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Exam 11: Capital Budgeting and Investment Analysis

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Question 21

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There are two basic steps in calculating the internal rate of return.Which of the following represents those two steps?

A) (1) Compute the PV factor for the project and (2) compare it to the hurdle rate.
B) (1) Compute the PV factor for the project and (2) identify the discount rate.
C) (1) Identify the discount rate and (2) compare the IRR to the hurdle rate.
D) (1) Compare IRR to the hurdle rate and (2) accept or reject the project.
E) (1) Select the hurdle rate and (2) compute the PV factor for the project.

F) None of the above
G) A) and D)

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Question 22

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For purposes of applying the net present value and the internal rate of return methods, the rate chosen to measure the time adjusted value of money is known as the:

A) Internal rate.
B) Average rate.
C) Prime rate.
D) Discount rate.
E) Compound rate.

F) A) and B)
G) A) and C)

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Question 23

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Capital budgeting decisions that relate to investments in technology are not as risky as other types of capital budgeting decisions.

Which methods of evaluating a capital investment project ignore the time value of money?

The net present value capital budgeting method considers all estimated cash flows for the project's expected life.

Which methods of evaluating a capital investment project use cash flows as a measurement basis?

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

Presented below are terms preceded by letters (a) through (g) and followed by a list of definitions (1) through (7) .Match the letter of the term with the definition.Use the space provided preceding each definition -A minimum acceptable rate of return.

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

Presented below are terms preceded by letters (a) through (g) and followed by a list of definitions (1) through (7) .Match the letter of the term with the definition.Use the space provided preceding each definition -Cash inflows minus cash outflows for the period.

Scott Corporation is considering the purchase of new equipment costing $30,000.The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation.The revenue is to be received at the end of each year.The machine has a useful life of three years and a $4,000 salvage value.Scott requires a 12% return on its investments.The factors for the present value of $1 for different periods follow: $\begin{array}{lr}\underline { \text { Periods }} & \underline { \text { 12 Percent }} \\1 & 0.8929 \\2 & 0.7972 \\3 & 0.7118 \\4 & 0.6355\end{array}$ What is the net present value of the machine and what is the maximum Scott would have been willing to pay for it?

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

Use of the internal rate of return method cannot be used with uneven cash flows.

Monterey Corporation is considering the purchase of a machine costing $36,000 with a six-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?

A major limitation of the internal rate of return method is:

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

Accounting rate of return is the simplest capital budgeting method.It gives managers an estimate of how soon they will recover their initial investment.

Capital budgeting decisions are not affected by return on investment considerations.

Which of the following is an objective of capital budgeting?

The internal rate of return method is not subject to the limitations of the net present value method when comparing projects with different amounts invested because: