FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 24: Capital Budgeting and Investment Analysis

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 1

Matching

Review LaterAdd Note

Review Later

Match the following definitions with the appropriate terms

Premises

Responses

Annual after-tax net income divided by annual average investment.

Discounting

A rate used to evaluate the acceptability of an investment; equals the after-tax periodic income divided by the average investment in the asset.

Break-even time

An estimate of an asset's value to the company; calculated by discounting the future cash flows from the investment at a satisfactory rate and then subtracting the initial cost of the investment.

Return on average investment

Cash flows that are not all equal in amount.

Net present value

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

Uneven cash flows

A measure of the amount of time needed for the present value of the net cash flows to equal the initial cost of an investment.

Accounting rate of return

Premises

Annual after-tax net income divided by annual average investment.

A rate used to evaluate the acceptability of an investment; equals the after-tax periodic income divided by the average investment in the asset.

An estimate of an asset's value to the company; calculated by discounting the future cash flows from the investment at a satisfactory rate and then subtracting the initial cost of the investment.

Cash flows that are not all equal in amount.

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

A measure of the amount of time needed for the present value of the net cash flows to equal the initial cost of an investment.

Responses

Discounting

Break-even time

Return on average investment

Net present value

Uneven cash flows

Accounting rate of return

Show Answer

Correct Answer

Premises

Responses

Annual after-tax net income divided by annual average investment.

A rate used to evaluate the acceptability of an investment; equals the after-tax periodic income divided by the average investment in the asset.

An estimate of an asset's value to the company; calculated by discounting the future cash flows from the investment at a satisfactory rate and then subtracting the initial cost of the investment.

Cash flows that are not all equal in amount.

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

A measure of the amount of time needed for the present value of the net cash flows to equal the initial cost of an investment.

Premises

Annual after-tax net income divided by annual average investment.

A rate used to evaluate the acceptability of an investment; equals the after-tax periodic income divided by the average investment in the asset.

An estimate of an asset's value to the company; calculated by discounting the future cash flows from the investment at a satisfactory rate and then subtracting the initial cost of the investment.

Cash flows that are not all equal in amount.

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

A measure of the amount of time needed for the present value of the net cash flows to equal the initial cost of an investment.

Responses

Question 2

True/False

Review LaterAdd Note

Review Later

The accounting rate of return uses cash flows in its calculation.

Correct Answer

verified

Show Answer

Question 3

Multiple Choice

Review LaterAdd Note

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: $\begin{array} { c c c } i = 10 \% & i = 10 \% / 4 & i = 10 \% / 1 \\n = 1 & n = 2 & n = 3 \\\hline .9091 & .8264 & .7513\end{array}$

Peng 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 four years and no salvage value.Peng requires a 12% return on its investments.The factors for the present value of $1 for different periods follow: $\begin{array} { l r } \underline{\text { Periods }} & \underline{12 \text { Percent }} \\1 & 0.8929 \\2 & 0.7972 \\3 & 0.7118 \\4 & 0.6355\end{array}$ Calculate the break-even time for this equipment.

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

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

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

The _____________________ is the simplest capital budgeting method studied in this chapter.

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

A company purchases a machine for $84,000.The machine has an expected life of 12 years and no salvage value.The company anticipates a yearly net income of $41,000 after taxes of 32% to be received uniformly throughout each year.What is the accounting rate of return?

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

How can management evaluate the risk of an investment?

Presented below are terms preceded by letters (a)through (f)and followed by a list of definitions (1)through (6).Match the letter of the terms with the definitions.Use the space provided preceding each definition. (a)Discounting (b)Break-even time (c)Return on average investment (d)Net present value (e)Uneven cash flows (f)Accounting rate of return __________ (1) Annual after-tax net income divided by annual average investment. __________ (2) A rate used to evaluate the acceptability of an investment; equals the after-tax periodic income divided by the average investment in the asset. __________ (3) An estimate of an asset's value to the company; calculated by discounting the future cash flows from the investment at a satisfactory rate and then subtracting the initial cost of the investment. __________ (4) Cash flows that are not all equal in amount. __________ (5) The process of restating future cash flows in terms of their present value. __________ (6) A measure of the amount of time needed for the present value of the net cash flows to equal the initial cost of an investment.

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

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: $\begin{array} { l c } &\text { Present Value of an }\\\underline{\text { Period}} & \underline{\text { Annuity of } 1 \text { at } 12 \%} \\1 & 0.8929 \\2 & 1.6901 \\3 & 2.4018\end{array}$ What is the net present value of this machine,assuming all cash flows occur at year-end?

Briefly describe both the payback period method and the net present value method of comparing investment alternatives.

A company bought a machine that has an expected life of six years and no salvage value.Management estimates that this machine will generate annual after-tax net income of $700.If the accounting rate of return is 10%,what was the purchase price of the machine?

Reference: 24_02 A company is planning to purchase a machine that will cost $35,000, have a seven-year life, and be depreciated using the straight-line method with no salvage value. The company expects to sell the machine's output of 4,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below: $\begin{array}{llr}\text{Sales} & & \$ 119,000\\\text{Costs:} & & \\\text{Manufacturing} & \$ 68,000 \\ \text{Depreciation on machine} & 5,000 \\ \text{Selling and administrative expenses} & 40,000 & \underline{(113,000) }\\\text{Income before taxes} & & \$ 6,000 \\\text{Income tax 50 \%} & & \underline{(3,000) }\\\text{Net income} & & \bold{\underline{\$ 3,000}}\end{array}$ -What is the payback period for this machine?

Internal rate of return is expressed as a _________________.

Capital budgeting decisions that relate to investments in technology are not as risky as other types of capital budgeting decisions.