Exam 21: Capital Budgeting: Methods of Investment Analysis

Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.

Projects with shorter paybacks always generate more cash flows.

Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is referred to as

Describe the purpose, features and benefits of a postinvestment audit for a capital budgeting project.

Depreciation charges

When the present value of expected cash inflows from a project equals the present value of expected cash outflows of a project, the discount rate is the

Supply the missing data for each of the following proposals.

In NPV analysis, if the IRR exceeds the RRR,

A company is considering purchasing new equipment. The equipment will allow the company to expand into a new product line. The equipment will be installed in the company's existing facility. Which of the following cash flows would NOT be relevant to the decision to acquire the new equipment?

The time value of money

Use the information below to answer the following question(s). Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below: Note: Other than the initial investment, cash flows are end of period. -In what range is the internal rate of return?

In capital budgeting analysis, opportunity considers as a minimum

When all future cash inflows and outflows are discounted to the present using the required rate of return, the method used is

Use the information below to answer the following question(s). Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below: Note: Other than the initial investment, cash flows are end of period. -Wagner Ltd. is considering investing in a new piece of equipment for its factory. It estimates that annual cash flows would be $17,000 and the equipment would last for 8 years. The company's required rate of return is 12%. What is the most that the company should be willing to invest in this equipment? (Ignore income taxes.)

Use the information below to answer the following question(s). Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below: Note: Other than the initial investment, cash flows are end of period. -Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $150,000. The annual cost savings if the new machine is acquired will be $40,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be $20,000. Upper Darby Park Department is assuming no tax consequences. If Upper Darby Park Department has a required rate of return of 10%, which of the following is closest to the present value of the project?

Discounted cash flow methods focus on operating income.

Mercury Ltd. is considering purchasing laser equipment for $72,000. The machine will require additional working capital of $8,000. Its anticipated seven-year life will generate additional revenue of $31,000 annually with operating costs, excluding depreciation, of $14,000. At the end of seven years it will have a salvage value of $17,760 and return $8,000 in working capital. Required: a. If the company has a required rate of return of 12 percent, what is the net present value of the proposed investment? b. What is the internal rate of return?

Use the information below to answer the following question(s). Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below: Note: Other than the initial investment, cash flows are end of period. -Investment A requires a net investment of $600,000. The required rate of return is 10 percent for the three-year annuity. What are the annual cash inflows if the net present value equals 0?

Which of the following is False concerning the Payback method of capital budgeting?

A comparison of year-to-year changes in customer net present value estimates