Exam 25: Capital Budgeting and Managerial Decisions

Beyer Corporation is considering buying a machine for $25,000. Its estimated useful life is 5 years, with no salvage value. Beyer anticipates annual net income after taxes of $1,500 from the new machine. What is the accounting rate of return assuming that Beyer uses straight-line depreciation and that income is earned uniformly throughout each year?

A company is trying to decide which of two new product lines to introduce in the coming year. The predicted revenue and cost data for each product line follows: The company has a 30% tax rate, it uses the straight-line depreciation method, and it predicts that cash flows will be spread evenly throughout each year. Calculate each product's payback period. If the company requires a payback period of three years or less, which, if either, product should be chosen?

The concept of incremental cost is the same as the concept of differential cost.

The hurdle rate is often set at:

The break-even time (BET) method is a variation of the:

Briefly describe both the payback period method and the net present value method of comparing investment alternatives.

A cost that requires a current and/or future outlay of cash, and is usually an incremental cost, is a(n):

Identify at least three reasons for managers to favor the internal rate of return (IRR) over other capital budgeting approaches.

Braybar Company is deciding between two projects. Each project requires an initial investment of $350,000. The projected net cash flows for the two projects are listed below. The revenue is to be received at the end of each year. Braybar requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below. Use net present value to determine which project should be pursued and explain why.

For each of the capital budgeting methods listed below, place an X in the correct column, indicating the measurement basis of each, the ability to make comparison among projects, and whether each method reflects or ignores the time value of money.