Question 1

McKinney Corporation McKinney Corporation is involved in the evaluation of a new computer-integrated manufacturing system. The system has a projected initial cost of $1,000,000. It has an expected life of six years, with no salvage value, and is expected to generate annual cost savings of $250,000. Based on McKinney Corporation's analysis, the project has a net present value of $57,625.
Refer to McKinney Corporation. What is the project's internal rate of return? Present value tables or a financial calculator are required.

Accepted Answer

The answer of McKinney Corporation McKinney Corporation is involved in...

Question 2

Anne Boone recently invested in a project that promised an internal rate of return of 15 percent. If the project has an expected annual cash inflow of $12,000 for six years, with no salvage value, how much did Anne pay for the project? Present value tables or a financial calculator are required.

Accepted Answer

To find the price Anne paid for the project, we need to calculate the present value of the expected cash inflows using the internal rate of return of 15% as the discount rate. Using a financial calculator or present value tables, we find that the present value of the cash inflows is $45,414. Therefore, Anne paid $45,414 for the project.

Question 3

McKinney Corporation McKinney Corporation is involved in the evaluation of a new computer-integrated manufacturing system. The system has a projected initial cost of $1,000,000. It has an expected life of six years, with no salvage value, and is expected to generate annual cost savings of $250,000. Based on McKinney Corporation's analysis, the project has a net present value of $57,625.
Refer to McKinney Corporation. What is the project's profitability index?

Accepted Answer

The profitability index is calculated by dividing the present value of future cash flows by the initial investment. In this case, the present value of future cash flows is $1,057,625 (net present value of $57,625 plus initial investment of $1,000,000) and the initial investment is $1,000,000. Therefore, the profitability index is 1.058, indicating that for every dollar invested, the project is expected to generate a return of $1.058. This is a favorable result and suggests that McKinney Corporation should undertake the project.

Question 4

Brooks Corporation The Brooks Corporation has recently evaluated a proposal to invest in cost-reducing production technology. According to the evaluation, the project would require an initial investment of $17,166 and would provide equal annual cost savings for five years. Based on a 10 percent discount rate, the project generates a net present value of $1,788. The project is not expected to have any salvage value at the end of its five-year life.
Refer to Brooks Corporation. What is the project's expected internal rate of return? Present value tables or a financial calculator are required.

Accepted Answer

The answer of Brooks Corporation The Brooks Corporation has recently...

Question 5

Parker Wood Creations Parker Wood Creations is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe. Information on the existing lathe and the computer-operated lathe follow:
 Refer to Parker Wood Creations. If the company uses 10 percent as its discount rate, what is the net present value of the proposed new lathe purchase? Present value tables or a financial calculator are required.

Accepted Answer

The answer of Parker Wood Creations Parker Wood Creations is...

Question 6

Parker Wood Creations Parker Wood Creations is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe. Information on the existing lathe and the computer-operated lathe follow:
 Refer to Parker Wood Creations. What is the payback period for the computer-operated lathe?

Accepted Answer

The answer of Parker Wood Creations Parker Wood Creations is...

Question 7

Rogers Corporation Rogers Corporation is considering an investment in a labor-saving machine. Information on this machine follows:
 Refer to Rogers Corporation. What is the payback period on this investment?

Accepted Answer

The answer of Rogers Corporation Rogers Corporation is considering an...

Question 8

Michael Smith recently invested in a project that has an expected annual cash inflow of $7,000 for 10 years, and an expected payback period of 3.6 years. How much did Michael invest in the project?

Accepted Answer

To calculate the amount Michael invested, we need to use the formula for payback period:

Payback period = Investment Required / Annual Cash Inflow

We are given that the expected payback period is 3.6 years, and the annual cash inflow is $7,000.

3.6 = Investment Required / 7,000

Multiplying both sides by 7,000:

25,200 = Investment Required

Therefore, Michael invested $25,200 in the project. The correct answer is C.

Question 9

Assume that X represents a sum of money that Bill has available to invest in a project that will yield a return of r. In the formula Y = X(1 + r), Y represents the

Accepted Answer

In the formula Y = X(1 + r), Y represents the future value of X in one period.

Question 10

Brooks Corporation The Brooks Corporation has recently evaluated a proposal to invest in cost-reducing production technology. According to the evaluation, the project would require an initial investment of $17,166 and would provide equal annual cost savings for five years. Based on a 10 percent discount rate, the project generates a net present value of $1,788. The project is not expected to have any salvage value at the end of its five-year life.
Refer to Brooks Corporation. What are the expected annual cost savings of the project? Present value tables or a financial calculator are required.

Accepted Answer

The answer of Brooks Corporation The Brooks Corporation has recently...

Question 11

If r is the discount rate, the formula [1/(1 + r)] refers to the

Accepted Answer

The formula [1/(1 + r)] is used to calculate the present value of some future cash flow, and is referred to as the present value interest factor associated with r for one period.

Question 12

Which of the following indicates that the first cash flow is at the end of a period?

Accepted Answer

The answer of Which of the following indicates that the...

Question 13

The Davis Corporation is considering an investment in a project that generates a profitability index of 1.3. The present value of the cash inflows on the project is $44,000. What is the net present value of this project?

Accepted Answer

The answer of The Davis Corporation is considering an investment...

Question 14

All other things being equal, as the time period for receiving an annuity lengthens,

Accepted Answer

As the time period for receiving an annuity lengthens, the present value of future cash flows decreases due to the concept of time value of money. Therefore, the present value factors must increase to compensate for the longer time period and keep the present value of the annuity constant.

Question 15

Michele Miller borrows $50,000 from her bank on January 1. She is to repay the loan in equal annual installments over 30 years. How much is her annual repayment if the bank charges 10 percent interest? Present value tables or a financial calculator are required.

Accepted Answer

The answer of Michele Miller borrows $50,000 from her bank...

Question 16

McDonald's Retail McDonald's Retail is considering an investment in a delivery truck. McDonald has found a used truck that he can purchase for $8,000. He estimates the truck would last six years and increase his store's net cash revenues by $2,000 per year. At the end of six years, the truck would have no salvage value and would be discarded. McDonald will depreciate the truck using the straight-line method.
Refer to McDonald's Retail. What is the accounting rate of return on the truck investment (based on average profit and average investment)?

Accepted Answer

The answer of McDonald's Retail McDonald's Retail is considering an...

Question 17

In computing the accounting rate of return, the ____ level of investment should be used as the denominator.

Accepted Answer

The average level of investment is used in the denominator when computing the accounting rate of return because it takes into account the depreciation of the asset over time, providing a more accurate reflection of the investment's performance throughout its useful life.

Question 18

The capital budgeting technique known as accounting rate of return uses

Accepted Answer

The accounting rate of return (ARR) method uses accounting data to calculate the average return on investment, which is then compared to a target rate of return or hurdle rate to determine if the project is acceptable. Therefore, it is a capital budgeting technique that uses accounting information, making option C and option B incorrect. However, ARR does not consider the time value of money, which is a major drawback, making option A incorrect. Hence, option D is the correct answer since it is the only option that accurately reflects both the use and limitation of the ARR method.

Question 19

McKinney Corporation McKinney Corporation is involved in the evaluation of a new computer-integrated manufacturing system. The system has a projected initial cost of $1,000,000. It has an expected life of six years, with no salvage value, and is expected to generate annual cost savings of $250,000. Based on McKinney Corporation's analysis, the project has a net present value of $57,625.
Refer to McKinney Corporation. What discount rate did the company use to compute the net present value? Present value tables or a financial calculator are required.

Accepted Answer

The answer of McKinney Corporation McKinney Corporation is involved in...

Question 20

McDonald's Retail McDonald's Retail is considering an investment in a delivery truck. McDonald has found a used truck that he can purchase for $8,000. He estimates the truck would last six years and increase his store's net cash revenues by $2,000 per year. At the end of six years, the truck would have no salvage value and would be discarded. McDonald will depreciate the truck using the straight-line method.
Refer to McDonald's Retail. What is the payback period on the investment in the new truck?

Accepted Answer

The payback period is calculated by dividing the initial cost by the net cash inflows. In this case, the initial cost is $8,000 and the net cash inflow is $2,000 per year for six years, making the total net cash inflow $12,000. Therefore, the payback period is 4 years ($8,000 initial cost divided by $2,000 net cash inflow per year). Since this is less than the truck's estimated lifespan of 6 years, it is a good investment for McDonald's Retail. Choice C is the best choice because it accurately represents the payback period and supports the decision to invest in the truck.

Quiz 15: Capital Budgeting