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Exam 11: Capital Budgeting and Investment Analysis

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Question 61

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Which of the following cash flows is not considered when using the net present value method?

A) Future cash inflows.
B) Future cash outflows.
C) Past cash outflows.
D) Non-uniform cash inflows.
E) Future year-end cash flows.

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

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Question 62

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A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the payback period for the purchase.

A) 8.7 years.
B) 3.8 years.
C) 4.2 years.
D) 7.3 years.
E) 5.4 years.

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

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Question 63

Multiple Choice

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A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for the investment.

The payback method, unlike the net present value method, ignores cash flows after the point of cost recovery.

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

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 $12,000 per year including depreciation of $3,000 per year. Income tax expense is $1,600 per year based on a tax rate of 40%. What is the payback period for the new machine?

Porter Co. is analyzing two potential investments. The payback period in years for Project X is:

A postaudit is:

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: What is the net present value of the machine?

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 ________.

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

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:

Porter Co. is analyzing two potential investments. If the company is using the payback period method and it requires a payback of three years or less, which project(s) should be selected?

The time value of money is considered when calculating the payback period of an investment.

The rate that yields a net present value of zero for an investment is the:

Tressor Company is considering a 5-year project. The company plans to invest $90,000 now and it forecasts cash flows for each year of $27,000. The company requires that investments yield a discount rate of at least 14%. Selected factors for a present value of an annuity of $1 for five years are shown below: Calculate the internal rate of return to determine whether it should accept this project.

A company is considering purchasing a machine for $85,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $8,500. What is the payback period for this machine?

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?

The payback period is the amount of time for the investment to generate enough net cash flow to return the initial cost of investment.

There is only one method of evaluating capital budgeting decisions.