FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 9: Capital Budgeting

Show Answer

Share

---

All types

Filters

Study Flashcards

Question 71

Multiple Choice

Review LaterAdd Note

Review Later

Capital budgeting decisions involve all of the following $\textbf{ except }$

A) Outflows of cash at one or more times
B) Inflows of cash at one or more times
C) Consideration of depreciation expense
D) A review and approval process

Correct Answer

verified

Show Answer

Question 72

Multiple Choice

Review LaterAdd Note

Review Later

Morrow Company has invested in equipment that cost $70,000.The equipment has a 7-year life and no salvage value.Morrow uses straight-line depreciation.The equipment has a payback period of 4 years.The accounting rate of return is closest to

A) 3.5%
B) 10.7%
C) 25%
D) 39%

Correct Answer

verified

Show Answer

Question 73

True/False

Review LaterAdd Note

Two major weaknesses of the accounting rate of return are that it does not consider cash flows and it is the least accurate capital budgeting technique.

Capital budgeting differs from cash budgeting in that

Long-term investment decisions,including capital budgeting decisions,involve outflows of cash at one time or more and inflows of cash at other times.Managers must decide whether the inflows justify the outflows. a.List three examples of cash inflows and three examples of cash outflows that might be involved in making a capital budgeting decision. b.Many capital budgeting decisions are made using present value calculations.What three factors does present value depend on?

In looking at the "Present Value of $1 Received in n Periods" the columns represent

Which of the following is an advantage of the payback period?

Which of the following is $\textbf{ not }$ a weakness of the accounting rate of return?

Which of the following items is not included in the decision to purchase a new capital asset to replace an old one?

Keltner Enterprises is considering investing in a new packing machine.The new machine will provide annual cash operating inflows of $12,300 for 5 years.The cost of the machine is $42,300 and it can be sold at the end of its 5-year useful life for $6,800.Keltner's required rate of return is 10%.What is the packing machine's payback period?

The interest rate used in present value calculations is called the

When making the decision to replace an old factory machine with a new one, financial and non-financial factors are considered. As with any investment, a company investing in factory machinery expects that the new machinery will generate a future return. Required: a. Define the two types of returns that can be expected from investments in a long-term asset such as factory machinery. b. List three financial factors that a company might consider before making an investment in factory machinery. c. List three non-financial factors that a company might consider before making an investment in factory machinery. d. List one cost that is not included in a decision to replace an old factory machine with a new one.

Identify which of the following items would be classified as capital assets.

Patricia is 66 years old and is planning to retire this year.She is covered under her company's retirement policy which gives her two payment options.The first option is to receive annuity payments of $20,000 each year for the next 20 years.The second option is to receive $250,000 immediately upon retirement.The interest rate is 4%. a.What is the present value of Patricia's first option? b.What is the present value of Patricia's second option? c.Which option should Patricia choose?

Johnson Whole Distributors has invested in equipment that cost $120,000.The equipment has an 8-year life and no salvage value.Johnson uses straight-line depreciation.The equipment has a payback period of 5 years.The accounting rate of return is closest to

A capital asset is

Pilot Corporation is considering the purchase of equipment costing $100,000.The equipment will reduce operating cash expenses by $25,000 each year.The new equipment has a salvage value of $2,000 and will be depreciated over a 10-year useful life.The accounting rate of return is closest to

Betty's Bakery needs to purchase a new oven costing $8,000 to replace her old oven that cannot be repaired.The new oven has several features that the old oven did not have and is expected to have a useful life of 12 years.Betty does not expect the oven will have any salvage value at the end of its life. a.If Betty's required rate of return is 8%,what level of annual cash savings must the oven generate to be considered an acceptable investment under the net present value method? b.If Betty decides the cash savings will not be sufficient to justify the cost of the new oven,list two alternatives she might consider.

The accounting rate of return differs from the internal rate of return and the payback period in that the accounting rate of return does not focus on cash flows.

Jodi Jarvis won a $10 million lottery and elected to receive her winnings in 20 equal annual installments.After receiving the first 10 installments,Jodi and her husband divorced,and the remaining 10 payments became part of the property settlement.The judge who presided over the divorce proceedings awarded one-half interest in the future lottery payments to Jodi and the other half to her ex-husband.Following the divorce,Jodi decided to sell her interest in the 10 remaining lottery payments to raise the cash needed to open a bakery.An investor has offered Jodi $1,677,520. Required a.What discount rate did the investor use in calculating the purchase price? b.If Jodi can invest the money she gets at 6%,which is the better option,keeping the annuity or accepting the investor's offer? Why? c.What needs might Jodi have that would make the investor's offer the preferable option,no matter what the interest rate within reason?