QUESTION 1
Which of the following statements is correct regarding thepayback method as a capital budgeting technique?
The payback method considers the time value of money.
An advantage of the payback method is that it indicates if aninvestment will be profitable.
The payback method provides the years needed to recoup theinvestment in a project.
Payback is calculated by dividing the annual cash inflows by thenet investment.
0.625 points
QUESTION 2
Taxes are not an important consideration indeveloping cash flow assessments.
True
False
0.625 points
QUESTION 3
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2)QUESTIONS:
Parkways Inc. is considering the purchase of a new machine. Themachine will cost $60,000 to purchase and will generate $15,000 ofcash revenues per year for the next 8 years. The machine will cost$1,000 per year to operate & maintain. At the end of it'suseful life, it has an estimated salvage value of $5,000. Parkwaysrequires a minimum rate of return of 14% for this class of asset.Determine the Net Present Value of this investment proposal.
PV of $1 (14%, 8n) is .351; PVOA (14%, 8n) is 4.639
$6,701
$57,000
$1,166
$0
0.625 points
QUESTION 4
Sun Devil Corporation is adding a new product line that willrequire an investment of $138,000. The product line is estimated togenerate net cash flows of $25,000 the first year, $23,000 thesecond year, and $18,000 each year thereafter for ten more years.What is the payback period?
7.26
5.52
7.00
7.67
0.625 points
QUESTION 5
Sparky Company invested in an asset with a useful life of 5years. The companys required rate of return is 10% for this classof asset. The net cash flows are estimated to be $7,610 per yearfor the next 5 years and no salvage value is anticipated.
If the asset generates a positive net present value of $2,000,what was the amount of the original investment? (Roundyour answer to the nearest whole dollar. Do not use $signs or commas in recording youranswer. EXAMPLE: If you answer is $22,516,enter your answer as 22516).
Present Value of $1
Periods
10%
12%
14%
5
.621
.567
.519
8
.467
.404
.351
10
.386
.322
.270
Present Value of Ordinary Annuity
Periods
10%
12%
14%
5
3.791
3.605
3.433
8
5.335
4.968
4.639
10
6.145
5.650
5.216
0.625 points
QUESTION 6
Suppose Whole Foods is considering investing inwarehouse-management software that costs $500,000, has $60,000residual value and should lead to cash cost savings of $130,000 peryear for its five-year life. Determine the NPV of the investment ifmanagement uses a 12% discount rate. (Round to the nearest wholenumber for your final answer. When recording your answer, do notuse $ dollar signs or commas. EXAMPLE: If you answer is $12,251,enter 12251)
Present Value of $1
Periods
10%
12%
14%
5
.621
.567
.519
8
.467
.404
.351
10
.386
.322
.270
Present Value of Ordinary Annuity
Periods
10%
12%
14%
5
3.791
3.605
3.433
8
5.335
4.968
4.639
10
6.145
5.650
5.216
0.625 points
QUESTION 7
ABC, Corporation is looking to purchase a new piece of equipmentfor $121,505. The equipment has a useful life of 8 years and noexpected salvage value.
The minimum desired rate of return is 10%. ABC is uncertain asto the annual net cash flows the equipment will generate.
What is the minimum annual net cashflow ABC must achieve in order to justify the purchase of this newequipment?
(Round your answer to the nearest whole dollar. Do not use $dollar signs or commas when recording your answer.)
Present Value of $1
Periods
10%
12%
14%
5
.621
.567
.519
8
.467
.404
.351
10
.386
.322
.270
Present Value of Ordinary Annuity
Periods
10%
12%
14%
5
3.791
3.605
3.433
8
5.335
4.968
4.639
10
6.145
5.650
5.216
0.625 points
QUESTION 8
Sparky Company is considering the replacement of an old machinewith the purchase of a new piece of production equipment that willreduce labor and maintenance costs by $45,000 peryear. If Sparky purchases the new machine, the companywill sell the old equipment for an estimated $20,000 salvage value.Data related to the new machine follows:
InitialInvestment $300,000
UsefulLife 10years
Salvagevalue (newmachine) $30,000
HurdleRate 12%
Assume all cash flows occur at the end of the year and ignoreincome taxes. Calculate the net present value of theinvestment in the new machine. (Round your answer to the nearestwhole dollar. If you have a negative NPV, record youranswer using () parenthesis. EXAMPLE: If yourNPV is ($2,000), enter your answer as (2000).
Present Value of $1
Periods
10%
12%
14%
5
.621
.567
.519
8
.467
.404
.351
10
.386
.322
.270
Present Value of Ordinary Annuity
Periods
10%
12%
14%
5
3.791
3.605
3.433
8
5.335
4.968
4.639
10
6.145
5.650
5.216
QUESTION 1
Which of the following statements is correct regarding thepayback method as a capital budgeting technique?
The payback method considers the time value of money. | ||
An advantage of the payback method is that it indicates if aninvestment will be profitable. | ||
The payback method provides the years needed to recoup theinvestment in a project. | ||
Payback is calculated by dividing the annual cash inflows by thenet investment. |
0.625 points
QUESTION 2
Taxes are not an important consideration indeveloping cash flow assessments.
True
False
0.625 points
QUESTION 3
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2)QUESTIONS:
Parkways Inc. is considering the purchase of a new machine. Themachine will cost $60,000 to purchase and will generate $15,000 ofcash revenues per year for the next 8 years. The machine will cost$1,000 per year to operate & maintain. At the end of it'suseful life, it has an estimated salvage value of $5,000. Parkwaysrequires a minimum rate of return of 14% for this class of asset.Determine the Net Present Value of this investment proposal.
PV of $1 (14%, 8n) is .351; PVOA (14%, 8n) is 4.639
$6,701 | ||
$57,000 | ||
$1,166 | ||
$0 |
0.625 points
QUESTION 4
Sun Devil Corporation is adding a new product line that willrequire an investment of $138,000. The product line is estimated togenerate net cash flows of $25,000 the first year, $23,000 thesecond year, and $18,000 each year thereafter for ten more years.What is the payback period?
7.26 | ||
5.52 | ||
7.00 | ||
7.67 |
0.625 points
QUESTION 5
Sparky Company invested in an asset with a useful life of 5years. The companys required rate of return is 10% for this classof asset. The net cash flows are estimated to be $7,610 per yearfor the next 5 years and no salvage value is anticipated.
If the asset generates a positive net present value of $2,000,what was the amount of the original investment? (Roundyour answer to the nearest whole dollar. Do not use $signs or commas in recording youranswer. EXAMPLE: If you answer is $22,516,enter your answer as 22516).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 6
Suppose Whole Foods is considering investing inwarehouse-management software that costs $500,000, has $60,000residual value and should lead to cash cost savings of $130,000 peryear for its five-year life. Determine the NPV of the investment ifmanagement uses a 12% discount rate. (Round to the nearest wholenumber for your final answer. When recording your answer, do notuse $ dollar signs or commas. EXAMPLE: If you answer is $12,251,enter 12251)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 7
ABC, Corporation is looking to purchase a new piece of equipmentfor $121,505. The equipment has a useful life of 8 years and noexpected salvage value.
The minimum desired rate of return is 10%. ABC is uncertain asto the annual net cash flows the equipment will generate.
What is the minimum annual net cashflow ABC must achieve in order to justify the purchase of this newequipment?
(Round your answer to the nearest whole dollar. Do not use $dollar signs or commas when recording your answer.)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 8
Sparky Company is considering the replacement of an old machinewith the purchase of a new piece of production equipment that willreduce labor and maintenance costs by $45,000 peryear. If Sparky purchases the new machine, the companywill sell the old equipment for an estimated $20,000 salvage value.Data related to the new machine follows:
InitialInvestment $300,000
UsefulLife 10years
Salvagevalue (newmachine) $30,000
HurdleRate 12%
Assume all cash flows occur at the end of the year and ignoreincome taxes. Calculate the net present value of theinvestment in the new machine. (Round your answer to the nearestwhole dollar. If you have a negative NPV, record youranswer using () parenthesis. EXAMPLE: If yourNPV is ($2,000), enter your answer as (2000).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
Related questions
1. A company anticipates a depreciation deduction of $70,000 in year 4 of a project. The company's tax rate is 40% and its discount rate is 12%. The present value of the depreciation tax shield resulting from this deduction is closest to:
A) $17,808
B) $29,000
C) $21,000
D) $13,356
2. (Ignore income taxes in this problem.) Nevland Corporation is considering the purchase of a machine that would cost $120,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $43,000. The company requires a minimum pretax return of 19% on all investment projects. The net present value of the proposed project is closest to:
A) $32,966
B) $26,376
C) $64,902
D) $30,040
3. (Ignore income taxes in this problem) The management of Elamin Corporation is considering the purchase of a machine that would cost $305,745 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $51,000 per year. The internal rate of return on the investment in the new machine is closest to:
A) 9%
B) 11%
C) 12%
D) 10%
4. (Ignore income taxes in this problem.) The management of Solar Corporation is considering the following three investment projects:
| Project L | Project M | Project N | ||
| Investment required....................... | $37,000 | $55,000 | $82,000 | |
| Present value of cash inflows........ | $39,480 | $60,150 | $90,200 |
Rank the projects according to the profitability index, from most profitable to least profitable.
A) M,N,L
B) L,N,M
C) N,L,M
D) N,M,L
5. (Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $368,600 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The payback period of the project is closest to:
A) 3.8 years
B) 2.6 years
C) 2.7 years
D) 4.0 years
6. Dunn Construction, Inc., has a large crane that cost $35,000 when purchased ten years ago. Depreciation taken to date totals $25,000. The crane can be sold now for $8,000. Assuming a tax rate of 40%, if the crane is sold the total after-tax cash inflow for capital budgeting purposes will be:
A) $7,400
B) $10,000
C) $8,800
D) $8,000
