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Exam 25: Capital Budgeting and Managerial Decisions

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Question 71

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When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

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Shorter payback periods increase return ...

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Question 72

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A company is evaluating the purchase of a machine for $900,000 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?

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($900,000 ...

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Question 73

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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 ______________________.

Capital budgeting decisions are risky because:

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

The accounting rate of return is calculated as:

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

A minimum acceptable rate of return for an investment decision is called the:

Incremental costs should be considered in a make or buy decision.

Two investments with exactly the same payback periods are always equally valuable to an investor.

A machine costs $180,000 and is expected to yield an after-tax net income of $10,800 each year. Management estimates the machine will have a ten-year life, a $20,000 salvage value, and straight-line depreciation is used. Compute the accounting rate of return for the investment.

Fleming Company had the following results of operations for the past year: A foreign company (whose sales will not affect Fleming's regular sales) offers to buy 2,000 units at $5.00 per unit. In addition to variable manufacturing costs, there would be shipping costs of $1,200 in total on these units. Should Fleming take this order? Explain.

After-tax net income divided by the annual average investment in an investment, is the:

A company purchases a machine for $1,000,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year. What is the accounting rate of return?

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.

A sunk cost will change with a future course of action.

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

An out-of-pocket cost requires a current and/or future outlay of cash.

What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

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