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Exam 24: Capital Budgeting and Investment Analysis

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Question 61

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Capital budgeting decisions that relate to investments in technology are not as risky as other types of capital budgeting decisions.

A) True
B) False

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Question 62

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

A) True
B) False

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Question 63

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Match the letter of the term with the definition.Use the space provided preceding each definition.

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

Using accelerated depreciation for tax reporting increases the net present value of an asset's cash flows because it produces larger net cash inflows in the early years of the asset's life.

Which methods of evaluating a capital investment project use cash flows as a measurement basis?

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 a $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:

An estimate of an asset's value to the company,calculated by discounting the future cash flows from the investment at the project's required rate of return and then subtracting the initial amount of the investment,is known as:

Trevoline Company is deciding between two projects.Each project requires an initial investment of $350,000.The projected net cash flows for the two projects are listed below.The revenue is to be received at the end of each year.Trevoline requires a 10% return on its investments.The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below.Use net present value to determine which project should be pursued and explain why.

If two projects have the same risks,the same payback periods,and the same initial investments,they are equally attractive.

Nestor Company is considering the purchase of an asset for $100,000.It is expected to produce the following net cash flows.The cash flows occur evenly throughout each year.Compute the break-even time (BET) period for this investment.

A shorter payback period reduces the company's ability to respond to unanticipated changes and increases the risk of having to keep an unprofitable investment.

Nebraska Co.is reviewing a capital investment of $100,000.This project's projected cash flows over a five-year period are estimated at $35,000 each year. Required: (a)Calculate the payback period. (b)Calculate the break-even time.Assume a 12% hurdle rate and use the table below: (c)Using the results in (a)and (b),make a recommendation for the project.

The calculation of the payback period for an investment when net cash flow is uneven is:

The net present value capital budgeting method considers all estimated cash flows for the project's expected life.

Watson Corporation is considering buying a machine for $25,000.Its estimated useful life is 5 years,with no salvage value.Watson anticipates annual net income after taxes of $1,500 from the new machine.What is the accounting rate of return assuming that Watson uses straight-line depreciation and that income is earned uniformly throughout each year?

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 B is:

Butler 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 3 years and no salvage value.Butler requires a 12% return on its investments.The present value of an annuity of $1 for different periods follows: -What is the net present value of the machine?

In using a capital budgeting method that takes the time value of money into consideration,management must consider a hurdle rate in making its decisions.What is a hurdle rate? What factors does management have to consider in selecting a hurdle rate?

Restating future cash flows in terms of present values and then determining the payback period using these present values is known as: