Exam 11: Capital Budgeting

If a project has a positive net present value, it means the project is expected to provide returns that are ___________ the cost of capital.

Devon Corp. is trying to decide whether to lease or purchase a piece of equipment. The total cost lease the equipment will be $150,000 over its estimated life, while the total cost to buy the equipment will be $120,000 over its estimated life. At Devon's required rate of return, the net present value of the cost of leasing the equipment is $108,000 and the net present value of the cost of buying the equipment is $119,000. Based on financial factors, Devon should:

You have $10,000 that you can invest in a savings account that earns 7% interest, compounded annually. If you want to withdraw at least $18,000 at some point in the future, how long will you need to keep the money invested?

How much would you need to deposit now in a savings account that earns 5% interest, compounded annually, in order to withdraw $5,000 at the end of every year for ten years?

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

Fire Corp. is considering the purchase of a new piece of equipment. The equipment costs $50,000, and will have a salvage value of $5,000 after nine years. Using the new piece of equipment will increase Fire's annual cash flows by $6,000. a. What is the payback period for the new piece of equipment? b. Suppose that the increase in cash flows were $10,000 in the first year, then decreased by $1,000 each year over the life of the equipment. What is the payback period for the equipment?

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:

Major Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $500,000 and have an 8-year life. The equipment has no salvage value. The hurdle rate is 8%. Ignore income taxes. Answer the following: a. What is the net present value? b. What would the net present value be with a 12% hurdle rate? c. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

Which of the following would be included in net income but not in annual cash flows?

Independent projects are unrelated to one another, so that investing in one project does not affect the choice about investing in another project

To find the present value of a single amount, you only need to know the amount to be received in the future, the interest rate and the number of periods until the amount will be received

Independent projects should be prioritized according to their:

The accounting rate of return is also called all of the following except:

Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes.

A profitability index greater than ____________ means that a project has a positive NPV.

Surf 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 $600,000 and have an 8-year life. The equipment has no salvage value. The hurdle rate is 10%. Ignore income taxes. Answer the following: a. What is the accounting rate of return? b. What is the payback period? c. What is the net present value? d. What would the net present value be with a 15% hurdle rate? e. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

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

Frank Inc. is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years. The equipment would cost $45,000 to purchase, and maintenance costs would be $5,000 per year. After ten years, Frank estimates it could sell the equipment for $20,000. If Frank leased the equipment, it would pay a set annual fee that would include all maintenance costs. Frank has determined after a net present value analysis that at its hurdle rate of 10%, it would be better off by $5,700 if it buys the equipment. What would the approximate annual cost be if Frank were to lease the equipment?

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

Sensitivity analysis helps determine whether changing the underlying assumptions would affect the decision