Exam 21: Capital Budgeting and Cost Analysis

The three common discounted cash flow methods are net present value, internal rate of return, and payback.

Forise Water Company drills small commercial water wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below. What is the net present value of the investment? Assume there is no recovery of working capital.

The Comil Corporation recently purchased a new machine for its factory operations at a cost of $328,325. The investment is expected to generate $115,000 in annual cash flows for a period of four years. The required rate of return is 13%. The old machine has a remaining life of four years. The new machine is expected to have zero value at the end of the four-year period. The disposal value of the old machine at the time of replacement is zero. What is the internal rate of return?

In the net present value (NPV) method, pre-tax cash flows should be used instead of after-tax cash flows.

The minimum annual acceptable rate of return on an investment is the ________.

An example of a sunk cost in a capital budgeting decision for new equipment is ________.

Upon which of the following items does discounted cash flow methods for capital budgeting focus?

The accrual accounting rate-of-return method is similar to the internal rate-of-return method because both methods calculate a rate-of-return percentage.

The reason to have a post-investment audit is ________.

The net present value method focuses on ________.

Unlike the payback method, which ignores cash flows after the payback period, the AARR method considers income earned throughout a project's expected useful life.

Concose Park Department is considering a new capital investment. The cost of the machine is $280,000. The annual cost savings if the new machine is acquired will be $165,000. The machine will have a 3-year life and the terminal disposal value is expected to be $35,000. There are no tax consequences related to this decision. If Concose Park Department has a required rate of return of 14%, which of the following is closest to the present value of the project?

As cash flows and time value of money are central to capital budgeting decisions, the AARR method is regarded as better than the IRR method.

The relevant terminal disposal price of a machine equals the ________.

What are the strengths and weaknesses of the accrual accounting rate-of-return (AARR) method for evaluating long-term projects?

The net present value (NPV) method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time using the required rate of return.

The AARR method is similar to the IRR method as ________.

The net present value method assumes that project cash flows can be reinvested at the company's ________.

Which of the following is a stage of the capital budgeting process in which a firm obtains funding for the project?

Which of the following projects is rejected on the basis of net present value method?