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Exam 24: Capital Budgeting and Investment Analysis

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Question 61

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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.

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Question 62

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The payback method,unlike the net present value method,does not ignore cash flows after the point of cost recovery.

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Question 63

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A company is considering the purchase of a new machine for $128,000.Management predicts that the machine can produce sales of $32,000 each year for the next eight years.Expenses are expected to include direct materials,direct labor,and factory overhead totaling $7,500 per year plus depreciation of $10,800 per year.The company's tax rate is 38%.What is the payback period for the new machine?

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

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

Daniels Corporation is considering the purchase of new equipment costing $30,000.The projected annual after-tax net income from the equipment is $1,200,after deducting $10,000 for depreciation.The revenue is to be received at the end of each year.The machine has a useful life of three years and no salvage value.Daniels requires a 12% return on its investments.The factors for the present value of $1 for different periods follow: $\begin{array} { l r } \underline{\text { Periods }} & \underline{12 \text { Percent }} \\1 & 0.8929 \\2 & 0.7972 \\3 & 0.7118 \\4 & 0.6355\end{array}$ What is the net present value of the machine?

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

After-tax net income divided by the annual average investment is the:

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?

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

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 _______________________.

A company wishes to buy new equipment for $9,000.The equipment is expected to generate an additional $2,800 in cash inflows for six years.All cash flows occur at year-end.A bank will make an $9,000 loan to the company at a 10% interest rate so that the company can purchase the equipment.Use the table below to determine break-even time for this equipment: $\begin{array}{c}&\text { Present Value }\\\text { Year } & \text { of 1 at } 10 \% \\0 & 1.0000 \\1 & 0.9091 \\2 & 0.8264 \\3 & 0.7513 \\4 & 0.6830 \\5 & 0.6209 \\6 & 0.5645\end{array}$

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

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

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

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:

The following data concerns a proposed equipment purchase: $\begin{array}{lr}\text{cost} & \quad & \$~ 58,000\\\text{Salvage value} & \quad & \$~ 3,000 \\\text{Estimated useful life} & \quad & 5~ \text{years}\\\text{Annual net cash flows} & \quad & \$ ~18,000\\ \text{Depreciation method} & \quad & \text{Straight-line}\\\end{array}$ Assuming that net cash flows are received evenly throughout the year,the accounting rate of return is:

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

Match the following definitions with the appropriate terms

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