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Exam 24: Capital Budgeting and Investment Analysis

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Question 51

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Reference: 24_02 A company is planning to purchase a machine that will cost $35,000, have a seven-year life, and be depreciated using the straight-line method with no salvage value. The company expects to sell the machine's output of 4,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below: $\begin{array}{llr}\text{Sales} & & \$ 119,000\\\text{Costs:} & & \\\text{Manufacturing} & \$ 68,000 \\ \text{Depreciation on machine} & 5,000 \\ \text{Selling and administrative expenses} & 40,000 & \underline{(113,000) }\\\text{Income before taxes} & & \$ 6,000 \\\text{Income tax 50 \%} & & \underline{(3,000) }\\\text{Net income} & & \bold{\underline{\$ 3,000}}\end{array}$ -What is the accounting rate of return for this machine?

A) 14.28%
B) 17.14%
C) 60.0%
D) 8.57%
E) 7%

F) A) and E)
G) A) and D)

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Question 52

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What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

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An advantage of using the rate of return...

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Question 53

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Which methods of evaluating a capital investment project ignore the time value of money?

The time value of money is considered when calculating the payback period of an investment.

A company is considering purchasing a machine for $75,000.The machine is expected to generate a net after-tax income of $11,250 per year.Depreciation expense would be $7,500.What is the payback period for this machine?

The net present value capital budgeting method considers all estimated cash flows for the project's expected life.

Capital budgeting decisions usually involve analysis of:

Beyer Corporation is considering buying a machine for $25,000.Its estimated useful life is five 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?

The following present value factors are provided for use in this problem: $\begin{array} { cc } &\text{Present}&\\&\text{Value}& \text{Present Value of an}\\\text{Periods}& \text{of 1 at 8 \%}& \text{Annutity of 1 at 8 \%}\\1 & 0.9259 & 0.9259 \\ 2 & 0.8573 & 1.7833 \\ 3 & 0.7938 & 2.5771 \\ 4 & 07350 & 3.3121 \end{array}$ Norman Co.wants to purchase a machine for $40,000 but needs to earn an 8% return.The expected year-end net cash flows are $12,000 in each of the first three years and $16,000 in the fourth year.What is the machine's net present value (rounded to the nearest whole dollar) ?

A company buys a machine for $60,000 that has an expected life of nine years and no salvage value.The company anticipates a yearly net income of $2,850 after taxes of 30%,with the cash flows to be received evenly throughout of each year.What is the accounting rate of return?

A company is considering the purchase of new equipment costing $91,000.The machine has a useful life of four years and no salvage value.The company requires a 12% return on its investments.The factors for the present value of an annuity of 1 for different periods follow: $\begin{array} { lr } \underline{\text { Periods }} &\underline{12 \text { Percert }} \\1 &0.8929 \\2 &1.6901 \\3 &2.4018 \\4 & 3.0373\end{array}$ Assuming all revenue is to be received at the end of each year,what are the net cash flows for this investment if net present value equals ($11,790) ?

The following data concerns a proposed equipment purchase: $\begin{array}{lr}\text{cost} & \quad & \$~ 278,000\\\text{Salvage value} & \quad & \$~ 6,000 \\\text{Estimated useful life} & \quad & 8~ \text{years}\\\text{Annual net cash flows} & \quad & \$ ~46,360\\ \text{Depreciation method} & \quad & \text{Straight-line}\\\end{array}$ Assuming that net cash flows are received evenly throughout the year,the accounting rate of return is:

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:

A given project requires a $28,000 investment and is expected to generate end-of-period annual cash inflows as follows: $\begin{array} { c c c } \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\hline 12,000 & \$ 13,000 & \$ 12,000\end{array}$ Assuming a discount rate of 10%,what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below. $\begin{array} { c c c } i = 10 \% & i = 10 \% / 4 & i = 10 \% / 1 \\n = 1 & n = 2 & n = 3 \\\hline .9091 & .8264 & .7513\end{array}$

A company is considering purchasing a machine for $600,000.The machine is expected to generate a net after-tax income of $15,000 per year.Depreciation expense would be $60,000.What is the payback period for this machine?

The calculation of the payback period for an investment when net cash flow is even (equal) is:

For purposes of applying the net present value and the internal rate of return methods,the rate chosen to measure the time adjusted value of money is known as the:

The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value,the project should be ____________________.

There are two basic steps in calculating the internal rate of return.Which of the following represents those two steps?

A company bought a machine that has an expected life of seven years and no salvage value.Management estimates that this machine will generate annual after-tax net income of $540.If the accounting rate of return is 12%,what was the purchase price of the machine?