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Exam 11: Capital Budgeting and Investment Analysis

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Question 51

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Neither the net present value nor the internal rate of return methods of evaluating investments consider the time value of money.

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B) False

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Question 52

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A company is trying to decide which of two new product lines to introduce in the coming year. The company requires a 12% return on investment. The predicted revenue and cost data for each product line follows: The company has a 30% tax rate and it uses the straight-line depreciation method. The present value of an annuity of 1 for 5 years at 12% is 3.6048. Compute the net present value for each piece of equipment under each of the two product lines. Which, if either of these two investments is acceptable?

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*Annual depreciation: A $2,500,000/5 yr...

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Question 53

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

The following present value factors are provided for use in this problem. Xavier Co. wants to purchase a machine for $37,000 with a four year life and a $1,000 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $12,000 in each of the four years. What is the machine's net present value?

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

All projects with a profitability index of less than 1 should be accepted.

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

The following present value factors are provided for use in this problem. Cliff Co. wants to purchase a machine for $40,000, but needs to earn a return of 8%. The expected year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the fourth year. What is the machine's net present value?

Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,000 and will produce cash flows as follows: The present value factors of $1 each year at 15% are: The present value of an annuity of $1 for 3 years at 15% is 2.2832 Which investment should Alfarsi choose?

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1) , $30,000 (year 2) , $18,000 (year 3) , $12,000 (year 4) and $6,000 (year 5) . The payback period is:

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Turk purchase?

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

The following relates to a proposed equipment purchase: The annual average investment amount used to calculate the accounting rate of return is:

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

Capital budgeting decisions usually involve analysis of:

Accounting rate of return gives managers an estimate of how soon they will recover their initial investment.

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?

Two investments with exactly the same payback periods are not equally valuable to an investor because the timing of net cash flows may be different.

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows: Year 1 $ 6,500 Year 2 12,700 Year 3 15,000 Year 4 12,800 Compute the project's payback period.