Question 1

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.The working capital is returned at the end of the investment period.
-Soda Manufacturing Company provides vending machines for soft drink manufacturers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of 1 year and no sales value.The new equipment has a value of $52,650 with a three-year life.The expected additional cash inflows are $25,000 per year, end of year payments.What is the internal rate of return?

Accepted Answer

A) 24 percent 
B) 20 percent 
C) 16 percent 
D) 12 percent 
E) 8 percent

Question 2

The half-year rule assumes that all net additions are purchased in the middle of the year, and thus only one-half of the stated CCA rate is allowed in the first year.

Accepted Answer

A) True 
 B)False

Question 3

The accrual accounting rate of return method has a significant weakness for use in making capital budgeting decisions because it does not track cash flows and it ignores the time value of money.

Accepted Answer

A) True 
 B)False

Question 4

Use the information below to answer the following question(s).Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition, Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company uses straight-line depreciation and has a required rate of return of 14%.Ignore income taxes.
-What is the payback period for the investment Saturn Ltd.is considering?

Accepted Answer

A) 5.63 years 
B) 5.78 years 
C) 6.05 years 
D) 5.26 years 
E) The project does not payback.

Question 5

Cast Iron Stove Company wants to buy a molding machine that can be integrated into its computerized manufacturing process.It has received three bids for the machine and related manufacturer's specifications.The bids range from $3,500,000 to $3,550,000.The estimated annual savings of the machines range from $260,000 to $270,000.The payback periods are almost identical and the net present values are all within $8,000 of each other.The president just doesn't know what to do about which vendor to choose since all of the selection criteria are so close together.Required:
What suggestions do you have for the president with regard to specific qualitative factors that could be considered?

Accepted Answer

The answer of Cast Iron Stove Company wants to buy...

Question 6

The payback method allows for managers to highlight liquidity.

Accepted Answer

A) True 
 B)False

Question 7

The Income Tax Act classifies every amortizable asset into one of several classes.

Accepted Answer

A) True 
 B)False

Question 8

The first step in the capital budgeting decision process model is to

Accepted Answer

A) Establish assumptions common for each potential capital investment. 
B) Obtain appropriate sources of financing for investments. 
C) Identify potential capital investments that agree with the organization's strategy. 
D) Manage the control of non-quantitative factors. 
E) Analyze the present value of future cash inflow and outflow and relevant qualitative factors.

Question 9

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.The working capital is returned at the end of the investment period.
-What is the net present value for the Wet Water Company's new drill?

Accepted Answer

A) $96,000 
B) $1,722.83 
C) $12,651.05 
D) $23,579.26 
E) $34,507.48

Question 10

Use the information below to answer the following question(s).Jupiter Ltd.wants to automate one of its production processes.The new equipment will cost $90,000.In addition, Jupiter will incur installation and testing costs of $5,000 and $4,500 respectively.The expected life of the equipment is 5 years and the salvage value of the equipment is estimated at $12,000.The annual cash savings are estimated at $29,000.The company uses straight-line depreciation and has a required rate of return of 9%.Ignore income taxes.
-What is the net present value for the investment Jupiter Ltd.is considering?

Accepted Answer

A) $25,897.22 
B) $22,799.89 
C) $30,599.06 
D) $13,299.89 
E) $21,099.06

Question 11

The net initial investment for a new mainframe computer is $2,000,000.Annual cash flows are expected to increase by $800,000 per year.The equipment has a 10-year useful life.What is the payback period?

Accepted Answer

A) 4.00 years 
B) 2.50 years 
C) 2.00 years 
D) 1.75 years 
E) 0.75 years

Question 12

Use the information below to answer the following question(s).Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.If the machine is disposed of now, it may be sold for $30,000.The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project.The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000.The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.
-The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000.The investment is expected to generate $350,000 in annual cash flows for a period of four years.The required rate of return is 14%.The old machine can be sold for $50,000.The machine is expected to have zero value at the end of the four-year period.Income taxes are not considered.What is the net present value of the investment?

Accepted Answer

A) $119,799 
B) $69,799 
C) $1,019,550 
D) $326,750 
E) $500,000

Question 13

Net present value can be used to examine the effects of alternative ways of increasing customer loyalty.

Accepted Answer

A) True 
 B)False

Question 14

Computer integrated technology may increase workers' knowledge of automation and facilitate future installations.

Accepted Answer

A) True 
 B)False

Question 15

Return on investment (ROI)is also known as

Accepted Answer

A) internal rate of return. 
B) accrual accounting rate of return. 
C) payback. 
D) net present value. 
E) time-adjusted rate of return.

Question 16

East Coast Manufacturing Ltd.is considering buying an automated machine that costs $300,000.It requires working capital of $10,000.Annual cash savings are anticipated to be $80,000 for five years.The company uses straight-line depreciation.The salvage value at the end of five years is expected to be $20,000.The working capital will be recovered at the end of the machine's life.Required:
1.Compute the accrual accounting rate of return based on the initial investment.2.Compute the internal rate of return.

Accepted Answer

The answer of East Coast Manufacturing Ltd.is considering buying an...

Question 17

Use the information below to answer the following question(s).Jupiter Ltd.wants to automate one of its production processes.The new equipment will cost $90,000.In addition, Jupiter will incur installation and testing costs of $5,000 and $4,500 respectively.The expected life of the equipment is 5 years and the salvage value of the equipment is estimated at $12,000.The annual cash savings are estimated at $29,000.The company uses straight-line depreciation and has a required rate of return of 9%.Ignore income taxes.
-What is the payback period for the investment Jupiter Ltd.is considering?

Accepted Answer

A) 3.43 years 
B) 3.10 years 
C) 5.0 years 
D) 3.02 years 
E) The project does not payback.

Question 18

Bock Construction Company is considering four proposals for the construction of new loading facilities that will include the latest in ship loading/unloading equipment.After careful analysis, the company's accountant has developed the following information about the four proposals:
  Internal rate
  Accrual accounting
  Required:
How can this information be used in the decision making process for the new loading facilities? Does it cause any confusion?

Accepted Answer

The answer of Bock Construction Company is considering four proposals...

Question 19

In determining whether to keep a machine or replace it, the net book value of the machine is irrelevant.

Accepted Answer

A) True 
 B)False

Question 20

The consequences of capital expenditures are

Accepted Answer

A) quantitative and financial. 
B) quantitative and qualitative. 
C) qualitative and nonfinancial. 
D) appropriate and inappropriate. 
E) nonfinancial and irrelevant.

Exam 20: Capital Budgeting: Methods of Investment Analysis

The half-year rule assumes that all net additions are purchased in the middle of the year, and thus only one-half of the stated CCA rate is allowed in the first year.

The accrual accounting rate of return method has a significant weakness for use in making capital budgeting decisions because it does not track cash flows and it ignores the time value of money.

The payback method allows for managers to highlight liquidity.

The Income Tax Act classifies every amortizable asset into one of several classes.

The first step in the capital budgeting decision process model is to

The net initial investment for a new mainframe computer is $2,000,000.Annual cash flows are expected to increase by $800,000 per year.The equipment has a 10-year useful life.What is the payback period?

Net present value can be used to examine the effects of alternative ways of increasing customer loyalty.

Computer integrated technology may increase workers' knowledge of automation and facilitate future installations.

Return on investment (ROI) is also known as

In determining whether to keep a machine or replace it, the net book value of the machine is irrelevant.

The consequences of capital expenditures are