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Exam 11: Capital Budgeting

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Question 51

Multiple Choice

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Patterson Corp is considering the purchase of a new piece of equipment,which would have an initial cost of $500,000,a 7 year life,and $150,000 salvage value.The increase in cash flow each year of the equipment's life would be as follows: What is the payback period?

A) 5.51 years
B) 5.97 years
C) 6.00 years
D) 6.18 years

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

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Question 52

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Cortland Corp is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net cash flows of $100,000.The equipment will have an initial cost of $400,000 and have a 5 year life.If the salvage value of the equipment is estimated to be $75,000,what is the annual net income? Ignore income taxes.

A) $25,000
B) $35,000
C) $165,000
D) $175,000

E) B) and C)
F) A) and B)

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Question 53

Multiple Choice

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You have $10,000 that you can invest in a savings account that earns 7% interest,compounded annually.If you want to withdraw at least $18,000 at some point in the future,how long will you need to keep the money invested?

A problem in which you must calculate how much money you will have in the future as a result of investing a certain amount in the present is a

When cash flows are equal each year,the payback period is calculated as:

The value now of a cash flow to be received in the future is called

Which of the following methods is calculated as annual net income as a percentage of the original investment in assets?

Wright Corp is considering the purchase of a new piece of equipment,which would have an initial cost of $1,000,000 and a 5 year life.There is no salvage value for the equipment.The increase in net income each year of the equipment's life would be as follows: What is the payback period?

Lawrence Corp is considering the purchase of a new piece of equipment.When discounted at a hurdle rate of 8%,the project has a net present value of $24,580.When discounted at a hurdle rate of 10%,the project has a net present value of ($28,940) .The internal rate of return of the project is

A profitability index greater than zero means that a project has a positive NPV.A profitability index greater than one means that a project has a positive NPV.

Wright Corp is considering the purchase of a new piece of equipment,which would have an initial cost of $1,000,000 and a 5 year life.There is no salvage value for the equipment.The increase in cash flow each year of the equipment's life would be as follows: What is the payback period?

Which of the following is the formula for accounting rate of return?

Nelson Corp is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $100,000.The equipment will have an initial cost of $400,000 and have a 5 year life.If the salvage value of the equipment is estimated to be $75,000,what is the accounting rate of return? Ignore income taxes.

The discount rate that would return a net present value equal to zero is the

Newport Corp is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $200,000.The equipment will have an initial cost of $900,000 and have a 6 year life.There is no salvage value for the equipment.If the hurdle rate is 10%,what is the internal rate of return? Ignore income taxes.

A problem in which you must calculate the value now of a series of equal amounts to be received for some specified number of periods in the future is a

When a project has a positive net present value,it has a profitability index

How much would you need to deposit in a savings account that earns 7%,compounded annually,to withdraw $20,000 eight years from now?

Devon Corp is trying to decide whether to lease or purchase a piece of equipment.The total cost lease the equipment will be $150,000 over its estimated life,while the total cost to buy the equipment will be $120,000 over its estimated life.At Devon's required rate of return,the net present value of the cost of leasing the equipment is $108,000 and the net present value of the cost of buying the equipment is $119,000.Based on financial factors,Devon should

Norwood,Inc.is considering three different independent investment opportunities.The present value of future cash flows,initial investment,net present value,and profitability index for each of the projects are as follows: In what order should Norwood prioritize investment in the projects?