FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 11: Capital Budgeting and Investment Analysis

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 21

Multiple Choice

Review LaterAdd Note

Review Later

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: End of Investment Year A B $\begin{array} { | r | r | r | } \hline 1 & \$ 8,000 & \$ 0 \\\hline 2 & 8,000 & 0 \\\hline 3 & 8,000 & 24,000 \\\hline\end{array}$ Which investment should Alfarsi choose?

A) Only Investment A is acceptable.
B) Only Investment B is acceptable.
C) Both investments are acceptable, but A should be selected because it has the greater net present value.
D) Both investments are acceptable, but B should be selected because it has the greater net present value.
E) Neither machine is acceptable.

F) C) and D)
G) A) and E)

Correct Answer

verified

Show Answer

Question 22

Short Answer

Review LaterAdd Note

Review Later

A capital budgeting method that considers how quickly a project recovers costs is known as ________. An enhancement to this method that also considers the time value of money is called ________.

Correct Answer

verified

payback pe...

View Answer

Show Answer

Question 23

Multiple Choice

Review LaterAdd Note

The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

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

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. $\begin{array} { c c c } \text { Periods } & \text { Present Value } & \text { Presert Value of arl } \\ & \text { of } \$ 1 \text { at } 10 \% & \text { Annuity of } \$ 1 \text { at } 10 \% \\1 & 0.9091 & 0.9091 \\2 & 0.8264 & 1.7355 \\3 & 0.7514 & 2.4869 \\4& 0.6830 & 3.1699\end{array}$

A company is planning to purchase a machine that will cost $24,000 with a six-year life and no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine? Sales………………………………………… $90,000 Costs: Manufacturing……………………………… $52,000 Depreciation on machine…………………… 4,000 Selling and administrative expenses……….. 30,000 (86,000) Income before taxes………………………... $ 4,000 Income tax (50%) …………………………... (2,000) Net income…………………………………. $ 2,000

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.

Lower-risk investments require a higher rate of return compared with higher-risk investments.

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. $\begin{array} { | l | c | } \hline & \text { Annual Net Cash Flows } \\\hline \text { Year 1 } & \$ 40,000 \\\hline \text { Year 2 } & \$ 40,000 \\\hline \text { Year 3 } & \$ 35,000 \\\hline \text { Year 4 } & \$ 35,000 \\\hline \text { Year 5 } & \$ 30,000 \\\hline\end{array}$ Compute the payback period for this investment. (Round to two decimal places.)

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. $\begin{array}{|r|r|r|}\hline & \text { Project X } & \text { Project Y } \\\hline \text { Cost of machine } & \$ 68,000 & \$ 60,000 \\\hline \text { Net cash flow: } & & \\\hline \text { Year 1 } & 24,000 & 4,000 \\\hline \text { Year 2 } & 24,000 & 26,000 \\\hline \text { Year 3 } & 24,000 & 26,000 \\\hline \text { Year 4 } & 0 & 20,000 \\\hline\end{array}$ The payback period in years for Project X is:

If the straight-line depreciation method is used, the annual average investment amount used in calculating rate of return is calculated as (beginning book value + ending book value)/2.

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. $\begin{array} { | r | r | r | } \hline & \text { Project X } & \text { Project Y } \\\hline \text { Cost of machine } & \$ 68,000 & \$ 60,000 \\\hline \text { Net cash flow: } & & \\\hline \text { Year 1 } & 24,000 & 4,000 \\\hline \text { Year 2 } & 24,000 & 26,000 \\\hline \text { Year 3 } & 24,000 & 26,000 \\\hline \text { Year 4 } & 0 & 20,000 \\\hline\end{array}$ If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

Capital budgeting decisions usually involve analysis of:

The time value of money concept:

In ranking choices with the break-even time (BET) method, the investment with the longest BET gets the highest rank.

A company's required rate of return, typically its cost of capital is called the:

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

Vextra Corporation is considering the purchase of new equipment costing $35,000. The projected annual cash inflow is $11,000, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows: $\begin{array} { c l } \text { Periods } & 12 \% \\1 & 0.8929 \\2 & 1.6901 \\3 & 2.4018 \\4 & 3.0373\end{array}$ What is the net present value of the machine?

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 ________.