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Exam 11: Capital Budgeting

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Question 41

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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? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to nearest dollar amount. )

A) 9 years
B) 10 years
C) 11 years
D) 12 years

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

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Question 42

Multiple Choice

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Carmen,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 Carmen prioritize investment in the projects?

A) A,C,B
B) B,C,A
C) A,B,C
D) B,A,C

E) C) and D)
F) All of the above

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Question 43

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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.What is the payback period?

Foster Inc.is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years.The equipment would cost $45,000 to purchase,and maintenance costs would be $5,000 per year.After ten years,Foster estimates it could sell the equipment for $20,000.If Foster leases the equipment,it would pay $12,000 each year,which would include all maintenance costs.If the hurdle rate for Foster is 10%,Foster should: (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Do not round intermediate calculations.Round your final answer to the nearest hundred. )

The net present value method compares a project's future net income to the initial investment.

Which of the following is not a limitation of using the accounting rate of return method for capital budgeting?

Iron,Inc. ,which has a hurdle rate of 10%,is considering three different independent investment opportunities.Each project has a five-year life.The annual cash flows and initial investment for each of the projects are as follows: (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Do not round intermediate calculations.Round your final answer to the nearest hundred. ) In what order should Iron prioritize investment in the projects?

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

Belmont 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 income after tax of $200,000.The equipment will have an initial cost of $1,000,000 and have an 8-year life.If there is no salvage value of the equipment,what is the accounting rate of return?

Which of the following is not a characteristic of an annuity?

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?

If a project has a positive net present value,it means the project is expected to provide returns that are ________ the cost of capital.

Preference decisions compare an investment with some minimum criteria.

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 8%,what is the approximate net present value? Ignore income taxes.(Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

Dallas Corp.is trying to decide whether to lease or purchase a piece of equipment needed for the next five years.The equipment would cost $100,000 to purchase,and maintenance costs would be $10,000 per year.After five years,Dallas estimates it could sell the equipment for $30,000.If Dallas leased the equipment,it would pay a set annual fee that would include all maintenance costs.Dallas has determined after a net present value analysis that at its hurdle rate of 12% it would be better off by $11,000 if it leases the equipment.What would the approximate annual cost be if Dallas were to lease the equipment? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Do not round intermediate calculations.Round your final answer to the nearest hundred. )

The internal rate of return method uses cash flows rather than net income.

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:

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

Which of the following statements is correct about capital 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?