Question 1

Use the following information for questions 
A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.
-The cash payback period on the equipment is

Accepted Answer

The cash payback period is the length of time it takes for the cash inflows from a project to equal the initial cash outflow. To calculate the cash payback period, we need to determine how long it will take for the annual net cash inflows ($135,000 - $39,000 = $96,000) to total $480,000.

Cash payback period = Initial investment ÷ Annual net cash inflows
Cash payback period = $480,000 ÷ $96,000 = 5 years

Therefore, the best choice is C, as it has the shortest cash payback period compared to the other options.

Question 2

The capital budgeting technique that indicates the profitability of a capital expenditure is the

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The answer of The capital budgeting technique that indicates the...

Question 3

Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is

Accepted Answer

To compute the annual rate of return, the average annual income over the useful life of the equipment must be determined. 
Total income over 5 years: 
$21,000 x 5 = $105,000 
Average annual income: 
$105,000 / 5 = $21,000 
The denominator in the formula for annual rate of return is the initial investment minus the salvage value, divided by 2. 
($240,000 - $12,000) / 2 = $126,000 
Therefore, the answer is choice C.

Question 4

A company projects an increase in net income of $30,000 each year for the next five years if it invests $300,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $100,000. What is the annual rate of return on this investment?

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The answer of A company projects an increase in net...

Question 5

When calculating the annual rate of return, the average investment is equal to

Accepted Answer

The average investment is calculated by taking the sum of the initial investment and the salvage value at the end of the project and dividing it by 2. This is because the investment is assumed to be constant over the life of the project, and the salvage value represents the return of the initial investment at the end of the project. Therefore, choice D is the correct answer.

Question 6

A project that cost $75,000 has a useful life of 5 years and a salvage value of $3,000. The internal rate of return is 12% and the annual rate of return is 18%. The amount of the annual net income was

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The answer of A project that cost $75,000 has a...

Question 7

Use the following information for questions 
A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.
-If the equipment is purchased, the annual rate of return expected on this equipment is

Accepted Answer

First, we need to calculate the annual after-tax cash inflows from the investment:

Annual revenues: $135,000
Operating expenses: -$39,000
Depreciation expense: -$60,000 ($480,000/8 years)
Taxable income: $36,000
Annual taxes (35% tax rate): -$12,600
After-tax cash inflows: $84,400

Next, we need to calculate the initial investment and the salvage value:

Initial investment: $480,000
Salvage value: $0

Using the formula for the annual rate of return (ARR):

ARR = (After-tax cash inflows / Initial investment + Salvage value) / Useful life

ARR = ($84,400 / $480,000 + $0) / 8

ARR = 0.175 or 17.5%

Therefore, the expected annual rate of return on this equipment is 15.0% (rounded to the nearest tenth of a percent). The best choice is C.

Question 8

A project has annual income exclusive of depreciation of $80,000. The annual rate of return is 15% and annual depreciation is $20,000. There is no salvage value. The internal rate of return is 12%. The initial cost of the project was

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The answer of A project has annual income exclusive of...

Question 9

The annual rate of return is computed by dividing expected annual

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The annual rate of return is calculated by dividing the expected annual net income by the average investment.

Question 10

A project that cost $80,000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5,000. The project will generate annual cash flows of $21,375. The annual rate of return is

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The answer of A project that cost $80,000 with a...

Question 11

The annual rate of return method is based on

Accepted Answer

The annual rate of return method is based on accounting data, as it uses accounting profits rather than cash flows or time value of money.

Question 12

A project has an annual rate of return of 15%. The project cost $120,000, has a 5-year useful life, and no salvage value. Straight-line depreciation is used. The annual net income, exclusive of depreciation, was

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The answer of A project has an annual rate of...

Question 13

Disadvantages of the annual rate of return method include all of the following except that

Accepted Answer

The annual rate of return method does not require any special knowledge or expertise to understand the information used in the computation. Therefore, choice D is incorrect. The other options are disadvantages of the method, as it relies on accrual accounting numbers instead of actual cash flows (choice A), does not consider the time value of money (choice B), and does not consider when cash inflows occur (choice C).

Quiz 12: Planning for Capital Investments