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Exam 11: Capital Budgeting

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Question 1

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The total time to recover an original investment is the:

A) net present value.
B) internal rate of return.
C) accounting rate of return.
D) payback period.

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Question 2

Multiple Choice

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Which of the following statements is correct about the net present value method?

A) It is a discounted cash flow method based on net income.
B) It is a non-discounted method based on net income.
C) It is a discounted cash flow method based on cash flow.
D) It is a non-discounted method based on cash flow.

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Question 3

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Projects that involve a choice among competing alternatives,where selection of one project implies rejection of all the other alternatives,are:

A problem in which you must calculate how much money you will have in the future as a result of investing a certain amount in the present is a:

The method that compares the present value of a project's future cash flows to the initial investment is:

Which of the following methods is calculated as annual net income as a percentage of the original investment in assets?

York Inc.is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years.The equipment would cost $90,000 to purchase,and maintenance costs would be $10,000 per year.After ten years,York estimates it could sell the equipment for $40,000.If York leases the equipment,it would pay $24,000 each year,which would include all maintenance costs.The hurdle rate for York is 10%. a.What is the net present value of the cost of purchasing the equipment? b.What is the net present value of the cost of leasing the equipment? c.Based on financial factors,should York purchase or lease the equipment? Why?

Addison Corp.is considering the purchase of a new piece of equipment.The equipment will have an initial cost of $900,000,a 6-year life,and no salvage value.If the accounting rate of return for the project is 5%,what is the annual increase in net cash flow? Ignore income taxes.

Belmont Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $200,000.The equipment will have an initial cost of $1,000,000 and have an 8-year life.If there is no salvage value of the equipment,what is the payback period?

The internal rate of return is a measure of:

When managers must choose among independent projects,they should prioritize projects according to their net present value.

Which of the following statement regarding the payback method is incorrect?

You purchase a home for $200,000 that you expect to appreciate 6% in value on an annual basis.How much will the home be worth in ten years? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to nearest dollar amount. )

Wilson Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $50,000.The equipment will have an initial cost of $600,000 and have an 8-year life.The salvage value of the equipment is estimated to be $100,000.If the hurdle rate is 10%,what is the approximate net present value? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

Dobson Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income of $50,000.The equipment will have an initial cost of $500,000 and have an 8-year life.There is no salvage value of the equipment.The hurdle rate is 10%.Ignore income taxes.Calculate the following: a.Accounting rate of return b.Payback period

A decision that occurs when managers evaluate a proposed capital investment to determine whether it meets some minimum criteria is a(n) :

The accounting rate of return is calculated as:

An example of a future value of a single amount problem would be finding how much the right to receive a certain amount in the future would be worth today.

Your grandmother has told you she can either give you $4,000 now or $5,000 when you graduate from college in three years.Your savings account earns 7% interest,compounded annually.Which option would be worth more to you now,and how much more? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to 2 decimal places. )

If cash flows are not equal each year,the payback period: