Exam 12: Planning for Capital Investments

The internal rate of return factor is also the

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

Discounted cash flow techniques include all of the following except

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

Bark Company is considering buying a machine for $240,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $6,000 each year. The cash payback period on this investment is

Miles, Inc. is considering the purchase of a new machine for $600,000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $105,000. It is believed that the new machine will reduce downtime because of its reliability. Assume the discount rate is 8%. In order to make the project acceptable, the reduction in downtime must be worth Present Value PV of an Annuity Year of 1 at 8\% of 1 at 8\% 1 .926 .926 2 .857 1.783 3 .794 2.577 4 .735 3.312 5 .681 3.993

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 project that cost $80,000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5,000. The project will generate annual cash flows of $21,375. The annual rate of return is

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

Capital budgeting decisions depend in part on all of the following except the

Which of the following is not a capital budgeting decision?

Capital budgeting decisions usually involve large investments and often have a significant impact on a company's future profitability.

If a company's required rate of return is 10% and, in using the net present value method, a project's net present value is zero, this indicates that the

The cash payback technique

The annual rate of return method requires dividing a project's annual cash inflows by the economic life of the project.

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

Giraldi Company has identified that the cost of a new computer will be $48,000, but with the use of the new computer, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is:

The cash payback period is computed by dividing the cost of the capital investment by the

The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.

Use the following information for questions 106-108. Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return. $\text { Present Value of an Annuity of } 1$ Periods 8\% 9\% 10\% 11\% 12\% 15\% 5 4.623 4.486 4.355 4.231 4.111 3.784 -What is the approximate profitability index associated with this equipment?