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Exam 24: Capital Budgeting and Investment Analysis

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Question 71

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The time value of money concept:

A) Means that a dollar today is worth less than a dollar tomorrow.
B) Means that a dollar tomorrow is worth more than a dollar today.
C) Means that a dollar today is worth more than a dollar tomorrow.
D) Means that "Time is money."
E) Does not involve the concept of compound interest.

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Question 72

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The _______________________________ is computed by dividing a project's after-tax net income by the average amount invested in it.

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Question 73

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Saxon Manufacturing is considering purchasing two machines.Each machine costs $9,000 and will produce cash flows as follows: $\begin{array} { c c } \begin{array}{l}\text {End of}\\ \text {Year}\\1\\2\\3\end{array}\begin{array} { }& \text { Machine } \\&\begin{array} { }&\text { A } & \text { B } \\&\$ 5,000 & \$ 1,000 \\&4,000 & 2,000 \\&2,000 & 11,000\end{array}\end{array}\end{array}$ Saxon Manufacturing uses the net present value method to make the decision,and it requires a 15% annual return on its investments.The present value factors of 1 at 15% are: 1 year,0.8696; 2 years,0.7561; 3 years,0.6575.Which machine should Saxon purchase?

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.

A company purchases a machine for $1,000,000.The machine has an expected life of nine years and no salvage value.The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year.What is the accounting rate of return?

In ranking choices with the break-even time (BET)method,the investment with the highest BET measure gets the highest rank.

A company is considering a five-year project.It plans to invest $60,000 now and forecasts cash flows of $16,200 for each year.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: $\begin{array}{cc}\underline{\text{Interest}}&&\underline{\text{Present Value of an Annuity of 1}}\\\underline{\text{ Rate}}&&\underline{\text{ Factor}}\\10 \%&&3.7908 \\12 \%&&3.6048 \\14 \%&&3.4331\end{array}$

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

A company is considering the purchase of new equipment for $39,000.The projected after-tax net income is $6,000 after deducting $13,000 of depreciation.The machine has a useful life of three years and no salvage value.Management of the company requires a 12% return on investment.The present value of an annuity of 1 for various periods follows: $\begin{array} { l c } &\text { Present Value of an }\\\underline{\text { Period}} & \underline{\text { Annuity of } 1 \text { at } 12 \%} \\1 & 0.8929 \\2 & 1.6901 \\3 & 2.4018\end{array}$ Required: a.What is the net present value of this machine assuming all cash flows occur at year-end? b.What is the profitability index for this equipment?

The rate that yields a net present value of zero for an investment is the:

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

A company is considering purchasing a machine for $21,000.The machine will generate an after-tax net income of $2,000 per year.Annual depreciation expense would be $1,500.What is the approximate accounting rate of return?

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

The process of restating future cash flows in terms of their present value is called _____________________.

Capital budgeting decisions are generally based on:

If a manager were concerned with the time value of money,from which two capital budgeting methods should the manager choose?

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

Presented below are terms preceded by letters (a)through (g)and followed by a list of definitions (1)through (7).Match the letter of the term with the definition.Use the space provided preceding each definition. (a)Net present value (b)Capital budgeting (c)Accounting rate of return (d)Net cash flow (e)Internal rate of return (f)Payback period (g)Hurdle rate __________ (1) A discount rate that results in a net present value of zero. __________ (2) Cash inflows minus cash outflows for the period. __________ (3) A minimum acceptable rate of return. __________ (4) The time expected to pass before the net cash flows from an investment equals its initial cost. __________ (5) Annual after-tax net income divided by annual average investment. __________ (6) A process of analyzing alternative long-term investments. __________ (7) Initial cost of an investment subtracted from discounted future cash flows from the investment.

Which methods of evaluating a capital investment project use cash flows as a measurement basis?

The net cash flow of a particular investment project: