Exam 26: Capital Budgeting

Compute the net present value of this investment, using a discount rate of 12%. (An annuity table shows that the present value of $1 received annually for five years, discounted at 12%, is 3.605.)

The annual net cash flow expected from the investment in the machine is:

Jericho Corporation is considering the purchase of new equipment costing initially $96,000. The equipment has an estimated life of 6 years with no salvage value. Straight-line depreciation is to be used. Net annual after tax cash flow is estimated to be $31,200 for 6 years. The payback period is:

What is the net present value of the cutting machine discounted at an annual rate of 20%, if the present value of a ten-year $1 annuity discounted at 20% is 4.192? $_____________

In capital budgeting, the investment proposal with the shortest payback period always has the highest rate of return.

Which of the following is an example of a non financial consideration in capital budgeting?

What is the expected payback period of the cutting machine investment? $_____________

If an investment costs $140,000 with no residual value, an expected increase in net income of $35,000 and a 5 year useful life, the payback period would be:

The minimum rate of return used by an investor to bring future cash flows to their present value is called:

Accounting terminology Listed below are eight technical accounting terms introduced or emphasized in this chapter. Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ____ (a) The process of analyzing investments in plant assets. ____ (b) The number of years required to recover the entire cost of an investment from its net cash flows. ____ (c) A stream of equal cash flows to be received or paid. ____ (d) The estimated average annual income of an investment expressed as a percentage of its initial cost. ____ (e) The numerator in the return on average investment computation. ____ (f) The amount an investor should be willing to pay today for the right to receive a specified amount of cash at a specified future date. ____ (g) The process of computing the present value of future cash flows. Capital budgeting Return on average investment Payback period Average investment Discounting Incremental cash flows Annuity Net present value

Kenny Company is considering the possibility of investing $1,500,000 in a special project. This venture will return $375,000 per year for 12 years in after tax cash flows. Depreciation on the project will be $187,500 per year using straight-line depreciation. The payback period for the project is:

The expected rate of return on average investment of the machine is:

Which of the following is of least importance in determining whether to replace an old piece of equipment?

Capital investment refers to large expenditures to purchase plant assets, develop new products, or sell more company stock.

The payback period on this investment is estimated at:

Acquisition of the copying machine is expected to increase Physician's annual net income by:

What is the expected return on average investment associated with the cutting machine? $_____________

Capital budgeting computations A project costing $80,000 has an estimated life of 3 years and no salvage value. The estimated net income and net after tax cash flows from the project are as follows: The company's minimum desired rate of return for discounted cash flow analysis is 10%. The present value of $1 at compound interest of 10% at 1, 2, and 3 years is .909, .826, and .751 respectively. The present value of a $1 annuity for three years at 10% is 2.487. The company uses straight-line depreciation. Compute (a) Net present value of the project. _________________________ (b) The rate of return on average investment __________________ Calculations Year Net After Tax Income Net After Tax Cash Flow 1 \ 20,000 \ 35,000 2 35,000 50,000 3 \ 80,000 \ 130,000

Non-financial factors are relevant in capital budgeting.

The residual value of an asset should be subtracted from the cost of the asset when determining the average amount invested.