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 1

Multiple Choice

Review LaterAdd Note

Review Later

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

A) Planning and control.
B) Capital budgeting.
C) Variance analysis.
D) Master budgeting.
E) Managerial accounting.

Correct Answer

verified

Show Answer

Question 2

Short Answer

Review LaterAdd Note

Review Later

The minimum acceptable rate of return on an investment is called the _________________.

Correct Answer

verified

Show Answer

Question 3

Multiple Choice

Review LaterAdd Note

The break-even time (BET) method is a variation of the:

Capital budgeting decisions usually involve analysis of:

A company is considering the purchase of a new machine for $48,000.Management predicts that the machine can produce sales of $16,000 each year for the next 10 years.Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year.The company's tax rate is 40%.What is the payback period for the new machine?

A company is considering the purchase of new equipment for $45,000.The projected after-tax net income is $3,000 after deducting $15,000 of depreciation.The machine has a useful life of three years and no salvage value.Management of the company requires a 12% return on investment.The present value of an annuity of 1 for various periods follows: $\begin{array}{lc}& \text { Present Value of an }\\ \underline { \text { Period }}& \underline { \text { Annuity of 1 at 12 \% }}\\1 & 0.8929 \\2 & 1.6901 \\3 & 24018\end{array}$ What is the net present value of this machine, assuming all cash flows occur at year-end?

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

A given project requires a $25,000 investment and is expected to generate end-of-period annual cash inflows as follows: $\begin{array} { c c c c } \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Total } \\\hline \$ 4,000 & \$ 15,000 & \$ 6,000 & \$ 25,000\end{array}$ 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: $\begin{array} { c c c } i = 10 \% & i = 10 \% & i = 10 \% \\n = 1 & n = 2 & n = 3 \\\hline .9091 & .8264 & .7513\end{array}$

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%?

If the internal rate of return (IRR)of an investment is below the hurdle rate, the project should be accepted.

The process of restating future cash flows in terms of their present value is called _____________________.

The following data concerns a proposed equipment purchase: $\begin{array}{lr}\text { Cost } & \$ 144,000 \\\text { Salvage value } & \$ 4,000 \\\text { Estimated useful life } & 4 \text { years } \\\text { Annual net cash flows } & \$ 46,100 \\\text { Depreciation method } & \text { Straight-line }\end{array}$ Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:

The payback method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

A company is considering a proposal to invest $73,000 in a project that would provide the following net cash flows: $\begin{array} { l r } \text { Year 1 } & \$ 5,000 \\\text { Year 2 } & 12,000 \\\text { Year 3 } & 25,000 \\\text { Year 4 } & 29,000 \\\text { Year 5 } & 8,000\end{array}$ Compute the project's payback period.

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

A given project requires a $30,000 investment and is expected to generate end-of-period annual cash inflows as follows: $\begin{array} { c c c c } \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Total } \\\hline \$ 12,000 & \$ 8,000 & \$ 10,000 & \$ 30,000\end{array}$ 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: $\begin{array} { c c c } i = 10 \% & i = 10 \% & i = 10 \% \\n = 1 & n = 2 & n = 3 \\\hline .9091 & .8264 & .7513\end{array}$

A given project requires a $28,000 investment and is expected to generate end-of-period annual cash inflows as follows: $\begin{array} { c c c } \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\hline\$ 12,000 & \$ 13,000 & \$ 12,000\end{array}$ 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. $\begin{array} { c c c } i = 10 \% & i = 10 \% & i = 10 \% \\n = 1 & n = 2 & n = 3 \\\hline .9091 & .8264 & .7513\end{array}$

Presented below are terms preceded by letters (a) through (g) and followed by a list of definitions (1) through (7) .Match the letter of the term with the definition.Use the space provided preceding each definition -A discount rate that results in a net present value of zero.

For projects financed from borrowed funds, the hurdle rate must exceed the _________________ paid on these funds.

Three widely used methods of comparing investment alternatives are payback period, net present value, and rate of return on average investment.