Exam 23: Planning for Capital Investments

Bradshaw Inc. is contemplating a capital investment of $88,000. The cash flows over the project's four years are: Expected Annual Expected Annual Year Cash Inflows Cash Outflows 1 \ 30,000 \ 12,000 2 45,000 20,000 3 60,000 25,000 4 50,000 30,000 The cash payback period is

To avoid rejecting projects that actually should be accepted, 1. intangible benefits should be ignored. 2. conservative estimates of the intangible benefits' value should be incorporated into the NPV calculation. 3. calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV.

If a project costing $80,000 has a profitability index of 1.00 and the discount rate was 12%, then the present value of the net cash flows was

A major advantage of the annual rate of return method is that it considers the time value of money.

In evaluating high-tech projects,

To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.

Use the following table for questions . -A company has a minimum required rate of return of 9%. It is considering investing in a project that costs $210,000 and is expected to generate cash inflows of $84,000 at the end of each year for three years. The net present value of this project is

The capital budgeting committee ultimately approves the capital expenditure budget for the year.

All of the following statements about intangible benefits in capital budgeting are correct except that they

If a project's profitability index is equal to 1, then

A project with an initial investment of $70,000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is

When using the cash payback technique, the payback period is expressed in terms of

The profitability index

A negative net present value indicates that the

If an asset costs $240,000 and is expected to have a $40,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of $40,000 each year, the cash payback period is

A company is considering purchasing a machine that costs $280,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. If the machine is purchased, the annual rate of return expected on this machine is

Which of the following is based directly on accrual accounting data rather than cash flows?

By ignoring intangible benefits, capital budgeting techniques might incorrectly eliminate projects that could be financially beneficial to the company.

Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project's life are: Year Net Annual Cash Flow 2 \ 3,000 2 8,000 3 15,000 4 9,000 The cash payback period is

A company is considering purchasing a machine that costs $400,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000. The straight-line method of depreciation would be used. The cash payback period on the machine is