Exam 23: Planning for Capital Investments

Jordan Company is considering the purchase of a machine with the following data: Initial cost \ 150,000 One-time training cost 12,000 Annual maintenance costs 15,000 Annual cost savings 75,000 Salvage value 20,000 The cash payback period is

If a 2-year capital project has an internal rate of return factor equal to 1.690 and net annual cash flows of $60,000, the initial capital investment was

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is

Use the following information for questions Selma Inc. is comparing several alternative capital budgeting projects as shown below: Projects A B C Initial investment \ 80,000 \ \ 160,000 Present value of net cash flows 90,000 110,000 200,000 -Using the profitability index, the projects rank as

The annual rate of return is computed by dividing expected annual

Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated.

Sloan Inc. recently invested in a project with a 3-year life span. The net present value was $9,000 and annual cash inflows were $21,000 for year 1; $24,000 for year 2; and $27,000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was Year Present Value of 1 at 15\% PV of an Annuity of 1 at 15\% 1 .870 .870 2 .756 1.626 3 .658 2.283

If a project has a negative net present value, the internal rate of return will be

The internal rate of return method is, like the NPV method, a discounted cash flow technique.

Which of the following is a disadvantage of the cash payback technique?

Which of the following does not consider a company's required rate of return?

An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.

The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds provided by investors in the company's stock.

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

The capital budget for the year is approved by a company's

If a project has a positive net present value, its profitability index will be

Net annual cash flow can be estimated by

Capital budgeting is the process

In using the internal rate of return method, the internal rate of return factor was 4.0 and the equal annual cash inflows were $18,000. The initial investment in the project must have been