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Exam 11: Capital Budgeting and Investment Analysis

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Question 31

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

A) Amortization period.
B) Payback period.
C) Interest period.
D) Budgeting period.
E) Discounted cash flow period.

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

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Question 32

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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 payback period for this investment.

A) 2.85 years.
B) 2.57 years.
C) 3.00 years.
D) 2.50 years.
E) 3.62 years.

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

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Question 33

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The process of restating cash flows in terms of their present values is called discounting.

A company is evaluating the purchase of a machine for $750,000 with a six-year useful life and no salvage value. The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is the company's average investment?

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

A project requires a $28,000 investment and is expected to generate end-of-period annual cash inflows as follows: $\begin{array} { l c c } \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\$ 12,000 & \$ 13,000 & \$ 12,000\end{array}$ Assuming a discount rate of 10%, what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below. $\begin{array} { c c c } = 10 \% & i = 10 \% & i = 10 \% \\n = 1 & n = 2 & n = 3 \\0.9091 & 0.8264 & 0.7513\end{array}$

If Management was not concerned with the time value of money, from which two capital budgeting methods should they choose?

The time value of money concept:

Capital budgeting decisions are risky because all of the following are true except:

Capital budgeting decisions are risky because the outcome is uncertain, large amounts are usually involved, the investment involves a long-term commitment, and the decision could be difficult or impossible to reverse.

The internal rate of return equals the rate that yields a net present value of zero for an investment.

A hurdle rate is the minimum acceptable rate of return for an investment.

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

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

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: $\begin{array} { c c } \text { Periods } & 12 \% \\1 & 0.8929 \\2 & 1.6901 \\3 & 2.4018 \\4 & 3.0373\end{array}$ What is the net present value of the machine?

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.

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.

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

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