Weaver, 2005). A strong partnership between teachers and minority parents contributes tremendously to minority children’s matriculation (Espinosa, 1995). Hispanics and African-Americans were more likely to dropout than Caucasians; the Hispanic dropout rate for the year 2003 was 23.5% and the African- American rate was 10.9%, while the dropout rate for Caucasians was 6.3% for the same year (National Center for Education Statistics, 2006). Steele (1992) found that the school achievement and retention rate gaps between African-American and Caucasian students have been persistent throughout history. If minorities continue to dropout of school, they will continue to make less, depend on the federal government for assistance, and have less positive outcomes overall.

Epstein (1991) found that parents from all ethnicities care about the education of their children, yet parent involvement is often low for minority parents. The problem isn’t that minority parents aren’t interested in their children’s education; rather, they are unsure of what schools expect from them and how they might contribute at their children’s school. It is a lack of knowledge on how to participate that leads to low levels of minority parent involvement (Epstein, 1991). Sometimes barriers and stereotypes exist that prohibit parental involvement of minority parents (Moosa, Karabenick, & Adams, 2001).

In an Arab-American study conducted by Moosa et al., they found that oftentimes teachers thought that Arab parents did not want to be a part of their parental involvement process, which usually entailed parents going to a parent training workshop. When polled, it was found that parents simply were not comfortable with the traditional parent training workshop. Instead, they preferred a one-on-one parent training workshop with the teacher. Arab-American parents felt uncomfortable because of their language proficiency, which they felt would be called into question in a larger setting. Similarly, one reason for why parents tend to drop off involvement at the secondary level identified by Collins et al. (1995) included the increased number of teachers to deal with and language barriers.

African-American parents also have a hard time with involving themselves with their children’s schooling (Koonce & Harper, 2005). Unlike the language barrier of Arab parents, some African-American parents find it difficult to trust their children’s school. Horrible childhood experiences of their own, continuous pessimism from teachers, and feelings of helplessness have led some African-American parents to not trust their children’s school (Brandon, 2007). Furthermore, African- American parents complain that they do not feel welcome at their child’s school (Dauber & Epstein, 1993). Nevertheless, involving African-American parents in their child’s school is an important factor for academic progress. When African-American parents are academically involved in their children’s schooling, behavior problems decrease and academic achievement increase. (Hill & Taylor, 2004)

Cultural and language differences hinder Hispanic parental involvement at schools; parents who do not speak English in their homes are least likely to participate in activities at their children’s schools (Koonce & Harper, 2005). Espinosa (1995) argued that successful involvement of Hispanic parents begins with understanding their culture and values. Failure to understand Hispanic parents’ values and culture may lead to negative outcomes for schools and students. For instance, Hispanic parents prefer face-to-face communication versus handwritten notes sent home by teachers. Additionally, American teachers traditionally prefer a structured parent conference, whereas Hispanic parents prefer a more relaxed conference setting. Failure to recognize simple cultural values could hinder the academic success of the Hispanic child and the involvement of the Hispanic parent (Inger, 1992).

Martinez and Velazquez (2000) found that engaging migrant families in the school process is an added challenge to schools. Children of migrant workers have greater risks of failing in school than the non-transient child. To effectively involve migrant parents, schools should first understand their background and cultural beliefs, and then base involvement strategies around these beliefs. School activities that may assist with involving migrant workers may include providing transportation, refreshments at school activities, and evening and weekend events (Inger, 1992).

2.7.6 Levels of Home-School Communication

In their research on School, Family and Community Partnership, Epstein et al., (1997) developed six types of parental involvement frameworks to help educators develop more comprehensive programs for school, family, and community partnerships. Although this framework may be used by schools as a guide, it is important to note that each school must choose practices that will help achieve its goals and meet the needs of its students and families. The six types of parental involvement framework include parenting, communication, volunteering, learning at home, decision making, and collaborating with the community (NMSA Research Summary, 2006). Epstein and her colleagues also emphasized the duty of the school in helping families establish home environments that will support children, design effective forms of home-school communication about students’ progress and school programs, and provide training and schedules that allow parents to get involved. Parents must be involved in the school decision-making process, governance, and advocacy through PTA/PTO, school councils committees, and other parent organizations. Schools have the responsibilities to work in partnership with businesses, agencies and other groups to coordinate resources and provide services to the school and the community (Epstein, Coates, Salinas, Sanders, & Simon, 1997).

Parental involvement has always been a key component in Title 1 Law (Wayne, 2008). This law requires that each school develop and distribute to parents a written parental involvement policy they agreed upon. National PTA (2006) required districts receiving Title I funds to notify parents on their rights to get information from the school regarding the professional qualifications of the child’s classroom teacher and paraprofessionals.

2.8 Importance of Parental Involvement at primary level

Extensive research has shown that student achievement increases when parents get involved (Harris et al, 1987). Teachers have acknowledged that priority be given in the public education policy to strengthen parents’ roles in the education of their children.

Comer (2001) explained that research on K-5 schools have linked parental involvement to student out comes including increased achievement in test results, a decrease in dropout rate, improved attendance and student behavior, improved parent teacher relations, greater commitment to schoolwork, and improved attitude toward school (Rich, et al., 1979). The following conclusions were made by Public School Review (2003) on parental involvement:

Increase in parental involvement leads to an increase in academic achievement, better classroom behavior and conduct, greater self esteem, increased motivation and attitude towards school, low rate of absenteeism, increased school satisfaction, and increased school climate (Russell & Reece, 2000).

Desforges and Abouchaar (2003) advised that parents should start getting involved in their children’s education from pre-school which can also make a positive difference at all levels, especially in the early years of school. In their study, Feinstein and Symons (1999) came up with the finding that parental involvement has been identified as a predictor for students’ achievement at the age of sixteen. Other studies have also shown that parental involvement of primary students is equally important.

Taylor (1999) has as one of its goals to get parents of under-achieving and low-income children involved in their education by providing them with adequate training and encouragement. Through parental involvement teachers’ morals are improved as parents develop greater appreciation of the challenges they are facing in the classroom. Teachers become aware of whom students are when they communicate with parents, and through that, they are able to develop individual teaching styles to meet the students’ needs. Many researchers have also confirmed to the fact that parents become more supportive and engage in their children’s schooling when two-way communication is established by the school. (Bauch, 1989)

2.8.1 Parent involvement for their child’s better education

Parent involvement is important across cultures and school levels. Children whose parents are actively involved in their education do better academically and socially. Furthermore, children whose parents are actively involved in their education have not a higher rate of primary level education. It is important that schools collaborate with parents in order to facilitate a climate of cohesiveness. (Harris et al, 1987)

When parents are actively involved in their children’s education at school and at home, students do better in school. Parent involvement is critical to helping children succeed regardless of grade level. A home environment where learning is promoted is a better predictor of academic success than income or cultural background. Reading aloud to children helps them to become better readers in school. Children perform better when parents talk to them about school on a daily basis. In addition to reading books and talking to their children about school, parents can organize and manage their children’s time spent doing academics in the home setting. Parent involvement in the home and school setting has showed improved achievement, absenteeism, behavior, and self confidence. (Inger, 1992)

Parent involvement drops off significantly after admission of school. Students whose parents stay involved in their schooling do better academically and socially. Transitioning from primary to middle school can be hard for some children. Without parent support at home and school, children may be at a risk for dropping out of school. Literature shows that minority children are at an even greater risk of dropping out. Obstacles that may prevent parents from becoming involved at the secondary level include: (a) not knowing how to be involved, (b) parents feel schoolwork is beyond their knowledge, and (c) previous negative school experiences. Schools can increase parent involvement by sending positive notes home, phone calls, and home visits. The current research focused on obtaining teachers’ perceptions of parent involvement at the primary and middle school levels. It was hypothesized that there would not be a significant difference between primary and middle school teachers’ perceptions of parent involvement; in fact, the results indicated that there was no significant difference in teachers’ perceptions of parental involvement at the primary and middle school levels. Because parental involvement may be more of an issue in low income areas with high minority populations, the Title I status and the interaction between Title I status and percent minority was accounted for by school characteristics. (Moosa, Karabenick, & Adams, 2001)

2.8.2 Parent involvement for better School Climate

Parent involvement is important to children’s success. However, parents may not become involved in their children’s education if schools do not have a positive school climate. Schools that create a positive school climate by reaching out to parents in turn create an atmosphere where parents want to be involved. When schools encourage parents to become involved, parents’ perceptions of schools improve. Schools can improve their school climate by facilitating positive home-to-school communication. (Davies, 1987)

When teachers send correspondence home about classroom activities and strategies for assisting children at home, parents are more likely to volunteer at school. Teachers create an atmosphere of partnership when they communicate with parents. Teachers also create an atmosphere of collaboration when they show enthusiasm towards working with students and parents from different cultures. (Kaplan, Liu, and Kaplan, 2000)

The current research focused on teachers’ perceptions of school climate at the primary and middle school levels. It was hypothesized that there would not be a significant difference between primary and middle school teachers’ perceptions of school climate; the results indicated that there was a significant difference in teachers’ perceptions of school climate at primary level. (Moles, 1987)

2.9 Better effective of Parental Involvement at primary level

Epstein (1995) found that schools also affect parent involvement levels and evidence shows that parents want to become involved but are not allowed to have open communication with the school. Conventional avenues for involving parents in school can be closed to parents due to specific cultural knowledge. Parents have a lot of difficulty adapting to the school culture especially in non English speaking communities, but cultural knowledge is power and it can prevent parents from participating fully.

Parental involvement benefits children, parents, as well as the community, at different levels. By becoming involved in their children’s education, parents have a better understanding of the school curriculum and activities. This makes parents more comfortable with the quality of education their children are receiving. Studies have shown that children whose parents are involved show greater social and emotional development (Allen & Daly, 2002). In addition, parental involvement leads to greater self-satisfaction, self-direction and control, social adjustment, and competence; more supportive relationships, positive peer relations, tolerance, successful marriages; and less delinquent behaviors (Desforges & Abouchaar, 2003)

The U.S. Department of Education (1997) research on parent involvement outlined three important aspects for children’s development and academic success. These include demonstrating attitudes, values, and interactions about learning through parenting; creating partnerships between schools and homes using two-way communication; and developing a sense of shared responsibility for learning outcomes by both schools and parents (Supreme Education Council, 2008).

Henderson and Berla (1994) explained that when parents are involved in education, teachers build high expectations for students, and high expectations for parents’ opinions on their ability to help their children at home. As a result of parental involvement, parents develop more self-confidence and become motivated to advance their own education. Families are willing to support children’s learning to increase achievement and, thus, the school gets a better reputation from the community (National PTA, 1998).

The New Skills for New Schools (1997) reported that research reviewing historical trends on parental involvement and student achievement has shown inconsistency in their findings and do not support the relationship. A number of studies have revealed that the benefits of family involvement are not restricted to student achievement but also include other factors based on educational accountability. For example, in Kentucky, the Prichard Committee for Academic Excellence provided parents and the community with information on specific components of school reform and informed them about their roles in implementing the education reform law.

2.10 Barriers to Effective Parental Involvement

Sanders and Sheldon (2009) highlighted minimal resources parents acquire through social networks as one reason parents are less involved in their children’s education. Another is the educational level of the parents can present a barrier to the school involvement, Stevenson and Baker (1997). The parents with more education are actively involved in Parent Teacher Association meetings and conferences. The involvement decreases as the students move from primary to middle school because parents are less knowledgeable in some of the academic subjects. Eccles and Harold (1993) found that less educated parents shift their attention away from school because they feel inadequate to help their children with homework.

The quality of parental involvement makes all the difference according to Zellman & Waterman (1998). We need to understand the underlying relationship between parent and child that supports children’s achievement and positive educational outcomes overall. A parent’s enthusiasm about education is, in most instances the underlying factor that contributes the child’s academic success. “Parent involvement programs might be more effective if they focus on such underlying constructs.”

It is believed by Lazar and Slostad (1999) that parents are willing to get involved in the education of their children, but the negative perceptions of parents persist because teacher education programs do not educate teachers to work with parents. Foster and Loven (1992) shared that the major explanation for this, according to researchers, is the fact that “very little attention is given to preparing teachers to work with parents and other adults” (Lazar & Slostad, 1999).

Despite the importance attached to parental involvement, it is still being ignored in schools (The New Skills for Schools, 1997). According to Lazar and Slostad, (1999) “the way parents viewed their roles was shaped by the circumstances and norms of particular cultures” and “their beliefs about their own effectiveness as teachers or tutors” (p. 208). Major barriers to parental involvement in schools include the school environment, school culture, time constraint, changing demographics and employment patterns, and the lack of teacher preparation in involving parents in their children’s schooling (New Skills for Schools, 1997).

In her study of school programs and teacher practice of parental involvement at inner-city primary and middle schools in 1991, Epstein found out that teachers had doubts whether they could motivate parents to become more involved even though they thought that parental involvement would improve students’ achievement. Teachers lack the attitudes, knowledge, skills, and strategies needed to collaborate with families leading to a weak school-family partnership (De Acosta, 1996). A report by the U.S. Department of Education (1997) indicated that 48 percent of principals who participated in a study believed that lack of staff training on parental involvement posed a barrier to parents’ involvement. The lack of preparation by teachers to involve parents in the education of their children remains a weakness in teacher education programs (Bredekamp, 1996).

Cost of Capital: Multiple Choice Questions

  1. A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called?
    A. dividend yield
    B. cost of equity
    C. capital gains yield
    D. cost of capital
    E. income return

  1. Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the:
    A. compound rate.
    B. current yield.
    C. cost of debt.
    D. capital gains yield.
    E. cost of capital.

  1. The average of a firm’s cost of equity and aftertax cost of debt that is weighted based on the firm’s capital structure is called the:
    A. reward to risk ratio.
    B. weighted capital gains rate.
    C. structured cost of capital.
    D. subjective cost of capital.
    E. weighted average cost of capital.

  1. When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach.
    A. subjective risk
    B. pure play
    C. divisional cost of capital
    D. capital adjustment
    E. security market line

  1. A firm’s cost of capital:
    A. will decrease as the risk level of the firm increases.
    B. for a specific project is primarily dependent upon the source of the funds used for the project.
    C. is independent of the firm’s capital structure.
    D. should be applied as the discount rate for any project considered by the firm.
    E. depends upon how the funds raised are going to be spent.

  1. The weighted average cost of capital for a wholesaler:
    A. is equivalent to the aftertax cost of the firm’s liabilities.
    B. should be used as the required return when analyzing a potential acquisition of a retail outlet.
    C. is the return investors require on the total assets of the firm.
    D. remains constant when the debt-equity ratio changes.
    E. is unaffected by changes in corporate tax rates.

  1. Which one of the following is the primary determinant of a firm’s cost of capital?
    A. debt-equity ratio
    B. applicable tax rate
    C. cost of equity
    D. cost of debt
    E. use of the funds

  1. Scholastic Toys is considering developing and distributing a new board game for children. The project is similar in risk to the firm’s current operations. The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm’s rapid growth. How should the firm determine its cost of equity?
    A. by adding the market risk premium to the aftertax cost of debt
    B. by multiplying the market risk premium by (1 – 0.40)
    C. by using the dividend growth model
    D. by using the capital asset pricing model
    E. by averaging the costs based on the dividend growth model and the capital asset pricing model

  1. All else constant, which one of the following will increase a firm’s cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.
    A. a reduction in the dividend amount
    B. an increase in the dividend amount
    C. a reduction in the market rate of return
    D. a reduction in the firm’s beta
    E. a reduction in the risk-free rate

  1. A firm’s overall cost of equity is:
    A. is generally less that the firm’s WACC given a leveraged firm.
    B. unaffected by changes in the market risk premium.
    C. highly dependent upon the growth rate and risk level of the firm.
    D. generally less than the firm’s aftertax cost of debt.
    E. inversely related to changes in the firm’s tax rate.

  1. The cost of equity for a firm:
    A. tends to remain static for firms with increasing levels of risk.
    B. increases as the unsystematic risk of the firm increases.
    C. ignores the firm’s risks when that cost is based on the dividend growth model.
    D. equals the risk-free rate plus the market risk premium.
    E. equals the firm’s pretax weighted average cost of capital.

  1. The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?
    I. firms that have a 100 percent retention ratio
    II. firms that pay a constant dividend
    III. firms that pay an increasing dividend
    IV. firms that pay a decreasing dividend
    A. I and II only
    B. I and III only
    C. II and III only
    D. I, II, and III only
    E. II, III, and IV only

  1. The dividend growth model:
    A. is only as reliable as the estimated rate of growth.
    B. can only be used if historical dividend information is available.
    C. considers the risk that future dividends may vary from their estimated values.
    D. applies only when a firm is currently paying dividends.
    E. uses beta to measure the systematic risk of a firm.

  1. Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure.
    A. This model considers a firm’s rate of growth.
    B. The model applies only to non-dividend paying firms.
    C. The model is dependent upon a reliable estimate of the market risk premium.
    D. The model generally produces the same cost of equity as the dividend growth model.
    E. This approach generally produces a cost of equity that equals the firm’s overall cost of capital.

  1. Which of the following statements are correct?
    I. The SML approach is dependent upon a reliable measure of a firm’s unsystematic risk.
    II. The SML approach can be applied to firms that retain all of their earnings.
    III. The SML approach assumes a firm’s future risks are similar to its past risks.
    IV. The SML approach assumes the reward-to-risk ratio is constant.
    A. I and III only
    B. II and IV only
    C. III and IV only
    D. I, II, and III only
    E. II, III, and IV only

  1. The pre-tax cost of debt:
    A. is based on the current yield to maturity of the firm’s outstanding bonds.
    B. is equal to the coupon rate on the latest bonds issued by a firm.
    C. is equivalent to the average current yield on all of a firm’s outstanding bonds.
    D. is based on the original yield to maturity on the latest bonds issued by a firm.
    E. has to be estimated as it cannot be directly observed in the market.

  1. The aftertax cost of debt generally increases when:
    I. a firm’s bond rating increases.
    II. the market rate of interest increases.
    III. tax rates decrease.
    IV. bond prices rise.
    A. I and III only
    B. II and III only
    C. I, II, and III only
    D. II, III, and IV only
    E. I, II, III, and IV

  1. The cost of preferred stock is computed the same as the:
    A. pre-tax cost of debt.
    B. return on an annuity.
    C. aftertax cost of debt.
    D. return on a perpetuity.
    E. cost of an irregular growth common stock.

  1. The cost of preferred stock:
    A. is equal to the dividend yield.
    B. is equal to the yield to maturity.
    C. is highly dependent on the dividend growth rate.
    D. is independent of the stock’s price.
    E. decreases when tax rates increase.

  1. The capital structure weights used in computing the weighted average cost of capital:
    A. are based on the book values of total debt and total equity.
    B. are based on the market value of the firm’s debt and equity securities.
    C. are computed using the book value of the long-term debt and the book value of equity.
    D. remain constant over time unless the firm issues new securities.
    E. are restricted to the firm’s debt and common stock.

  1. Morris Industries has a capital structure of 55 percent common stock, 10 percent preferred stock, and 45 percent debt. The firm has a 60 percent dividend payout ratio, a beta of 0.89, and a tax rate of 38 percent. Given this, which one of the following statements is correct?
    A. The aftertax cost of debt will be greater than the current yield-to-maturity on the firm’s bonds.
    B. The firm’s cost of preferred is most likely less than the firm’s actual cost of debt.
    C. The firm’s cost of equity is unaffected by a change in the firm’s tax rate.
    D. The cost of equity can only be estimated using the SML approach.
    E. The firm’s weighted average cost of capital will remain constant as long as the capital structure remains constant.

  1. The aftertax cost of debt:
    A. varies inversely to changes in market interest rates.
    B. will generally exceed the cost of equity if the relevant tax rate is zero.
    C. will generally equal the cost of preferred if the tax rate is zero.
    D. is unaffected by changes in the market rate of interest.
    E. has a greater effect on a firm’s cost of capital when the debt-equity ratio increases.

  1. The weighted average cost of capital for a firm may be dependent upon the firm’s:
    I. rate of growth.
    II. debt-equity ratio.
    III. preferred dividend payment.
    IV. retention ratio.
    A. I and III only
    B. II and IV only
    C. I, II, and IV only
    D. I, III, and IV only
    E. I, II, III, and IV

  1. The weighted average cost of capital for a firm is the:
    A. discount rate which the firm should apply to all of the projects it undertakes.
    B. rate of return a firm must earn on its existing assets to maintain the current value of its stock.
    C. coupon rate the firm should expect to pay on its next bond issue.
    D. minimum discount rate the firm should require on any new project.
    E. rate of return shareholders should expect to earn on their investment in this firm.

  1. Which one of the following statements is correct for a firm that uses debt in its capital structure?
    A. The WACC should decrease as the firm’s debt-equity ratio increases.
    B. When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred.
    C. The firm’s WACC will decrease as the corporate tax rate decreases.
    D. The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.
    E. The WACC will remain constant unless a firm retires some of its debt.

  1. If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to:
    I. reject some positive net present value projects.
    II. accept some negative net present value projects.
    III. favor high risk projects over low risk projects.
    IV. increase its overall level of risk over time.
    A. I and III only
    B. III and IV only
    C. I, II, and III only
    D. I, II, and IV only
    E. I, II, III, and IV

  1. Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm’s overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should:
    A. allocate more funds to Division A since it is the largest of the two divisions.
    B. fund all of Division B’s projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values.
    C. allocate the company’s funds to the projects with the highest net present values based on the firm’s weighted average cost of capital.
    D. assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.
    E. fund the highest net present value projects from each division based on an allocation of 70 percent of the funds to Division A and 30 percent of the funds to Division B.

  1. Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to:
    A. receive less project funding if its line of business is riskier than that of the other divisions.
    B. avoid risky projects so it can receive more project funding.
    C. become less risky over time based on the projects that are accepted.
    D. have equal probability of receiving funding as compared to the other divisions.
    E. prefer higher risk projects over lower risk projects.

  1. The discount rate assigned to an individual project should be based on:
    A. the firm’s weighted average cost of capital.
    B. the actual sources of funding used for the project.
    C. an average of the firm’s overall cost of capital for the past five years.
    D. the current risk level of the overall firm.
    E. the risks associated with the use of the funds required by the project.

  1. Assigning discount rates to individual projects based on the risk level of each project:
    A. may cause the firm’s overall weighted average cost of capital to either increase or decrease over time.
    B. will prevent the firm’s overall cost of capital from changing over time.
    C. will cause the firm’s overall cost of capital to decrease over time.
    D. decreases the value of the firm over time.
    E. negates the firm’s goal of creating the most value for the shareholders.

  1. Which one of the following statements is correct?
    A. Firms should accept low risk projects prior to funding high risk projects.
    B. Making subjective adjustments to a firm’s WACC when determining project discount rates unfairly punishes low-risk divisions within a firm.
    C. A project that is unacceptable today might be acceptable tomorrow given a change in market returns.
    D. The pure play method is most frequently used for projects involving the expansion of a firm’s current operations.
    E. Firms that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate.

  1. Phil’s is a sit-down restaurant that specializes in home-cooked meals. Theresa’s is a walk-in deli that specializes in specialty soups and sandwiches. Both firms are currently considering expanding their operations during the summer months by offering pre-wrapped donuts, sandwiches, and wraps at a local beach. Phil’s currently has a WACC of 14 percent while Theresa’s WACC is 10 percent. The expansion project has a projected net present value of $12,600 at a 10 percent discount rate and a net present value of -$2,080 at a 14 percent discount rate. Which firm or firms should expand and offer food at the local beach during the summer months?
    A. Phil’s only
    B. Theresa’s only
    C. both Phil’s and Theresa’s
    D. neither Phil’s nor Theresa’s
    E. cannot be determined from the information provided

  1. Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel Excitement has an aftertax cost of capital of 11 percent. Both firms are considering building wilderness campgrounds complete with man-made lakes and hiking trails. The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either, should accept this project?
    A. Wilderness Adventures only
    B. Travel Excitement only
    C. both Wilderness Adventures and Travel Excitement
    D. neither Wilderness Adventures nor Travel Excitement
    E. cannot be determined without further information

  1. The subjective approach to project analysis:
    A. is used only when a firm has an all-equity capital structure.
    B. uses the WACC of firm X as the basis for the discount rate for a project under consideration by firm Y.
    C. assigns discount rates to projects based on the discretion of the senior managers of a firm.
    D. allows managers to randomly adjust the discount rate assigned to a project once the project’s beta has been determined.
    E. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.

  1. Which one of the following statements is correct?
    A. The subjective approach assesses the risks of each project and assigns an adjustment factor that is unique just for that project.
    B. Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.
    C. Firms will correctly accept or reject every project if they adopt the subjective approach.
    D. Mandatory projects should only be accepted if they produce a positive NPV when the firm’s WACC is used as the discount rate.
    E. The pure play approach should only be used with low-risk projects.

  1. When a firm has flotation costs equal to 7 percent of the funding need, project analysts should:
    A. increase the project’s discount rate to offset these expenses by multiplying the firm’s WACC by 1.07.
    B. increase the project’s discount rate to offset these expenses by dividing the firm’s WACC by (1 – 0.07).
    C. add 7 percent to the firm’s WACC to get the discount rate for the project.
    D. increase the initial project cost by multiplying that cost by 1.07.
    E. increase the initial project cost by dividing that cost by (1 – 0.07).

  1. The flotation cost for a firm is computed as:
    A. the arithmetic average of the flotation costs of both debt and equity.
    B. the weighted average of the flotation costs associated with each form of financing.
    C. the geometric average of the flotation costs associated with each form of financing.
    D. one-half of the flotation cost of debt plus one-half of the flotation cost of equity.
    E. a weighted average based on the book values of the firm’s debt and equity.

  1. Incorporating flotation costs into the analysis of a project will:
    A. cause the project to be improperly evaluated.
    B. increase the net present value of the project.
    C. increase the project’s rate of return.
    D. increase the initial cash outflow of the project.
    E. have no effect on the present value of the project.

  1. Flotation costs for a levered firm should:
    A. be ignored when analyzing a project because they are not an actual project cost.
    B. be spread over the life of a project thereby reducing the cash flows for each year of the project.
    C. only be considered when two projects are mutually exclusive.
    D. be weighted and included in the initial cash flow.
    E. be totally ignored when internal equity funding is utilized.

  1. Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm’s cost of equity?
    A. 7.58 percent
    B. 7.91 percent
    C. 8.24 percent
    D. 8.57 percent
    E. 9.00 percent

  1. The Shoe Outlet has paid annual dividends of $0.65, $0.70, $0.72, and $0.75 per share over the last four years, respectively. The stock is currently selling for $26 a share. What is this firm’s cost of equity?
    A. 7.56 percent
    B. 7.93 percent
    C. 10.38 percent
    D. 10.53 percent
    E. 11.79 percent

  1. Sweet Treats common stock is currently priced at $19.06 a share. The company just paid $1.15 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. What is this firm’s cost of equity?
    A. 6.03 percent
    B. 6.18 percent
    C. 8.47 percent
    D. 8.68 percent
    E. 8.82 percent

  1. The common stock of Metal Molds has a negative growth rate of 1.5 percent and a required return of 18 percent. The current stock price is $11.40. What was the amount of the last dividend paid?
    A. $2.07
    B. $2.11
    C. $2.19
    D. $2.22
    E. $2.26

  1. Highway Express has paid annual dividends of $1.16, $1.20, $1.25, $1.10, and $0.95 over the past five years respectively. What is the average dividend growth rate?
    A. -4.51 percent
    B. -3.60 percent
    C. 2.28 percent
    D. 2.47 percent
    E. 4.39 percent

  1. Southern Home Cookin’ just paid its annual dividend of $0.65 a share. The stock has a market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5 percent and the market risk premium is 6.8 percent. What is the cost of equity?
    A. 9.98 percent
    B. 10.04 percent
    C. 10.12 percent
    D. 10.37 percent
    E. 10.45 percent

  1. National Home Rentals has a beta of 1.38, a stock price of $19, and recently paid an annual dividend of $0.94 a share. The dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of return and a risk premium of 7.5 percent. What is the firm’s cost of equity?
    A. 7.05 percent
    B. 8.67 percent
    C. 9.13 percent
    D. 10.30 percent
    E. 11.56 percent

  1. Henessey Markets has a growth rate of 4.8 percent and is equally as risky as the market. The stock is currently selling for $17 a share. The overall stock market has a 10.6 percent rate of return and a risk premium of 8.7 percent. What is the expected rate of return on this stock?
    A. 8.7 percent
    B. 9.2 percent
    C. 10.6 percent
    D. 11.3 percent
    E. 11.7 percent

  1. Tidewater Fishing has a current beta of 1.48. The market risk premium is 8.9 percent and the risk-free rate of return is 3.2 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.60?
    A. 0.88 percent
    B. 1.07 percent
    C. 1.50 percent
    D. 2.10 percent
    E. 2.26 percent

  1. Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value. What is the company’s pre-tax cost of debt?
    A. 3.98 percent
    B. 4.42 percent
    C. 4.71 percent
    D. 5.36 percent
    E. 5.55 percent

  1. Boulder Furniture has bonds outstanding that mature in 13 years, have a 6 percent coupon, and pay interest annually. These bonds have a face value of $1,000 and a current market price of $1,040. What is the company’s aftertax cost of debt if its tax rate is 32 percent?
    A. 2.97 percent
    B. 3.24 percent
    C. 3.78 percent
    D. 5.21 percent
    E. 5.53 percent

  1. Handy Man, Inc. has zero coupon bonds outstanding that mature in 8 years. The bonds have a face value of $1,000 and a current market price of $640. What is the company’s pre-tax cost of debt?
    A. 2.55 percent
    B. 5.09 percent
    C. 5.66 percent
    D. 7.31 percent
    E. 7.48 percent

  1. Dog Gone Good Engines has a bond issue outstanding with 17 years to maturity. These bonds have a $1,000 face value, a 9 percent coupon, and pay interest semi-annually. The bonds are currently quoted at 87 percent of face value. What is the company’s pre-tax cost of debt if the tax rate is 38 percent?
    A. 4.10 percent
    B. 4.42 percent
    C. 6.61 percent
    D. 8.90 percent
    E. 10.67 percent

  1. The Corner Bakery has a bond issue outstanding that matures in 7 years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 101.4 percent of face value and carry a 9 percent coupon. What is the firm’s aftertax cost of debt if the tax rate is 30 percent?
    A. 4.88 percent
    B. 5.36 percent
    C. 5.45 percent
    D. 6.11 percent
    E. 8.74 percent

  1. The outstanding bonds of Tech Express are priced at $989 and mature in 8 years. These bonds have a 6 percent coupon and pay interest annually. The firm’s tax rate is 39 percent. What is the firm’s aftertax cost of debt?
    A. 3.01 percent
    B. 3.22 percent
    C. 3.35 percent
    D. 3.77 percent
    E. 4.41 percent

  1. Simple Foods has a zero coupon bond issue outstanding that matures in 9 years. The bonds are selling at 42 percent of par value. What is the company’s aftertax cost of debt if the tax rate is 38 percent?
    A. 5.48 percent
    B. 5.73 percent
    C. 6.12 percent
    D. 7.73 percent
    E. 9.88 percent

  1. Grill Works and More has 8 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm’s tax rate is 37 percent. What is the firm’s cost of preferred stock?
    A. 14.77 percent
    B. 15.29 percent
    C. 15.67 percent
    D. 16.33 percent
    E. 16.54 percent

  1. Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of $52 and a book value per share of $38. What is the cost of preferred stock?
    A. 7.50 percent
    B. 13.88 percent
    C. 14.42 percent
    D. 19.29 percent
    E. 19.74 percent

  1. New York Deli’s has 7 percent preferred stock outstanding that sells for $36 a share. This stock was originally issued at $50 per share. What is the cost of preferred stock?
    A. 13.68 percent
    B. 14.00 percent
    C. 14.29 percent
    D. 19.44 percent
    E. 19.80 percent

  1. Nelson’s Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2,500 shares of preferred stock at a market price of $28 a share. The common stock is priced at $37 a share and there are 28,000 shares outstanding. What is the weight of the common stock as it relates to the firm’s weighted average cost of capital?
    A. 43.08 percent
    B. 45.16 percent
    C. 47.11 percent
    D. 54.00 percent
    E. 55.45 percent

  1. Mangrove Fruit Farms has a $200,000 bond issue outstanding that is selling at 92 percent of face value. The firm also has 1,500 shares of preferred stock and 15,000 shares of common stock outstanding. The preferred stock has a market price of $35 a share compared to a price of $24 a share for the common stock. What is the weight of the preferred stock as it relates to the firm’s weighted average cost of capital?
    A. 6.75 percent
    B. 7.20 percent
    C. 7.75 percent
    D. 8.30 percent
    E. 8.80 percent

  1. Electronics Galore has 950,000 shares of common stock outstanding at a market price of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value. What weight should be given to the debt when the firm computes its weighted average cost of capital?
    A. 42 percent
    B. 46 percent
    C. 50 percent
    D. 54 percent
    E. 58 percent

  1. Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm’s weighted average cost of capital?
    A. 10.39 percent
    B. 10.64 percent
    C. 11.18 percent
    D. 11.30 percent
    E. 11.56 percent

  1. Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of 14.3 percent, and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company’s tax rate is 37 percent. What is the firm’s weighted average cost of capital?
    A. 10.18 percent
    B. 10.84 percent
    C. 11.32 percent
    D. 12.60 percent
    E. 12.81 percent

  1. Central Systems, Inc. desires a weighted average cost of capital of 8 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.2 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?
    A. 0.38
    B. 0.44
    C. 1.02
    D. 2.25
    E. 2.63

  1. R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year’s annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company’s tax rate is 34 percent. What is the firm’s weighted average cost of capital?
    A. 5.4 percent
    B. 6.2 percent
    C. 7.5 percent
    D. 8.5 percent
    E. 9.6 percent

  1. Kelso’s has a debt-equity ratio of 0.55 and a tax rate of 35 percent. The firm does not issue preferred stock. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent. What is the weighted average cost of capital?
    A. 10.46 percent
    B. 10.67 percent
    C. 11.06 percent
    D. 11.38 percent
    E. 11.57 percent

  1. Granite Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32 percent. The firm does not issue preferred stock. The pre-tax cost of debt is 9.8 percent. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share. The current market risk premium is 8.5 percent and the current risk-free rate is 3.6 percent. This year, the firm paid an annual dividend of $1.10 a share and expects to increase that amount by 2 percent each year. Using an average expected cost of equity, what is the weighted average cost of capital?
    A. 8.44 percent
    B. 8.78 percent
    C. 8.96 percent
    D. 9.13 percent
    E. 9.20 percent

  1. Delta Lighting has 30,000 shares of common stock outstanding at a market price of $17.50 a share. This stock was originally issued at $31 per share. The firm also has a bond issue outstanding with a total face value of $280,000 which is selling for 86 percent of par. The cost of equity is 16 percent while the aftertax cost of debt is 6.9 percent. The firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted average cost of capital?
    A. 11.07 percent
    B. 13.14 percent
    C. 14.36 percent
    D. 15.29 percent
    E. 15.47 percent

  1. The Market Outlet has a beta of 1.38 and a cost of equity of 14.945 percent. The risk-free rate of return is 4.25 percent. What discount rate should the firm assign to a new project that has a beta of 1.25?
    A. 13.54 percent.
    B. 13.72 percent.
    C. 13.94 percent.
    D. 14.14 percent.
    E. 14.36 percent.

  1. Silo Mills has a beta of 0.87 and a cost of equity of 11.9 percent. The risk-free rate of return is 2.8 percent. The firm is currently considering a project that has a beta of 1.03 and a project life of 6 years. What discount rate should be assigned to this project?
    A. 13.33 percent.
    B. 13.57 percent.
    C. 13.62 percent.
    D. 13.84 percent.
    E. 14.09 percent.

  1. Travis & Sons has a capital structure which is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pre-tax cost of debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of common stock is 13 percent. The company’s tax rate is 39 percent. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $325,000 and annual cash inflows of $87,000, $279,000, and $116,000 over the next three years, respectively. What is the projected net present value of this project?
    A. $68,211.04
    B. $68,879.97
    C. $69,361.08
    D. $74,208.18
    E. $76,011.23

  1. Panelli’s is analyzing a project with an initial cost of $102,000 and cash inflows of $65,000 in year one and $74,000 in year two. This project is an extension of the firm’s current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debt-equity ratio of 0.45. The aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35 percent. What is the projected net present value of this project?
    A. $15,411
    B. $15,809
    C. $16,333
    D. $16,938
    E. $17,840

  1. Carson Electronics uses 70 percent common stock and 30 percent debt to finance its operations. The aftertax cost of debt is 5.4 percent and the cost of equity is 15.4 percent. Management is considering a project that will produce a cash inflow of $36,000 in the first year. The cash inflows will then grow at 3 percent per year forever. What is the maximum amount the firm can initially invest in this project to avoid a negative net present value for the project?
    A. $299,032
    B. $382,979
    C. $411,406
    D. $434,086
    E. $441,414

  1. The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.5 percent to the company’s overall cost of capital when evaluating this project. The project has an initial cash outlay of $62,000 and projected cash inflows of $17,000 in year one, $28,000 in year two, and $30,000 in year three. The firm uses 25 percent debt and 75 percent common stock as its capital structure. The company’s cost of equity is 15.5 percent while the aftertax cost of debt for the firm is 6.1 percent. What is the projected net present value of the new project?
    A. -$6,208
    B. -$5,964
    C. -$2,308
    D. $1,427
    E. $1,573

  1. The Oil Derrick has an overall cost of equity of 13.6 percent and a beta of 1.28. The firm is financed solely with common stock. The risk-free rate of return is 3.4 percent. What is an appropriate cost of capital for a division within the firm that has an estimated beta of 1.18?
    A. 12.37 percent
    B. 12.41 percent
    C. 12.54 percent
    D. 12.67 percent
    E. 12.80 percent

  1. Miller Sisters has an overall beta of 0.64 and a cost of equity of 11.2 percent for the firm overall. The firm is 100 percent financed with common stock. Division A within the firm has an estimated beta of 1.08 and is the riskiest of all of the firm’s operations. What is an appropriate cost of capital for division A if the market risk premium is 9.5 percent?
    A. 15.12 percent
    B. 15.38 percent
    C. 15.63 percent
    D. 15.77 percent
    E. 16.01 percent

  1. Deep Mining and Precious Metals are separate firms that are both considering a silver exploration project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 12.8 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 10.6 percent. The project under consideration has initial costs of $575,000 and anticipated annual cash inflows of $102,000 a year for ten years. Which firm(s), if either, should accept this project?
    A. Company A only
    B. Company B only
    C. both Company A and Company B
    D. neither Company A or Company B
    E. cannot be determined without further information

  1. Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 11.6 percent. Al’s Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.8 percent. Sister Pools is considering building and selling its own water features and fountains. The sales manager of Sister Pools estimates that the water features and fountains would produce 20 percent of the firm’s future total sales. The initial cash outlay for this project would be $85,000. The expected net cash inflows are $16,000 a year for 7 years. What is the net present value of the Sister Pools project?
    A. -$11,044
    B. -$9,115
    C. -$7,262
    D. -$4,508
    E. $1,219

  1. Decker’s is a chain of furniture retail stores. Furniture Fashions is a furniture maker and a supplier to Decker’s. Decker’s has a beta of 1.38 as compared to Furniture Fashion’s beta of 1.12. The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should Decker’s use if it considers a project that involves the manufacturing of furniture?
    A. 12.46 percent
    B. 12.92 percent
    C. 13.50 percent
    D. 14.08 percent
    E. 14.54 percent

  1. Bleakly Enterprises has a capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. The flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and 9.5 percent for common stock. The corporate tax rate is 34 percent. What is the weighted average flotation cost?
    A. 5.8 percent
    B. 6.2 percent
    C. 6.7 percent
    D. 7.0 percent
    E. 7.5 percent

  1. Justice, Inc. has a capital structure which is based on 30 percent debt, 5 percent preferred stock, and 65 percent common stock. The flotation costs are 11 percent for common stock, 10 percent for preferred stock, and 7 percent for debt. The corporate tax rate is 37 percent. What is the weighted average flotation cost?
    A. 8.97 percent
    B. 9.48 percent
    C. 9.62 percent
    D. 9.75 percent
    E. 10.00 percent

  1. The Daily Brew has a debt-equity ratio of 0.72. The firm is analyzing a new project which requires an initial cash outlay of $420,000 for equipment. The flotation cost is 9.6 percent for equity and 5.4 percent for debt. What is the initial cost of the project including the flotation costs?
    A. $302,400
    B. $368,924
    C. $455,738
    D. $456,400
    E. $583,333

  1. You are evaluating a project which requires $230,000 in external financing. The flotation cost of equity is 11.6 percent and the flotation cost of debt is 5.4 percent. What is the initial cost of the project including the flotation costs if you maintain a debt-equity ratio of 0.45?
    A. $248,494
    B. $249,021
    C. $254,638
    D. $255,551
    E. $255,646

  1. Western Wear is considering a project that requires an initial investment of $274,000. The firm maintains a debt-equity ratio of 0.40 and has a flotation cost of debt of 7 percent and a flotation cost of equity of 10.5 percent. The firm has sufficient internally generated equity to cover the equity portion of this project. What is the initial cost of the project including the flotation costs?
    A. $279,592
    B. $281,406
    C. $288,005
    D. $297,747
    E. $302,762

  1. Yesteryear Productions is considering a project with an initial start up cost of $960,000. The firm maintains a debt-equity ratio of 0.50 and has a flotation cost of debt of 6.8 percent and a flotation cost of equity of 11.4 percent. The firm has sufficient internally generated equity to cover the equity cost of this project. What is the initial cost of the project including the flotation costs?
    A. $979,417
    B. $982,265
    C. $992,386
    D. $1,038,513
    E. $1,065,089

Essay Questions

  1. What role does the weighted average cost of capital play when determining a project’s cost of capital?

  1. What are some advantages of the subjective approach to determining the cost of capital and why do you think that approach is utilized?

  1. Give an example of a situation where a firm should adopt the pure play approach for determining the cost of capital for a project.

  1. Suppose your boss comes to you and asks you to re-evaluate a capital budgeting project. The first evaluation was in error, he explains, because it ignored flotation costs. To correct for this, he asks you to evaluate the project using a higher cost of capital which incorporates these costs. Is your boss’ approach correct? Why or why not?

  1. Explain how the use of internal equity rather than external equity affects the analysis of a project.
  1. The City Street Corporation’s common stock has a beta of 1.2. The risk-free rate is 3.5 percent and the expected return on the market is 13 percent. What is the firm’s cost of equity?
    A. 11.4 percent
    B. 12.8 percent
    C. 14.9 percent
    D. 17.6 percent
    E. 19.1 percent

  1. Stock in Country Road Industries has a beta of 0.97. The market risk premium is 10 percent while T-bills are currently yielding 5.5 percent. Country Road’s most recent dividend was $1.70 per share, and dividends are expected to grow at a 7 percent annual rate indefinitely. The stock sells for $32 a share. What is the estimated cost of equity using the average of the CAPM approach and the dividend discount approach?
    A. 13.94 percent
    B. 14.06 percent
    C. 14.21 percent
    D. 14.38 percent
    E. 14.50 percent

  1. Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for $92 per share. What is the bank’s cost of preferred?
    A. 4.60 percent
    B. 4.64 percent
    C. 5.39 percent
    D. 5.43 percent
    E. 5.54 percent

  1. Decline, Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 11 percent annually. What is the aftertax cost of debt if the tax rate is 33 percent?
    A. 6.76 percent
    B. 6.90 percent
    C. 7.17 percent
    D. 7.37 percent
    E. 7.42 percent

  1. Jiminy’s Cricket Farm issued a 30-year, 8 percent, semiannual bond 6 years ago. The bond currently sells for 114 percent of its face value. What is the aftertax cost of debt if the company’s tax rate is 31 percent?
    A. 4.63 percent
    B. 4.70 percent
    C. 4.75 percent
    D. 4.82 percent
    E. 4.86 percent

  1. Mullineaux Corporation has a target capital structure of 41 percent common stock, 4 percent preferred stock, and 55 percent debt. Its cost of equity is 19 percent, the cost of preferred stock is 6.5 percent, and the pre-tax cost of debt is 7.5 percent. What is the firm’s WACC given a tax rate of 34 percent?
    A. 9.87 percent
    B. 10.43 percent
    C. 10.77 percent
    D. 13.38 percent
    E. 15.17 percent

  1. Cookie Dough Manufacturing has a target debt-equity ratio of 0.5. Its cost of equity is 15 percent, and its cost of debt is 11 percent. What is the firm’s WACC given a tax rate of 31 percent?
    A. 12.53 percent
    B. 12.78 percent
    C. 13.11 percent
    D. 13.48 percent
    E. 13.67 percent

  1. Fama’s Llamas has a weighted average cost of capital of 10.5 percent. The company’s cost of equity is 15.5 percent, and its pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What is the company’s target debt-equity ratio?
    A. 0.89
    B. 0.92
    C. 0.98
    D. 1.01
    E. 1.02

  1. Jungle, Inc. has a target debt-equity ratio of 0.72. Its WACC is 11.5 percent and the tax rate is 34 percent. What is the cost of equity if the aftertax cost of debt is 5.5 percent?
    A. 13.75 percent
    B. 13.84 percent
    C. 14.41 percent
    D. 14.79 percent
    E. 15.82 percent

  1. Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.15, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The market risk premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firm’s tax rate is 32 percent. What discount rate should the firm apply to a new project’s cash flows if the project has the same risk as the firm’s typical project?
    A. 14.59 percent
    B. 14.72 percent
    C. 15.17 percent
    D. 15.54 percent
    E. 16.41 percent

  1. Suppose your company needs $14 million to build a new assembly line. Your target debt-equity ratio is 0.84. The flotation cost for new equity is 9.5 percent, but the floatation cost for debt is only 2.5 percent. What is the true cost of building the new assembly line after taking flotation costs into account?
    A. 14.82 million
    B. 14.94 million
    C. 15.07 million
    D. 15.12 million
    E. 15.23 million

Capital Budgeting Decisions: Multiple Choice

Capital Budgeting Decisions

Multiple Choice

  1. Some investment projects require that a company increase its working capital. Under the net present value method, the investment and eventual recovery of working capital should be treated as:
  2. A) an initial cash outflow.
  3. B) a future cash inflow.
  4. C) both an initial cash outflow and a future cash inflow.
  5. D) irrelevant to the net present value analysis.
  1. The net present value (NPV) method of investment project analysis assumes that the project’s cash flows are reinvested at the:
  2. A) internal rate of return.
  3. B) discount rate used in the NPV calculation.
  4. C) firm’s simple rate of return.
  5. D) firm’s average ROI.
  1. If taxes are ignored, all of the following items are included in a discounted cash flow analysis except:
  2. A) future operating cash savings.
  3. B) depreciation expense.
  4. C) future salvage value.
  5. D) investment in working capital.
  1. In capital budgeting computations, discounted cash flow methods:
  2. A) automatically provide for recovery of initial investment.
  3. B) can’t be used unless cash flows are uniform from year to year.
  4. C) assume that all cash flows occur at the beginning of a period.
  5. D) responses a, b, and c are all correct.
  1. The investment required for the project profitability index should:
  2. A) be reduced by the amount of any salvage recovered from the sale of old equipment.
  3. B) be reduced by the amount of any salvage recovered from the sale of the new equipment at the end of its useful life.
  4. C) be reduced by the amount of any salvage recovered from the sale of both the old and new equipment.
  5. D) none of the above is correct.
  1. A company wants to have $40,000 at the end of a five-year period through investment of a single sum now. How much needs to be invested in order to have the desired sum in five years, if the money can be invested at 10%:
  2. A) $10,551
  3. B) $8,000
  4. C) $24,840
  5. D) $12,882
  1. The following data on a proposed investment project have been provided:

The net present value of the project would be:

  1. A) $3,730
  2. B) $0
  3. C) $32,450
  4. D) $88,370
  1. Stratford Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $9,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, and assuming the company’s discount rate is 10%, what is the purchase price of the machine if the net present value of the investment is $17,000?
  2. A) $43,812
  3. B) $26,812
  4. C) $17,000
  5. D) $22,195
  1. Anthony operates a part time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of $1,500 in Year 1, $2,100 in Year 2, and $3,200 in Year 3. If Anthony’s required rate of return is 10%, then the most he would be willing to pay for the new computer system would be:
  2. A) $4,599
  3. B) $5,501
  4. C) $5,638
  5. D) $5,107
  1. Fossa Road Paving Company is considering an investment in a curb-forming machine. The machine will cost $240,000, will last 10 years, and will have a $40,000 salvage value at the end of 10 years. The machine is expected to generate net cash inflows of $60,000 per year in each of the 10 years. Fossa’s discount rate is 18%. What is the net present value of this machine?
  2. A) $5,840
  3. B) $37,280
  4. C) $(48,780)
  5. D) $69,640
  1. Apnea Video Rental Store is considering the purchase of an almost new minivan to use as a vehicle to deliver and pick up video tapes for customers. The minivan will cost $18,000 and is expected to last 8 years but only if the engine is overhauled at a cost of $3,000 at the end of year 3. The minivan is expected to have a $1,000 salvage value at the end of 8 years. This delivery service is expected to generate net cash inflows of $6,000 per year in each of the 8 years. Apnea’s discount rate is 14%. What is the net present value of this investment opportunity?
  2. A) $(2,826)
  3. B) $(3,801)
  4. C) $7,185
  5. D) $8,160
  1. In an effort to reduce costs, Pontic Manufacturing Corporation is considering an investment in equipment that will reduce defects. This equipment will cost $420,000, will have an estimated useful life of 10 years, and will have an estimated salvage value of $50,000 at the end of 10 years. Pontic’s discount rate is 22%. What amount of cost savings will this equipment have to generate per year in each of the 10 years in order for it to be an acceptable project?
  2. A) $50,690 or more
  3. B) $41,315 or more
  4. C) $105,315 or more
  5. D) $94,316 or more
  1. Naomi Corporation has a capital budgeting project that has a negative net present value of $36,000. The life of this project is 6 years. Naomi’s discount rate is 20%. By how much would the annual cash inflows from this project have to increase in order to have a positive net present value?
  2. A) $1,200 or more
  3. B) $2,412 or more
  4. C) $6,000 or more
  5. D) $10,824 or more
  1. A project requires an initial investment of $70,000 and has a project profitability index of 0.932. The present value of the future cash inflows from this investment is:
  2. A) $70,000
  3. B) $36,231
  4. C) $135,240
  5. D) Cannot be determined from the data provided.
  1. Bowen Company is considering several investment proposals, as shown below:

If the project profitability index is used, the ranking of the projects would be:

  1. A) A above
  2. B) B above
  3. C) C above
  4. D) D above
  1. Information on four investment proposals is given below:

Rank the proposals in terms of preference according to the project profitability index:

  1. A) 1, 4, 3, 2
  2. B) 4, 1, 3, 2
  3. C) 3, 4, 1, 2
  4. D) 2, 1, 4, 3
  1. Information on four investment proposals is given below:

Rank the proposals in terms of preference using the project profitability index:

  1. A) 3, 2, 1, 4
  2. B) 2, 3, 1, 4
  3. C) 2, 1, 3, 4
  4. D) 4, 1, 2, 3
  1. The Gomez Company is considering two projects, T and V. The following information has been gathered on these projects:

Based on this information, which of the following statements is (are) true?

  1. Project T has the highest ranking according to the project profitability index criterion.
  2. Project V has the highest ranking according to the net present value criterion.
  1. A) Only I
  2. B) Only II
  3. C) Both I and II
  4. D) Neither I nor II
  1. Major Corporation is considering the purchase of a new machine for $5,000. The machine has an estimated useful life of 5 years and no salvage value. The machine will increase Major’s cash flows by $2,000 annually for 5 years. Major uses straight-line depreciation. The company’s required rate of return is 10%. What is the payback period for the machine?
  2. A) 5.00 years
  3. B) 2.50 years
  4. C) 7.58 years
  5. D) 8.34 years
  1. Harrison Company is studying a project that would have an eight-year life and would require a $300,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project:

The company’s required rate of return is 10%. What is the payback period for this project?

  1. A) 3 years
  2. B) 2 years
  3. C) 2.5 years
  4. D) 2.67 years
  1. An investment project requires an initial investment of $100,000. The project is expected to generate net cash inflows of $28,000 per year for the next five years. Assuming a 12% discount rate, the project’s payback period is:
  2. A) 0.28 years
  3. B) 3.36 years
  4. C) 3.57 years
  5. D) 1.40 years

Source: CMA, adapted

  1. Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $250,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $12,000 per year to operate and maintain, but would save $55,000 per year in labor and other costs. The old machine can be sold now for scrap for $10,000. The simple rate of return on the new machine is closest to:
  2. A) 17.9%
  3. B) 7.5%
  4. C) 22.0%
  5. D) 7.2%
  1. Pearson Co. is considering the purchase of a $200,000 machine that is expected to reduce operating cash expenses by $65,000 per year. This machine, which has no salvage value, has an estimated useful life of 5 years and will be depreciated on a straight-line basis. For this machine, the simple rate of return would be:
  2. A) 10%
  3. B) 12.5%
  4. C) 20%
  5. D) 32.5%
  1. Assume you can invest money at a 14% rate of return. How much money must be invested now in order to be able to withdraw $5,000 from this investment at the end of each year for 8 years, the first withdrawal occurring one year from now?
  2. A) $24,840
  3. B) $23,195
  4. C) $21,440
  5. D) $1,755
  1. How much would you have to invest today in the bank at an interest rate of 5% to have an annuity of $1,400 per year for 5 years, with nothing left in the bank at the end of the 5 years? Select the amount below that is closest to your answer.
  2. A) $6,667
  3. B) $6,061
  4. C) $7,000
  5. D) $1,098
  1. You have deposited $15,584 in a special account that has a guaranteed interest rate. If you withdraw $3,700 at the end of each year for 5 years, you will completely exhaust the balance in the account. The guaranteed interest rate is closest to:
  2. A) 6%
  3. B) 19%
  4. C) 24%
  5. D) 4%
  1. You have deposited $16,700 in a special account that has a guaranteed interest rate of 11% per year. If you are willing to completely exhaust the account, what is the maximum amount that you could withdraw at the end of each of the next 6 years? Select the amount below that is closest to your answer.
  2. A) $3,465
  3. B) $3,089
  4. C) $2,783
  5. D) $3,947
  1. Latting Corporation has entered into a 7 year lease for a building it will use as a warehouse. The annual payment under the lease will be $4,781. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. What is the present value of the lease payments if the discount rate is 6%?
  2. A) $31,573
  3. B) $22,257
  4. C) $33,467
  5. D) $26,688
  1. Schaad Corporation has entered into a 8 year lease for a piece of equipment. The annual payment under the lease will be $2,500, with payments being made at the beginning of each year. If the discount rate is 14%, the present value of the lease payments is closest to:
  2. A) $20,000
  3. B) $7,011
  4. C) $17,544
  5. D) $13,220
  1. Tangen Corporation is considering the purchase of a machine that would cost $380,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $80,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $104,000. The company requires a minimum pretax return of 14% on all investment projects. The net present value of the proposed project is closest to:
  2. A) $104,456
  3. B) $24,456
  4. C) $133,753
  5. D) $60,936
  1. The management of Urbine Corporation is considering the purchase of a machine that would cost $350,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $79,000 per year. The company requires a minimum pretax return of 14% on all investment projects. The net present value of the proposed project is closest to:
  2. A) -$42,769
  3. B) $124,000
  4. C) -$93,877
  5. D) $56,493
  1. Riveros, Inc., is considering the purchase of a machine that would cost $120,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $29,000. The machine would reduce labor and other costs by $25,000 per year. Additional working capital of $9,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 18% on all investment projects. The net present value of the proposed project is closest to:
  2. A) -$18,050
  3. B) -$63,683
  4. C) -$10,336
  5. D) -$16,942
  1. The management of Edelmann Corporation is considering the following three investment projects:

Rank the projects according to the profitability index, from most profitable to least profitable.

  1. A) T,S,R
  2. B) R,T,S
  3. C) S,T,R
  4. D) T,R,S
  1. Villena Corporation is considering a project that would require an investment of $48,000. No other cash outflows would be involved. The present value of the cash inflows would be $52,800. The profitability index of the project is closest to:
  2. A) 0.90
  3. B) 0.10
  4. C) 1.10
  5. D) 0.09
  1. Crowley Corporation is considering three investment projects-F, G, and H. Project F would require an investment of $21,000, Project G of $49,000, and Project H of $82,000. No other cash outflows would be involved. The present value of the cash inflows would be $21,210 for Project F, $57,820 for Project G, and $95,120 for Project H. Rank the projects according to the profitability index, from most profitable to least profitable.
  2. A) F,H,G
  3. B) G,H,F
  4. C) H,F,G
  5. D) H,G,F
  1. The management of Cantell Corporation is considering a project that would require an initial investment of $47,000. No other cash outflows would be required. The present value of the cash inflows would be $55,930. The profitability index of the project is closest to:
  2. A) 1.19
  3. B) 0.81
  4. C) 0.19
  5. D) 0.16
  1. Kautzer Corporation is considering a project that would require an investment of $418,000 and would last for 9 years. The incremental annual revenues and expenses generated by the project during those 9 years would be as follows:

The scrap value of the project’s assets at the end of the project would be $13,000. The payback period of the project is closest to:

  1. A) 5.9 years
  2. B) 6.1 years
  3. C) 17.4 years
  4. D) 16.9 years
  1. The management of Helberg Corporation is considering a project that would require an investment of $203,000 and would last for 6 years. The annual net operating income from the project would be $103,000, which includes depreciation of $30,000. The scrap value of the project’s assets at the end of the project would be $23,000. The payback period of the project is closest to:
  2. A) 1.5 years
  3. B) 2.0 years
  4. C) 1.4 years
  5. D) 1.7 years
  1. Wombles Corporation is contemplating purchasing equipment that would increase sales revenues by $478,000 per year and cash operating expenses by $249,000 per year. The equipment would cost $738,000 and have a 9 year life with no salvage value. The annual depreciation would be $82,000. The simple rate of return on the investment is closest to:
  2. A) 19.9%
  3. B) 30.8%
  4. C) 31.0%
  5. D) 11.1%
  1. The management of Duker Corporation is investigating purchasing equipment that would increase sales revenues by $130,000 per year and cash operating expenses by $39,000 per year. The equipment would cost $328,000 and have an 8 year life with no salvage value. The simple rate of return on the investment is closest to:
  2. A) 12.5%
  3. B) 27.7%
  4. C) 38.5%
  5. D) 15.2%
  1. An expansion at Fidell, Inc., would increase sales revenues by $75,000 per year and cash operating expenses by $38,000 per year. The initial investment would be for equipment that would cost $135,000 and have a 5 year life with no salvage value. The annual depreciation on the equipment would be $27,000. The simple rate of return on the investment is closest to:
  2. A) 20.0%
  3. B) 7.4%
  4. C) 27.4%
  5. D) 13.3%
  1. Messersmith Corporation is investigating automating a process by purchasing a machine for $688,000 that would have an 8 year useful life and no salvage value. By automating the process, the company would save $160,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $19,000. The annual depreciation on the new machine would be $86,000. The simple rate of return on the investment is closest to:
  2. A) 23.3%
  3. B) 11.1%
  4. C) 10.8%
  5. D) 12.5%
  1. The management of Stanforth Corporation is investigating automating a process. Old equipment, with a current salvage value of $24,000, would be replaced by a new machine. The new machine would be purchased for $516,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $173,000 per year in cash operating costs. The simple rate of return on the investment is closest to:
  2. A) 17.7%
  3. B) 16.9%
  4. C) 33.5%
  5. D) 16.7%

Use the following to answer 54-56

Overland Company has gathered the following data on a proposed investment project:

The company uses straight-line depreciation on all equipment.

  1. The payback period for the investment is:
  2. A) 0.27 years
  3. B) 3.75 years
  4. C) 10.00 years
  5. D) 2.13 years
  1. The simple rate of return on the investment is:
  2. A) 26.67%
  3. B) 16.67%
  4. C) 36.67%
  5. D) 10.00%
  1. The net present value of this investment is:
  2. A) $40,000
  3. B) $3,625
  4. C) $57,831
  5. D) $95,800

Use the following to answer 57-59

Perky Food Corporation produces and sells coffee jelly. Perky currently produces the jelly using a manual operation but is considering the purchase of machinery to automate its operations. Information related to the two operations is as follows:

Perky’s discount rate is 12%. Perky uses the straight-line method of depreciation.

  1. What is the net present value of automating operations using the incremental cost approach?
  2. A) $11,940
  3. B) $56,940
  4. C) $(104,106)
  5. D) $112,684
  1. What is the simple rate of return for automating operations?
  2. A) 3.8%
  3. B) 12.1%
  4. C) 14.5%
  5. D) 22.9%
  1. What will be the effect on the net present value of the decision to automate operations if 60,000 jars instead of 50,000 jars are expected to be sold each year? (Assume no change in cost structure or selling price.)
  2. A) no effect
  3. B) $52,030 decrease
  4. C) $63,179 increase
  5. D) $115,208 increase

Use the following to answer 60-62

Tam Company is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in cash operating costs. The equipment’s estimated useful life is 10 years, with no salvage value, and would be depreciated by the straight-line method. Tam’s required rate of return is 12%.

  1. The net present value of this investment is:
  2. A) $5,760
  3. B) $6,440
  4. C) $12,200
  5. D) $13,000

Source: CPA, adapted

  1. The payback period of this investment is:
  2. A) 4 years
  3. B) 1 year
  4. C) 10 years
  5. D) 5 years
  1. The simple rate of return of this investment is:
  2. A) 8%
  3. B) 20%
  4. C) 12%
  5. D) 10%

Use the following to answer 63-64

Evans Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows:

In addition, Evans Company would need to purchase equipment costing $275,000. The equipment would have a 12 year life and a $25,000 salvage value. The company’s required rate of return is 10%.

  1. The payback period on this investment is:
  2. A) 3.00 years
  3. B) 2.75 years
  4. C) 1.50 years
  5. D) 4.00 years
  1. The net present value of the project is closest to:
  2. A) $364,090
  3. B) $372,065
  4. C) $339,090
  5. D) $389,090

Use the following to answer 65-66

Baldock Inc. is considering the acquisition of a new machine that costs $420,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are:

  1. If the discount rate is 12%, the net present value of the investment is closest to:
  2. A) $330,000
  3. B) $539,365
  4. C) $119,365
  5. D) $420,000
  1. The payback period of this investment is closest to:
  2. A) 5.0 years
  3. B) 3.2 years
  4. C) 1.9 years
  5. D) 2.8 years

Use the following to answer 67-68

Delley Inc. is considering the acquisition of equipment that costs $340,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are:

  1. If the discount rate is 17%, the net present value of the investment is closest to:
  2. A) $45,811
  3. B) $385,811
  4. C) $301,000
  5. D) $117,341
  1. The payback period of this investment, rounded off to the nearest tenth of a year, is closest to:
  2. A) 3.9 years
  3. B) 3.6 years
  4. C) 3.1 years
  5. D) 5.0 years

Use the following to answer 69-70

Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:

Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of eight years.
69. The net present value of overhauling the present system is:

  1. A) $(321,084)
  2. B) $(532,516)
  3. C) $(560,536)
  4. D) $(592,516)
  1. The net present value of the new system alternative is:
  2. A) $(483,095)
  3. B) $(583,095)
  4. C) $(596,395)
  5. D) $(536,395)

Use the following to answer 71-72

Lambert Manufacturing has $100,000 to invest in either Project A or Project B. The following data are available on these projects:

Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert’s required rate of return is 14%. The company uses the total cost approach to evaluating alternatives.

  1. The net present value of Project A is:
  2. A) $51,000
  3. B) $60,120
  4. C) $55,560
  5. D) $94,450
  1. The net present value of Project B is:
  2. A) $90,355
  3. B) $76,115
  4. C) $36,115
  5. D) $54,355

Use the following to answer 73-75

Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following information has been gathered relative to this decision:

Carlson uses the total cost approach and a discount rate of 12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson Manufacturing plans to close its domestic manufacturing operations and to move these operations to foreign countries.

  1. If the new equipment is purchased, the present value of all cash flows that occur now is:
  2. A) $(48,000)
  3. B) $(39,000)
  4. C) $(41,000)
  5. D) $(37,000)
  1. If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is:
  2. A) $(28,840)
  3. B) $(19,160)
  4. C) $(14,420)
  5. D) $(36,050)
  1. If the equipment is rebuilt, the present value of all cash flows that occur now is:
  2. A) $(55,000)
  3. B) $(25,000)
  4. C) $(16,000)
  5. D) $(23,000)

Use the following to answer 76-79

Cedar Hill Hospital needs to expand its facilities and desires to obtain a new building on a piece of property adjacent to its present location. Two options are available to Cedar Hill, as follows:

Option 1: Buy the property, erect the building, and install the fixtures at a total cost of $600,000. This cost would be paid off in five installments: an immediate payment of $200,000, and a payment of $100,000 at the end of each of the next four years. The annual cash operating costs associated with the new facilities are estimated to be $12,000 per year. The new facilities would be occupied for thirteen years, and would have a total resale value of $300,000 at the end of the 13-year period.

Option 2: A leasing company would buy the property and construct the new facilities for Cedar Hill which would then be leased back to Cedar Hill at an annual lease cost of $70,000. The lease period would run for 13 years, with each payment being due at the BEGINNING of the year. Additionally, the company would require an immediate $10,000 security deposit, which would be returned to Cedar Hill at the end of the 13-year period. Finally, Cedar Hill would have to pay the annual maintenance cost of the facilities, which is estimated to be $4,000 per year. There would be no resale value at the end of the 13-year period under this option.

The hospital uses a discount rate of 14% and the total-cost approach to net present value analysis in evaluating its investment decisions.

  1. Under option 1, the present value of all cash outflows associated with buying the property, erecting the building, and installing the fixtures is closest to:
  2. A) $(200,000)
  3. B) $(491,400)
  4. C) $(600,000)
  5. D) $(387,200)
  1. Under option 1, the net present value of all cash flows is closest to:
  2. A) $(456,000)
  3. B) $(600,000)
  4. C) $(300,000)
  5. D) $(507,000)
  1. Under option 2, the present value of all the annual lease payments of $70,000 is closest to:
  2. A) $(466,200)
  3. B) $(408,900)
  4. C) $(483,700)
  5. D) $(910,000)
  1. Under option 2, the present value of all cash flows associated with maintenance costs is closest to:
  2. A) $(23,400)
  3. B) $(52,000)
  4. C) $(70,100)
  5. D) $(4,000)

Use the following to answer 80-81

Clairmont Corporation is considering the purchase of a machine that would cost $150,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $37,000. The company requires a minimum pretax return of 12% on all investment projects.

  1. The present value of the annual cost savings of $37,000 is closest to:
  2. A) $133,385
  3. B) $235,070
  4. C) $185,000
  5. D) $20,979
  1. The net present value of the proposed project is closest to:
  2. A) -$6,409
  3. B) -$11,295
  4. C) $1,385
  5. D) -$16,615

Reference: 12_12

Use the following to answer 82-83

The management of Mashiah Corporation is considering the purchase of a machine that would cost $290,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $102,000 per year. The company requires a minimum pretax return of 13% on all investment projects.

  1. The present value of the annual cost savings of $102,000 is closest to:
  2. A) $849,012
  3. B) $612,000
  4. C) $195,872
  5. D) $407,796
  1. The net present value of the proposed project is closest to:
  2. A) $154,663
  3. B) $322,000
  4. C) $117,796
  5. D) $245,246

Use the following to answer 84-85

Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $6,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 18% on all investment projects.

  1. The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:
  2. A) $16,872
  3. B) $0
  4. C) -$4,116
  5. D) -$13,111
  1. The net present value of the proposed project is closest to:
  2. A) $1,338
  3. B) -$8,849
  4. C) -$14,048
  5. D) -$2,778

Use the following to answer 86-87

Dube Corporation is considering the following three investment projects:

  1. The profitability index of investment project E is closest to:
  2. A) 0.13
  3. B) 1.13
  4. C) 0.87
  5. D) 0.12
  1. Rank the projects according to the profitability index, from most profitable to least profitable.
  2. A) F,E,D
  3. B) D,F,E
  4. C) F,D,E
  5. D) E,F,D

Use the following to answer 88-89

The management of Keno Corporation is considering three investment projects-B, C, and D. Project B would require an investment of $15,000, Project C of $50,000, and Project D of $89,000. The present value of the cash inflows would be $16,350 for Project B, $56,500 for Project C, and $96,120 for Project D.

  1. The profitability index of investment project C is closest to:
  2. A) 0.13
  3. B) 0.87
  4. C) 0.12
  5. D) 1.13
  1. Rank the projects according to the profitability index, from most profitable to least profitable.
  2. A) B,D,C
  3. B) C,B,D
  4. C) D,C,B
  5. D) D,B,C
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Therapy On Military Veterans With Ptsd

The modern world is characterized with undesirable events and process such as wars, earthquakes, floods and other natural disasters. This paper focuses on the deadly warfare such as Vietnam War and their impacts on the soldiers who participated in them, as well as their families and acquaintances. Apart from deadly injuries sustained by the victims of these tragedies, long lasting psychological problems such as post traumatic stress disorders are also exhibited by the actual casualties, friends and their families. In realization of the detrimental repercussions of this phenomenon several years after their occurrences, scholars have come up with ways to deal with victims of the tragedies. This paper focuses on the various articles which illustrates history, and effects of PTSD. Various approaches of dealing with the disorders have been discussed in details. The approaches include, use of equine therapy, dog service and cognitive behavioral therapy. Also included in the paper are the procedures of dealing with PTSD, expected results and a conclusive discussion of the whole process. Ample references to reinforce the arguments in the paper are also provided.

History of PTSD

Post Traumatic Stress Disorder (PTSD), is isolation and an anxiety predicament that develop in individuals sometimes after experiencing extremely traumatic occurrences such as crime, combat, a natural disaster or an accident. Traumatic event is a painful catastrophic stressor that is outside the range of the typical human experience. The peril of exposure to distress has been part and parcel of the man’s life since mankind evolved as a species. Academicians believe that (PTSD) has a long history that encompasses different fields of study. Psychiatry is one of the core fields associated with the phenomenon. Research shows that PTSD dates back to pre-Christ times, and also proves that today’s experience and effects of the disorder were also experienced in the distance past. The implication is that, since time immemorial human beings have always succumbed to fears. For instance, history has it that individuals who lived during the stone-age were mainly hunters and gatherers. The same history indicates that the individuals used to experience nightmares after a terrified day of hunting. As a matter of fact very little about PSTD has changed over the years except that human beings have emerged as more complex creatures with more complicated abilities. This complication is as a result of brain advancement which actually improves the manner in which people deal with stress and traumatic events. For the longest time ever, international psychological organs have invested a lot of time trying to come into terms with PSTD and ways to deal with it. For instance, in early 1980s American Psychiatrist Association recognized the disorder as a mental case which needs urgent attention. Though controversial in understanding of the disorder, PTSD knowledge has filled a crucial gap in psychiatric hypothesis and practices. Furthermore, PSTD is still an important phenomenon that calls for attention from psychologists and other academicians (Brian, Stanley, Sue, Katherine & Jill, 2011).

Individuals with PSTD may relive the occurrence through invasive memories, nightmares and flashbacks. Such individuals avoid anything that take them back to the trauma; and portrays restless feelings that they did not show long before the event/ occurrence. The feelings are so deep that their lives are extremely disrupted. In case of military veterans, their work experience involves a lot of traumatic events, which are inevitable throughout their work life. Some of these events involve military wars where at times they do execute criminals as part of their job. In other instances, they go through tough moments trying to safe people from disastrous areas such as in an event of bomb blast. These experiences end up challenging them psychologically long after these events takes place. Hence, they do develop psychological illness such as the PTSD. Equine therapy is one of the treatments that can be applied in dealing with PTSD. Equine therapy is a psychotherapy applied on horses, but research has shown that the same treatment can help military veterans recover from the traumatic events that they experience in their career. Consequently, various institutions have been set up in different parts of the world so as to provide these services. The effects of Equine Therapy depend on how it is applied. The analysis in the succeeding section focuses on some of the institutions that provide treatment and the effect of those services.

EAGALA Military Services

In an attempt to streamline many of equine-assisted schemes across the board, and assist active military, veterans, their families and the families of the diseased obtain the much needed therapy services, Equine Assisted Growth And Learning Organization has established EAGALA military services. The nonprofit making association was founded by Lynn Thomas, who became the executive director of the organization. The military task of the association focused on five key sections: community education, research, government relations, program development and member training. This population has been working with Equine professions and EAGALA Certified Mental Health unit, since 1999 to date. The services have always revolved around the provision of emotional treatments, behavioral and mental challenges ranging from TBI, depression, addiction to combat grief, misery and family trauma, reintegration to PTSD. Occurrence of PTSD might be as sky-scraping as 20% in military veterans of the famous Operations Iraqi as well as for the Enduring Freedom veterans. This is according to National Centre for PTSD. The centre also indicates that, PTSD among the Vietnam veterans might be as high as 30%. Despite these alarming rates of PTSD, a recent RAND report indicates that only few soldiers have sought the necessary treatment (Korinek, 2012). Consequently, more than 1000 soldiers have committed suicide.

In response to the high level of deaths out of PTSD, EAGALA has called upon all the interested stakeholders to exhibit the replica of Equine Assisted Psychotherapy (EAP). The model makes use of ground-based practices where the natural horses act as metaphors. These involve representing associations with unit members or family, fears, aspect of self or strengths. Academicians and scholars believe that horse therapy can be essentially more effective than conventional talk therapy. They also claim that horse therapy can be applied as either a short-term move for those already facing re-deployment, or as a long term approach treatment helping several in reintegration into family life and civilian (Santaquin & Utah, 2011).

According to survey program carried out by Asylum Services, an EAGALA military veteran Services plan located in Texas State, past only six programs, military veterans and their partners reported around 60% progress in harshness of marital challenges comprising, financial disputes, physical abuse, verbal abuse, parenting choices and forgiveness. Couples also reported around 50% perfection in emotional closeness, conflict resolution, sex, trust, anger and respect. An officer in the study stated that the forum provide a safe environment for him to open up because without it then it could be tricky to face reality. He also said that occasionally, the horses talked for him and assisted him to cope with his family challenges (Santaquin & Utah, 2011).

Jimmy Walters, a USA veteran, indicates that EAGALA Model makes use of the horse to achieve insight into perceptions and behaviors. According to Jimmy the reaction of the horse provide real time and unbiased feedback, breaking via the barriers that a lot of military people experience in discussions with others, who might not acknowledge what the veterans who made it back feels. Jimmy also notes that EAP provides a plan for coping with trauma in a manner that shows some sense to military veteran members. Another 23 years old active duty affiliate of Special Forces also proved that Equine Therapy works even for the active military people. He said that horses could understand his feelings and accept him; a phenomenon which he found very strange. As a result, the officer claims that the therapy has not only made it possible for him to re-connect with his family and himself, but has also made him a crucial tool in the military (Santaquin & Utah, 2011).

Ladies also have something to say concerning equine therapy. Julie Giove Sardonia, a Californian therapist, claims that since many veterans dislike talk therapy, then horses as therapists are the best in serving these military veterans. She also concluded that healing occurs naturally, particularly for the military veterans. Hence, a relationship of a soldier with a horse can offer self-understanding and emotional insights. Susan T. Lisi, a Chief Steward in VA Medical Center located in New York, affirmed that they conducted several EAGALA EAP programs with their veterans emphasizing on dealing with resilience, resources and anger management. She adds that comprehensively, veteran partakers have claimed that never ever have they found an individual session or a group so life-changing and useful. She also adds that after these sessions, several of them reflect recurrently on the skills and experience learned and then applies them in their lives. Another female soldier who was identified with PTSD after serving in the military for seven years also gave her side of the story. She claimed that she had been to numerous therapists and nothing seemed to come out of it. However, when she tried horses, it worked for her. These are some of the real life stories which portray the effectiveness of equine therapy on military veterans with PSTD (Santaquin & Utah, 2011).

High Hopes Therapeutic Riding

High Hopes Therapeutic Riding is an institution that provides equine therapy services to female veterans suffering from PSTD. In this discussion, a life story of a lady by the name Katye Zwiefka and her friends provides an overview of how Equine Therapy works for the veterans. Zwiefka had served as a marine corps for years before she joined High Hopes Therapeutic Riding. After Zwiefka had ridden a horse for the first time, she cried out of joy. She compared the good feeling to the pleasure she felt as a youngster on an early Christmas morning. Katye affirms that that It had been a long ever since she had that feeling; just that thrill and that excitement, that happiness that is uncontaminated by the humanity (McDermott & Jennifer, 2012).

Zwiefka who had been struggling with PTSD for years turned to the center hopeful that she would find psychological support that she needed. She was not alone in the centre but she was accompanied by another veteran, Khaylan Widener. Khaylan also said that linking with the horse has assisted them deal with the isolation and anxiety and isolation they have experienced while serving in the military (McDermott & Jennifer, 2012).

Zwiefka, describe the military life as that of total isolation where it is completely difficult to connect with people. She says that even at the age of 30, she still find it hard to feel comfortable and at peace with the surrounding. Her life is made even worse by the nightmares that accompany her dreams. She says that the nightmares makes her extremely uncomfortable, and hence, hard to go back to sleep. It is this desperation that pushes her into seeking professional assistance. However, with the horse riding, Zwiefka feel relaxed and forget all the stress that characterizes her daily life. She says that by thinking about riding then everything falls into its place. In fact, the thought of the smell of her horse makes her feel at peace with herself and with the surrounding (McDermott & Jennifer, 2012).

Widener has the same story as her colleague Zwiefka. The two met at Norwich vet centre where they had gone for counseling. The centre is run by the United States of America Department of Veterans Affairs and is meant to assist veterans such as Widener. She too was struggling with PTSD some few years after she was involved in the Iraq issues of 2007 and 2008. In the mission, widener lost eight of her closest friends, who succumbed to attacks from their enemies. The incidence demoralized widener more so because she lacked the support that she needed at the moment. As if that was not enough, widener also experienced another scenario that left her in a delicate health condition. This happened when she fell of a truck in Iraq during an attack by a rocket-propelled grenade. The tragedy made her suffer a traumatic brain injury which really affected her health. In general, her five years service in the army was not a good experience because it was full of tragedies and inhuman experiences (McDermott & Jennifer, 2012).

It is in the year 2009 that widener officially quitted from the military work. She is now 28 years and lives in Norwich. At this age it would be expected that she would be happily married and taking care of her own family. However, widener’s life is different from that of a typical woman because she still cannot find happiness; even though she is a mother of one and a wife. Widener feels that this abnormality has a lot to do with her military life. Nevertheless, she seems to have found a solution to her challenges the moment she enrolled for the Equine Therapy. She looks at the exercise as an opportunity to work through her issues without being criticized or judged. During her initial days in the center she made it a point of interacting with the members of the institution. These are especially children with disabilities such as cerebral palsy, autism and attention deficient disorders. By interacting with these children, Widener developed her skills of socializing with people (McDermott & Jennifer, 2012).

Apart from improving on her socialization skills, widener has been able to appreciate herself. At one point she says that riding helped her to be herself. She describes riding as a practice that has the ability to reveal a positive part of her that she had even forgotten that she possessed. In fact she claims that she was a social butterfly long before she joined militarily. Conversely, everything changed drastically because when she came back from the military she was extremely withdrawn. All in all, she is now able to appreciate her ability to lead a normal free from trauma (McDermott & Jennifer, 2012).

Zwiefka and Widener act as examples of many women who have benefited from the equine therapy. All of them have been able to recover or are in the process of recovering from post traumatic stress disorder. It should be noted that psychologically, horse riding is more effective in dealing with PTSD than talks. In fact, many of the military veterans are not sociable and that could be the reason as to why horse riding works with them and not the therapy talk.

Horses for Veterans

A Pentagon Channel documentary focuses on how veterans with PTSD are finding assistance via the supremacy of horse therapy at the Flag is Up Farms. A Horse Whisper by the name Monty Robert explores the effect of Equine Therapy on military veterans with PTSD. The study involves veterans of all ages. Robert thinks that the number one thing is to work with military veterans who have already lost hope in life. Robert demonstrates this by using abused and extremely mistreated horses; a technique he refers to Joining Up method. He adapts it specifically for the self-isolating military veterans experiencing post traumatic stress. His agenda is on learning to trust humans not by force but rather by choosing to trust them. Through the use of horse’s language or the trauma of the military veteran to converse, he supplemented, his plan engenders trust. He says that when horses trust you they will move towards you rather than keeping a distance from you. Roberts refer to horses as flight animals which are afraid of anything which does not earn their trust. That behavior matches perfectly well with the behavior of a military veteran. These individuals are never comfortable with anything they do not trust or understand. He also dislikes the traditional way of handling horses and advocates for the nonviolent approach. He thinks that veterans too need this approach to deal with their trust issues (Department Of Defense, 2012).

Alejandra Sanchez, a veteran, is a regular visitor to Flag is Up Farms, but recalls her foremost occasion as if it was in the recent past. She affirms that she has never been so frightened in her life; not even as it was in her Iraq experience. She recalls that her anxiety and isolation was via the roof, since she had to face the fact that she had PTSD. Since then nightmares challenged her throughout the night. In one instance, she remembers a nightmare that reminded her of how she had reached a point of desperation while in Iraq. Sanchez describes how life of a veteran is hard because of being forced to work with individuals you do not understand. This is on top of the fact that there is lack of trustworthiness between a veteran and those around them. Coming from such a difficult life, Sanchez looks at horse riding as the trickiest thing. She could not find it easy to calm herself down in order for the horses to trust her. However, she knew very well that while she was angry, anxious or violent; the horses could not corporate. That was the beginning point of her recovery from PTSD. She is now the humble character that any horse can trust. As a matter of fact, equine therapy has positively changed the life of Sanchez (Department Of Defense, 2012).

Alicia Watkins is another veteran who experienced the worst of the military life. She joined military as an outgoing and a fun loving woman but came out of it as totally different character. She says that her experiences in Afghanistan and Iraq were not the best because they left her traumatized than ever. After the noble military service, Alicia became an isolated character who was homeless and spent a year in her car because she had lost her dignity. Life was so difficult for her that she had reached a point where she felt like committing suicide. These near death experiences were averted drastically when she made it a point to attend to Roberts’s program.

Initially, it was not easy for her to deal with the horses. However, she was positive about riding and eventually she made it possible to bridge the psychological gap between her and the outer world. She can now talk to people freely without fear or distrust. She can also be able to deal with her challenges without complication. These are some of the numerous positive things that Equine Therapy brought to her life. Robert indicates that Equine Therapy does not help the veterans to forget the past but rather it help them to mask the trauma with positive behaviors. He illustrates this by use of the horses’ experiences. Roberts indicates that horses that were previously mistreated do not just forget the mistreatments, but the nonviolent treatment makes them to trust people again. That is the same way that equine therapy works for the veterans (Department Of Defense, 2012).

Therapist Using Horses in Treating PTSD

According to Bough, the author of this article, one may look hale and hearty physically, but it’s probable that, yet without either physical stress manifestations; traumatic experiences and stress can exhibit themselves in humans and horses. However, Bough looks at Equine Therapy as the only solution for the PTSD. The treatment makes it possible for the horses and human beings to interact and solve any trauma or stress (Baugh &Ben, 2009)

Suze Maze, a psychotherapist and horseman possesses a wide knowledge; essential in dealing with trauma. Veterans have Suze to trust with their disorders. For instance, she is able to assist soldiers from Fort Gordon after returning from Iraq military service. Maze learned about Equine Assisted Psychotherapist while living in Kentucky via the EAGALA model, and afterward became certified. The name of her dealing is Horse Empowerment. According to Maze, the impacts of long-term and recurring deployments can be exhibited in the workplace, however, the phenomenon also affect families of the soldiers. Maze learned these facts at a time while she was living with individuals who were struggling with alcoholism and drug addiction. As such Maze finds it extremely important to form a platform where people who had lost hope in life could find necessary help. She looks at the military occupation as one of the noble career, where individuals put their lives on danger for the sake of the society at large. She also found it crucial to devise ways to deal with challenges faced by families of the veterans (Baugh &Ben, 2009)

Maze uses her long experience to prove the fact that Equine Therapy is the best treatment for veterans and their families. She looks at the positive aspects of the horses that make them key in dealing with post traumatic stress disorders. For one, Maze notes that trust is one thing that veterans need to develop. Maze indicates that soldiers in the service are taught not to trust anybody not even their closest friend. The notion grows slowly by slowly while in the military. This notion is very healthy for them while at the military, but it turns out to be a challenge when they get out of the army. Conversely, horses need to trust people or else they flee from those they do not trust. Thus, horse riding helps soldiers to start trusting people again. Maze notes that horse riding involves doing a task, where all the five senses are involved. She also advocates for a classical therapeutic office model to be taken out of the framework and positioned in the ring with horses, permitting the patient to interrelate with the horses as well as a professional squad with at least a licensed psychological health expert and at least a horseman specialist. Maze notes that the objective of all these is to serve military people and even those civilians undertaking treatment, with a defensive safety measure. The wish is that the modality and treatment will assist service people make an easier changeover from warfare to garrison life. Eventually, Equine Therapy is able to achieve all these aspirations in the most efficient way possible. As a result, it provides the best option for military veterans experiencing post traumatic stress disorders (Baugh &Ben, 2009)

War Veterans get help from Rick Iannucci’s ‘therapeutic riding’ program

The article is authored by Reese, and emphasizes on the effectiveness of equine therapy on dealing with post traumatic stress disorder. The author makes uses a life story of Rick Iannucci, who is the current director of Cowboy Up, which is a horse equine therapy program for warfare military veterans. Rick describes horse therapy as the excellent means that help PTSD to recover within a very short period of time. He uses the words of Winston Churchill (a military man in the Boer war), who stated that there is great about the outer surface of a horse that is excellent for the in part of a man (Reese & April, 2011).

For two and a half years, a flow of Afghanistan and Iraq war-veterans have found their means to Rick. A lot of them get there carrying both psychological and physical scars of warfare. First, they learn to walk and groom the expressly skilled quarter horses, and then the veterans work out their means up to riding and mounting them around the ring. As the military veterans link with the horses, on top of learning how to understand them, they start to heal and feel related with the civilian world once more (Reese & April, 2011).

Rick affirms that Horses will only corporate with you; if you are not uptight. This is because they wheedle a certain degree of contemplation from individuals. In other words, horses demand to see veterans come into terms with the reality. As a rule, when the military veterans begin riding and associating with the horses, they instantly begin calming down. Despite the fact that the majority of the veterans arrive at cowboy up with physicals disabilities; they all recover through the use of Equine Therapy. In his study, Rick rebrands PTSD as post-traumatic spiritual disorder (PTSD). This because he tend to believe that what happens to soldiers during the warfare is a spirit’s wounding. Therefore, he thinks that their main goal is to find that wound and heal it. Iannucci and his team integrate psychological, physical and spiritual healing. Ricks describe it as having faith again in others, themselves and faith in almighty God. He advocates for horse riding as the only mechanism that can enable veterans to achieve this wonderful life requirements. The ability of Equine Therapy to deliver veterans from PTSD is emphasized by victims of the disorder such as Sterling Bucholz. He was assisted by Rick to recover from military trauma through the horse riding technique. Many other examples prove that Equine Therapy is effective in assisting veterans suffering from Post-Traumatic Stress Disorder (Reese & April, 2011).

Military Service, Post-Trauma Symptoms and Health in Older Adulthood: An Analysis of Northern Vietnamese Survivors of the Vietnam War

Vietnam war-induced anxiety influences mortality, morbidity, psychological state of affairs and value of life in the long run is understood roughly entirely as a product of psychoanalysis of the lives and healthiness of American military veterans of 20th century wars. Studies reveal that, over thirty years past hostilities, Post-Traumatic Stress Disorder (PTSD) proves to be a noteworthy predictor of every cause, cancer, cardiovascular and external root mortality amongst United States veterans involved in Vietnam War. These facts prove that the repercussions of Vietnam War were detrimental and needed attention. This papers focus on the most viable solution for the military veterans of the war (Korinek, 2012)

Procedures: The pilot study consisted of 2 phases. First, conducting structured interviews with 310 people, age 55 and above. 215 respondents of the 310 were successfully interviewed. Out of the 95 charged with attrition cases, 81 people had died by the time of this study while the remainder had moved outside the commune. Surprisingly, 75% of the decedents were not military veterans. In an attempt to meet a target sample range of 400 respondents, 196 individuals aged 55 and above were randomly chosen from existing household registration mechanism. 91 of them were successfully interviewed making up a total of 405 respondents. Included in this total is 19 proxy interviews conducted with next of kin. This was in cases where a respondent was too mentally or physically unfit to be interviewed however, Questions concerning perceptions and feelings were not responded to by the proxies. In examining the connection between military service, distress exposure and health conditions, military service was characterized using 4 categories militia nonveterans, non-militia, combat veterans and noncombat veterans. To determine exposure to war-time stress events, the study relied upon a modified report of PTSD module of the World Health Organization findings recorded by Composite International Diagnostic Interview (Korinek, 2012).

Results: Focusing on relationship between military service and trauma risk, the sample splits along gender lines. From the study, more than half of the males are armed military veterans, and virtually one third worked in combatant sections. On the other hand, less than half of the sample consisted of women, either as armed officers or in other military roles. The difference explains why 87 percent suffered from trauma while only 13% of women were dealing with PTSD and related disorders. In general, this populace of older generation had extremely prevalent exposure to stressful events throughout their life course (Korinek, 2012).

Statistically, a considerable association of war traumas with undesirable health among men is evident. The study also proves that long lasting effects of warfare on health and chronic illness several decades past the war are more perceptible amongst men who experienced combat exposure than in women. In addition, the war had disruptive effects on certain groups of people that are not may not be well expressed in a population-based sample. Such groups include: those orphaned at a tender age and those who sustained serious injuries in bombing campaigns or in other combat events (Korinek, 2012).

Conclusion: As a matter of facts, Post Traumatic Stress Disorders diagnosis and label is not easily transported linguistically and culturally. The cultural lens via which sadness, dreams and other mental and psychological conditions are interpreted will influence stress experienced and the tendencies to remember and disclose them. It can also be concluded that lasting physical and psychological pains of war can have culturally discrete roots. Therefore, it is important to perceive physical and psychological aspects linked to war from a Vietnamese spiritual lens and cultural perspective. Lastly, it is no doubt that this research has implications that extend clear of the Vietnamese context hence, it can address more challenges than just the few outlined therein (Korinek, 2012).

The Effects of Animal-Assisted Therapy on Anxiety Ratings of Hospitalized Psychiatric Patients

According to the authors of this article Barker and Dawson, Animal-assisted therapy comprise association between a trained animal and patients, along with the animal’s human handler or owner, with an objective of enhancing patients’ progress on the road to therapeutic objectives. This study scrutinized whether a program of animal-assisted therapy lowered the anxiety or nervous intensity of hospitalized psychiatric patients, as well as whether any disparities in declines in anxiety were correlating with patients’ diagnoses.

Procedures: The study subjects used were two hundred and thirty patients referred for therapeutic exercise sessions. A pre-treatment and post-treatment intersect study design was applied to compare the results of a particular animal-assisted therapy program with those of a solitary frequently scheduled therapeutic exercise program. Before and after partaking in the 2 types of programs, subjects completed the condition degree of the State-Trait Anxiety Inventory, which is a self-report examination of anxiety presently felt. Blended-models repeated-measures psychoanalysis was applied to test discrepancies in scores from prior to and past the two categories of sessions.

Results: Statistically considerable declines in anxiety scores were established subsequent to the animal-assisted therapy program for patients with mood disorders, psychotic disorders and other forms of disorders, and following the therapeutic recreation program for patients suffering from mood disorders. On the other hand, no statistically significant discrepancies in decline of anxiety were established between the 2 types of sessions.

Conclusions: Animal-assisted therapy was linked to reduced condition anxiety intensities for hospitalized patients suffering from a range of psychiatric diagnoses, whereas a routine therapeutic exercise session was related to reduced intensity, only for patients suffering from mood disorders (Barker, Dawson, 2011).

This study scrutinized 2 Tele-health interventions to deal with symptoms of combat-associated posttraumatic stress disorder (PTSD) in military veterans. Thirty-three men combat veterans were at random allocated to one of two Tele-health treatment situations: mindfulness or psycho-education. In the two conditions, partakers completed eight weeks of Tele-health treatment, which is, two sessions individually followed by six programs over the telephone. The eight weeks treatment was followed by three evaluations, which include pretreatment, post-treatment and finally a 6-week follow-up. The mindfulness healing was founded on the tenets of mindfulness-based anxiety reduction while the psycho-education guide was based on regularly applied psycho-education tools for Post Traumatic Stress Disorder.

For the 24 partakers who completed all evaluations showed that: (a) Tele-health appears to be a viable mode for relief of Post Traumatic Stress Disorders treatment for veterans; (b) Veterans suffering from PTSD have the capacity to bear and report high fulfillment with a concise mindfulness involvement; (c) partaking in the mindfulness involvement is associated with an impermanent decline in PTSD symptoms (d) A concise mindfulness treatment cannot be of sufficient intensity to cause effects on PTSD symptoms (Niles, Klunk-Gillis, Ryngala, Silberbogen, Paysnick, & Wolf, 2012).

The Physical and Mental Health of Australian Vietnam Veterans 3 Decades after the War and Its Relation to Military Service, Combat, and Post-Traumatic Stress Disorder

The long-term health repercussions of warfare service remain unclear, despite escalating scientific interest to reveal the underlying facts. A study of a random model of Australian Vietnam militarily veterans was planned to assess military veterans’ postwar mental and physical and health more than36 years past the war and to scrutinize its connection to combat, Army service and Post-Traumatic Stress Disorder evaluated 14 years earlier. Prevalence’s in 450 veterans were contrasted to those in the Australian broad population. Military Veterans’ Army service and information from the first evaluation were assessed using complex logistic regression projection modeling. Servicemen’s health and some health hazard factors were inferior and medical talk rates were superior to Australian populace expectations. Out of 67 long-term cases, the prevalence of 47 was superior and the occurrence of four was lower when contrasted to inhabitants expectations. Nearly half of all military veterans used medication for mental comfort. The occurrence of psychiatric diagnoses surpassed Australian people expectations. War service and Military characteristics as well as age were the mainly common predictors of physical health terminals, whereas PTSD was mainly heavily linked to psychiatric cases. In comparison Draftees had superior physical healthiness than habitual enlistees although no better mental fitness. War-related PTSD and Army service are associated with danger of ill health in later life amongst Australian Vietnam war veterans (Brian, Stanley, Sue, Katherine & Jill, 2011).

Service Dog Training Program for Treatment of Posttraumatic Stress in Service Members

As a matter of facts, only two uses of dogs are widely recognized, which include a dog as a pet and use of the animal by police officers to track law offenders and locating victims of disasters. However, it has been realized that dogs can deal with challenges faced by traumatized individuals such as war veterans. This article focuses on how dogs are used to provide treatment to service men with PTSD and other related disorders (Patricia, 2012).

According to National Education for Assistance Dog Service, a fully trained dog can help veterans with mental or physical problems both during rehabilitation and after they return to civilian life. This dogs provide physical and emotional support, hence, restore the serviceman’s self-confidence and dignity; necessary to move into next chapter of life. On the other hand, The Worrier Canine Connection plays the role of training service members with PTSD, how to train service dogs to serve as source of help to physically handicapped soldiers. The secret behind use of the dogs in treatment of mental problems lies in the fact that dogs are lively pets. This makes them good to interact with veterans, essential because service men are denied that opportunity to socialize during wars. In the interaction process veterans regain their lost confidence and lead a normal life (Patricia, 2012).

Cognitive Behavioral Therapy

Post-Traumatic Stress Disorder is a problem that affects the majority of the member of the society. As such, several psychologists have devised different mechanisms for dealing with it. Any mechanism used has its advantages as well as its drawbacks. In case of the equine therapy, it is effective in the long run and is mostly advocated for the personality portrayed by the majority of the veterans. However, Equine Therapy is an expensive means, which may not be afforded by the majority of the world veterans. In addition to the high cost, the practice works well with veterans who have enough free time to attend the riding sessions. This is a limitation because even after retirement, many of the soldiers still engage in other forms of employment to earn an extra coin. To solve these challenges other forms of treatment might be of help (Robert & Howard, 2012).

Cognitive-Behavioral Treatment is one of the most applied therapies globally. The treatment is based on the suggestion that, psychological tribulations crop up on account of the manner in which individuals evaluate or interpret situations, feelings, thoughts and our behaviors. The method is based on the fact that, due to their tendency to generalize things, human beings end up traumatized. For instance, individuals who have ever been bit by a spider may end up concluding that all spiders are equally dangerous. Such people exhibit a lot of fear and anxiety whenever they come across a spider of whichever type. These individuals may opt to avoid spiders completely in order to lead a normal life free of anxiety and fear. However, in some cases this might not be possible because it might be hard to avoid all the traumatizing events throughout someone’s life time. For instance, when military veterans experience inhuman acts during wars, it might not be easy to forget whatever happened especially where people had to lose their lives. For the veterans, whether they avoid the same scenes or not, they cannot avoid the trauma and the stress that goes with the experiences. Sometimes even the contemplation of the traumatizing events leads to anxiety and isolation (Monson, Fredman, Adair, Stevens, Resick, Schnurr, MacDonald & Macdonald, 2011). Eventually, the victims of such trauma develop Post Traumatic Stress Disorder which is not easy to heal. Cognitive behavioral treatment uses three different techniques to deal with PTSD. The analysis in the succeeding section focuses on these techniques (Robert & Howard, 2012).

Self-Monitoring

The therapists concerned might first and foremost request the veteran patient to track their feelings and thoughts. The psychologist may then ask the patient to put down the thoughts and their feelings in response to definite circumstances, particularly those that give rise to anxiety or any other disturbing feeling. This assist the patient acknowledge how they assess their incidents and the end results of these assessments, such as anxiety.

Cognitive Restructuring

Once these assessments are acknowledged, the specialized may then assist the patient collect proof for and against the assessments. This is the cognitive restructuring process. Through the process, veterans may appreciate that their assessments or interpretations of circumstances are not exclusively perfect. They may as well comprehend that, even though thoughts often appear factual, they are hardly ever based on facts. These realities help veterans overcome PTSD with a lot of ease.

Behavioral Experiments

In this final stage, the therapist will request the veteran to participate in behavioral experimentations. This encompasses asking the patient to try these new methods of perceiving the humanity. This might be possible by getting into circumstances where they might come into contact with something that they once feared. Once they manage to go through this stage successfully, then they might have managed to overcome PTSD.

Further Analysis of PTSD

Clinical understanding suggests that reported youth adversity, adult experiences of hostility, and post-traumatic stress disorder (PTSD) are widespread among people suffering from borderline personality disorder (BPD) (Zanarini, Hörz, Frankenburg, Reich & Fitzmaurice, 2011). While several research findings support the connection between babyhood and adult adversity and BPD, only seven studies have evaluated the commonness of PTSD in models of criteria-defined patients suffering from BPD (3-9). Generally, the researchers recognized that PTSD was fairly regular, with a range of 20-54.9% and a center commonness of around 46%. In addition, only 2 longitudinal researches have evaluated the path of PTSD in a model of well-defined patients suffering from BPD (Niles, Klunk-Gillis, Ryngala, Silberbogen, Paysnick, & Wolf,  2012). In the foremost of these studies the Collaborative Longitudinal Personality Disorders Study o CLPS- it was concluded that BPD dispatched more swiftly over 2 years of potential follow-up in individuals with PTSD than those with unqualified PTSD. In the second phase of these researches – the McLean Study of Adult Development (MSAD) – it was established that the occurrence of PTSD reduces extensively over six years of prospective transcribe but remained considerably higher among people with BPD than amongst axis II comparison theme (Barker, Dawson 2011). It was also established that the lack of PTSD at baseline was a noteworthy predictor of a quicker period to-remission of BPD.

The recent study, which is an annex of the McLean research of Adult Development research mentioned earlier, is the first longitudinal research to evaluate the prevalence of post-traumatic stress disorder, over and above 10 years of probable follow-up in a huge and well-defined model of patients with borderline traits disorder and axis II comparison subject matters (Zanarini, Hörz, Frankenburg, Weingeroff, Reich, Fitzmaurice 2011). It is also the very first research to evaluate time-to-recurrence, time-to-recurrence, and time-to new inception of post-traumatic stress disorder in individuals with borderline traits disorder tracked prospectively for a 10 years (Zanarini, Hörz, Frankenburg, Reich & Fitzmaurice, 2011). In addition, it is the very first research to evaluate the connection between sex adversity in childhood and maturity and the possibility of remission and reappearance of post-traumatic stress disorder amongst borderline patients meeting standards for this co-occurring mental challenge at research entry. Material and techniques the current research is section of the MSAD, a comprehensive longitudinal research of the units of BPD. All subjects were originally in-patients at the great McLean Hospital in Belmont, Massachusetts. every patient was first and foremost screened to establish that he/she: (i) was between the ages of 18-35; ii) had a known IQ of 71 or above (iii) was fluent in English (iv) had no history/current symptoms of schizoaffective disorder, bipolar I disorder, schizophrenia or an organic status that could result to psychiatric symptoms. After the research procedures were clarified, written informed approval was acquired. Each patient then convened with a master-level interviewer who was blind to the patient’s diagnoses for a meticulous diagnostic evaluation (Zanarini, Hörz, Frankenburg, Reich, & Fitzmaurice, 2011). Three semi prearranged diagnostic interviews were executed. These diagnostic consultations were: I) the ordered Clinical consultation for DSM-III-R Axis I (SCID I) (12), ii) the modified Diagnostic consultation for Borderlines (DIB-R) (13) and iii) the Diagnostic consultation for DSM-III-R Personality Disorders. The test-retest and inter-rater dependability of all 3 of these procedures have been established to be excellent. At each of 5 follow-up waves, disconnected by twenty four months, axis I and II psychopathology was re-evaluated through interview techniques comparable to the baseline measures by clinically qualified MA-level or BA-level staff affiliates blind to basic diagnoses. After informed approval was found, diagnostic battery was re administered.

Remission as any 2-year phase (any follow-up phase) in which the standards for PTSD were no longer obtained. For this study 2 years is appropriate at the beginning of the research to mirror meanings of remission of BPD and its essential symptoms (18). In addition, a reappearance or new inception could be defined as any 1-month epoch in which the standards for PTSD were achieved after a 2-year remission. Therefore it can be concluded that youth adversity, adult experiences of hostility, and post-traumatic stress disorder (PTSD) are widespread among people suffering from borderline personality disorder (BPD).

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