Exam 24: Capital Budgeting and Investment Analysis

The following present value factors are provided for use in this problem. -Xavier Co.wants to purchase a machine for $37,000 with a four year life and a $1,000 salvage value.Xavier requires an 8% return on investment.The expected year-end net cash flows are $12,000 in each of the four years.What is the machine's net present value?

The calculation of the payback period for an investment when net cash flow is even (equal)is:

A new manufacturing machine is expected to cost $278,000,have an eight-year life,and a $30,000 salvage value.The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation.Compute the payback period for the purchase.

The following relates to a proposed equipment purchase: -Assuming that net cash flows are received evenly throughout the year,the accounting rate of return is (ignore income taxes):

A project requires a $30,000 investment and is expected to generate end-of-period annual cash inflows as follows: Assuming a discount rate of 10%,what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below:

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

The capital budgeting process involves all of the following except:

The hurdle rate is often set at:

Briefly describe the time value of money.Why is the time value of money important in capital budgeting?

Projects with shorter payback periods have higher risk,as the company has less time to respond to unanticipated changes.

The process of restating future cash flows in today's dollars is known as:

Dracor Company is considering the purchase of equipment that would allow the company to add a new product to its line.The equipment is expected to cost $280,000 with a 7-year life,no salvage value,and will be depreciated using straight-line depreciation.The expected annual income related to this equipment follows.Compute the (a)payback period and (b)accounting rate of return for this equipment.

The internal rate of return method is not subject to the limitations of the net present value method when comparing projects with different amounts invested because:

There is only one method of evaluating capital budgeting decisions.

A company is trying to decide which of two new product lines to introduce in the coming year.The predicted revenue and cost data for each product line follows: The company has a 30% tax rate,it uses the straight-line depreciation method,and it predicts that cash flows will be spread evenly throughout each year.Calculate each product's payback period.If the company requires a payback period of three years or less,which,if either,product should be chosen?

A company is considering a 5-year project.The company plans to invest $60,000 now and it forecasts cash flows for each year of $16,200.The company requires a hurdle rate of 12%.Calculate the internal rate of return to determine whether it should accept this project.Selected factors for a present value of an annuity of $1 for five years are shown below:

Coffer Co.is analyzing two potential investments. If the company is using the payback period method and it requires a payback of three years or less,which project(s)should be selected?

A company purchases a machine for $800,000.The machine has an expected life of 9 years and no salvage value.The company anticipates a yearly after-tax net income of $60,000 to be received uniformly throughout each year.What is the accounting rate of return?

A company buys a machine for $76,000 that has an expected life of 6 years and no salvage value.The company uses straight-line depreciation.The company anticipates a yearly after tax net income of $1,805.What is the accounting rate of return?

Two investments with exactly the same payback periods are not equally valuable to an investor because the timing of net cash flows may be different.