Exam 25: Capital Budgeting and Managerial Decisions

A disadvantage of using the payback period to compare investment alternatives is that:

The _______________________________ is computed by dividing a project's after-tax net income by the average amount invested in it.

An estimate of an asset's value to the company, calculated by discounting the future cash flows from the investment at an appropriate rate and then subtracting the initial cost of the investment, is known as:

Axle Company can produce a product that incurs the following costs per unit: direct materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to Axle for $45. If Axle buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying.

In this chapter, you examined several short-term managerial decision tasks. Identify (list) any three of these types of decision tasks: ___________________________ _________________________ _________________________

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

Capital budgeting decisions usually involve analysis of:

The time expected to pass before the net cash flows from an investment would return its initial cost is called the:

A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?

The following data concerns a proposed equipment purchase: Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

The minimum acceptable rate of return on an investment is called the ________________.

The rate that yields a net present value of zero for an investment is the:

An ________________________ requires a future outlay of cash and is relevant for current and future decision making.

The potential benefits of one alternative that are lost by choosing another is known as a(n):

A new manufacturing machine is expected to cost $286,000, 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.

A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. The company's tax rate is 40%. What is the payback period for the new machine?

A _____________________ arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.

Eagle Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the break-even time (BET) period for this investment. (Round to two decimal places.)

Daniels Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Daniels requires a 12% return on its investments. The present value of an annuity of 1 for different periods follows: What is the net present value of the machine?