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Exam 24: Capital Budgeting and Investment Analysis

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Question 81

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The time value of money concept works on the principle that a dollar tomorrow is worth more than a dollar today.

A) True
B) False

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Question 82

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

A) True
B) False

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Question 83

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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?

An advantage of the break-even time (BET)method over the payback period method is that it recognizes the time value of money.

For each of the capital budgeting methods listed below,place an X in the correct column,indicating the measurement basis of each,the ability to make comparison among projects,and whether each method reflects or ignores the time value of money.

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.

The following relates to a proposed equipment purchase: -Ignoring income taxes,the annual net income amount used to calculate the accounting rate of return is:

A company is considering a 5-year project.It plans to invest $62,000 now and it forecasts cash flows for each year of $16,200.The company requires a hurdle rate of 12%.Calculate the internal rate of return to determine whether it should accept this project.Selected factors for a present value of an annuity of 1 for five years are shown below:

A company is considering two alternative investment opportunities,each of which requires an initial cash outlay of $110,000.The expected net cash flows from the two projects follow: Based on a comparison of their net present values,and assuming the same discount rate of 12% is required for both projects,which project is the better investment? Use the table values below to compute the net present value of each project's cash flows.

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows: Compute the project's payback period.

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

Projects with a profitability index of greater than 1 have a return that is greater than the hurdle rate.

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.

The net present value decision rule is: When an asset's expected cash flows yield a positive net present value when discounted at the required rate of return,the asset should be acquired.

All projects with a profitability index of less than 1 should be accepted.

Turk Manufacturing is considering purchasing two machines.Each machine costs $9,000 and will produce cash flows as follows: Turk Manufacturing uses the net present value method to make the decision,and it requires a 15% annual return on its investments.The present value factors of 1 at 15% are: 1 year,0.8696; 2 years,0.7561; 3 years,0.6575.Which machine should Turk purchase?

Using a profitability index allows management to rank projects of similar risks with different investment amounts.

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

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

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