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Exam 24: Capital Budgeting and Investment Analysis

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Question 51

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In calculating the accounting rate of return using the straight-line method of depreciation,the annual average investment is calculated as (beginning book value + ending book value)/2.

A) True
B) False

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Question 52

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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 -The net present value of Investment A is:

A) $18,266.
B) $(15,000) .
C) $9,000.
D) $(20,549) .
E) $3,266.

F) C) and E)
G) B) and D)

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Question 53

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Poe Company is considering the purchase of new equipment costing $80,000.The projected annual cash inflows are $30,200,to be received at the end of each year.The machine has a useful life of 4 years and no salvage value.Poe requires a 10% return on its investments.The present value of $1 and present value of an annuity of $1 for different periods is presented below. -Compute the net present value of the machine.

The expected amount of time to recover the initial amount of an investment is called the:

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 is considering purchasing a machine for $21,000.The machine will generate an after-tax net income of $2,000 per year.Annual depreciation expense would be $1,500.What is the payback period for the new machine?

How does the calculation of break-even time (BET)differ from the calculation of payback period (PBP)?

Carmel Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value.Carmel 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 Carmel's average investment?

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

All capital investment evaluation methods use the time value of money concept.

Which of the following cash flows is not considered when using the net present value method?

A limitation of the internal rate of return method is that it:

The ________ is computed by dividing a project's annual after-tax net income by the annual average amount invested.

A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value.The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year.If a table of present values of $1 at 12% shows values of 0.8929 for one year,0.7972 for two years,and 0.7118 for three years,what is the net present value of the cash flows from the investment,discounted at 12%?

The accounting rate of return is based on cash flows rather than net income in its calculation.

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?

A company is considering purchasing a machine for $21,000.The machine will generate an after-tax net income of $2,000 per year.Annual depreciation expense would be $1,500.The machine has no salvage value.What is the accounting rate of return?

The profitability index is computed by dividing the present value of net cash flows by the initial investment.

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

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.