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Exam 24: Capital Budgeting and Investment Analysis

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Question 1

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Lower-risk investments require a higher rate of return compared with higher-risk investments.

A) True
B) False

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Question 2

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The net present value decision rule is: When an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the asset should be acquired.

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B) False

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A company is considering a 5-year project. It plans to invest $60,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below:

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

The time value of money concept:

A minimum acceptable rate of return for an investment decision is called the:

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?

In calculating the rate of return on average investment, average investment should be calculated as (beginning book value + ending book value)/2.

Two investments with exactly the same payback periods are always equally valuable to an investor.

The _______________________________ is computed by discounting the future net cash flows from the investment at the project's required rate of return and then subtracting the initial amount invested.

Which of the following cash flows is not considered when using the net present value method?

For projects financed from borrowed funds, the hurdle rate must exceed the _________________ paid on these funds.

A company purchases a machine for $84,000. The machine has an expected life of 12 years and no salvage value. The company anticipates a yearly net income of $41,000 after taxes of 32% to be received uniformly throughout each year. What is the accounting rate of return?

How does the calculation of break-even time (BET) differ from the calculation of payback period (PBP)?

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 approximate Accounting Rate of Return for the machine?

Capital budgeting decisions are risky because the outcome is uncertain, large amounts are usually involved, the investment involves a long-term commitment, and the decision could be difficult or impossible to reverse.

If the internal rate of return (IRR) of an investment is below the hurdle rate, the project should be accepted.

The rate that yields a net present value of zero for an investment is 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 net present value capital budgeting method considers all estimated cash flows for the project's expected life.