FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 24: Capital Budgeting and Investment Analysis

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 61

Multiple Choice

Review LaterAdd Note

Review Later

The following data concerns a proposed equipment purchase: $\begin{array} { l r } \text { Cost } & \$ 278,000 \\\text { Salvage value } & \$ 6,000 \\\text { Estimated useful life } & 8 \text { years } \\\text { Annual net cash flows } & \$ 46,360 \\\text { Depreciation method } & \text { Straight-line }\end{array}$ Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:

A) 34.09%.
B) 32.64%.
C) 8.35%.
D) 8.70%.
E) 16.67%.

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

Correct Answer

verified

Show Answer

Question 62

Multiple Choice

Review LaterAdd Note

Review Later

The process of restating future cash flows in terms of their present values is called:

A) Discounting.
B) Capital budgeting.
C) Payback period.
D) Risk uncertainty.
E) Accounting rate of return.

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

Correct Answer

verified

Show Answer

Question 63

Essay

Review LaterAdd Note

For each of the capital budgeting methods listed below, place an X in the correct column, indicating the measurement basis of each, the ability to make comparison among projects, and whether each method reflects or ignores the time value of money. $\begin{array}{|l|c|c|c|c|c|c|}\hline&&&\text { Comparison among }\\&\text { Measurement Basis }&&\text { projects }&&\text { Time value of money }\\\hline & \begin{array}{c}\text { Cash } \\\text { flows }\end{array} & \begin{array}{c}\text { Accrual } \\\text { income }\end{array} & \begin{array}{c}\text { Allows } \\\text { comparison }\end{array} & \begin{array}{c}\text { Difficult } \\\text { to } \\\text { compare }\end{array} & \begin{array}{c}\text { Reflects } \\\text { time value } \\\text { of money }\end{array} & \begin{array}{c}\text { Ignores } \\\text { time value } \\\text { of money }\end{array} \\\hline \text { Payback period } & \\\hline \begin{array}{l}\text { Accounting rate of } \\\text { return }\end{array} & \\\hline \text { Net present value } & \\\hline \begin{array}{l}\text { Internal rate of } \\\text { return }\end{array} & \\\hline\end{array}$

A company is considering a proposal to invest $30,000 in a project that would provide the following net cash flows: $\begin{array} { l r } \text { Year 1 } & \$ 6,500 \\\text { Year 2 } & 10,700 \\\text { Year 3 } & 15,000 \\\text { Year 4 } & 12,800\end{array}$ (a) Compute the project's payback period. (b) Compute the net present value of the project assuming a 10% discount rate with the following factors: PV factors for $1(yr 1: 0.9091; yr 2: 0.8264; yr 3:0 .7513; yr 4: 0.6830) (c) Should the company invest in the machine? Why or why not?

A company is considering the purchase of new equipment for $39,000. The projected after-tax net income is $6,000 after deducting $13,000 of depreciation. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 12% return on investment. The present value of an annuity of 1 for various periods follows: (a) What is the net present value of this machine assuming all cash flows occur at year-end? (b) What is the profitability index for this equipment?

Three widely used methods of comparing investment alternatives are payback period, net present value, and rate of return on average investment.

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

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

The process of analyzing alternative investments and deciding which assets to acquire or sell is known as:

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be depreciated using the straight-line method with 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. $\begin{array}{lrr}\text { Sales } & & \$ 90,000 \\\text { Costs: } & & \\\text { Manufacturing } & \$ 52,000 & \\\text { Depreciation on machine } & 4,000 & \\\text { Selling and administrative expenses } & \underline{30,000} & \underline{(86,000) } \\\text { Income before taxes } && \$ 4,000 \\\text { Income tax }(50 \%) && \$(2,000) \\\text { Net income } && \$ 2,000\end{array}$ -What is the accounting rate of return for this machine?

The following data concerns a proposed equipment purchase: $\begin{array} { l r } \text { Cost } & \$ 144,000 \\\text { Salvage value } & \$ 4,000 \\\text { Estimated useful life } & 4 \text { years } \\\text { Annual net cash flows } & \$ 46,100 \\\text { Depreciation method } & \text { Straight-line }\end{array}$ Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:

Monterey Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value. Monterey uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Monterey's average investment?

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

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

An advantage of the break-even time (BET) method over the payback period method is that it recognizes the time value of money.

A company wishes to buy new equipment for $85,000. The equipment is expected to generate an additional $35,000 in cash inflows for four years. All cash flows occur at year-end. A bank will make an $85,000 loan to the company at a 10% interest rate so that the company can purchase the equipment. Use the table below to determine the present value of the future cash flows and the net present value of the investment. $\begin{array} { c c } \text { Year } & \begin{array} { c } \text { Present Value } \\\text { of } 1 \text { at } 10 \%\end{array} \\0 & 1.0000 \\1 & 0.9091 \\2 & 0.8264 \\3 & 0.7513 \\4 & 0.6830\end{array}$

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

A company bought a machine that has an expected life of 6 years and no salvage value. Management estimates that this machine will generate annual after-tax net income of $700. If the accounting rate of return is 10%, what was the purchase price of the machine?

The calculation of the payback period for an investment when net cash flow is even (equal) is:

The process of restating cash flows in terms of their present values is called discounting.