Exam 19: Capital Investment

Beduin Services is considering an investment of $25,000. Data related to the investment are as follows: Cost of capital is 14 percent. What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

Davidson, Inc., is considering the purchase of production equipment that costs $300,000. The equipment is expected to generate an annual cash flow of $100,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 14 percent. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. Payback for the project is

The __________ rate of return sets the present value of cash inflows equal to the present value of a project's cost.

The time required by a firm to recover its original investment is called the __________ period.

Santander Company is considering a project that requires an investment of $700,000. The project is expected to generate an annual cash flow of $280,000 for six years. The cash flow would be received at the end of each year. The asset is considered 5-year property for depreciation purposes and would be disposed of at the end of the sixth year, at which time it is expected to have no salvage value. The company plans to use MACRS. Assume the cost of capital is 12 percent and the income tax rate is 40 percent. Required:

A firm is considering a project requiring an investment of $27,000. The project would generate an annual cash flow of $6,296 for the next seven years. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The approximate internal rate of return for the project is