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Exam 24: Capital Budgeting and Investment Analysis

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Question 21

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

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Question 22

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The accounting rate of return is calculated as:

A) The annual after-tax income divided by the total investment.
B) The annual after-tax income divided by the annual average investment.
C) The annual cash flows divided by the annual average investment.
D) The annual cash flows divided by the total investment.
E) The annual average investment divided by the after-tax income.

F) A) and B)
G) D) and E)

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Question 23

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Capital budgeting decisions are risky because all of the following are true except:

The calculation of annual net cash flow from a particular investment project should include all of the following except:

A company buys a machine for $60,000 that has an expected life of 9 years and no salvage value.The company uses straight-line depreciation.The company anticipates a yearly net income of $2,850 after taxes of 30%,with the cash flows to be received evenly throughout each year.What is the accounting rate of return?

The internal rate of return equals the rate that yields a net present value of zero for an investment.

The time value of money concept:

When computing payback period,the date the initial capital investment is made is year 1.

In ranking choices with the break-even time (BET)method,the investment with the highest BET measure gets the highest rank.

A postaudit is:

The payback period method of evaluating an investment ignores cash inflows after the point where an investment's costs are fully recovered.

A company's required rate of return,typically its cost of capital is called the:

A company is planning to purchase a machine that will cost $24,000 with a six-year life and no salvage value.The company expects to sell the machine's output of 3,000 units evenly throughout each year.A projected income statement for each year of the asset's life appears below. -What is the payback period for this machine?

If Management was not concerned with the time value of money,from which two capital budgeting methods should they choose?

The time value of money concept works on the principle that a dollar today is worth more than a dollar tomorrow.

The time value of money is considered when calculating the payback period of an investment.

Porter Co.is analyzing two potential investments. -If the company is using the payback period method and it requires a payback of three years or less,which project(s) should be selected?

If net present values are used to evaluate two investments that have equal costs and equal total cash flows,the one with more cash flows in the early years has the higher net present value.

The accounting rate of return (ARR)is computed by dividing a project's after-tax net income by the amount of the initial investment.

You have evaluated three projects of similar investment amount and risk using the net present value (NPV)method.How would you decide which one of the projects to select?