Question 1

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value.The company expects to sell the machine's output of 3,000 units evenly throughout each year.Total income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.The average rate of return for the machine is 50%.

Accepted Answer

The average rate of return cannot be 50% since the net cash flows per year of $6,000 divided by the initial cost of $24,000 equals 25%.

Question 2

A company is considering the purchase of a new machine for $48,000.Management expects 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.All revenues and expenses except depreciation are on a cash basis.The payback period for the machine is 12 years.

Accepted Answer

The payback period for the machine is actually 3 years (48,000 initial investment / 16,000 annual cash inflow), not 12 years. Therefore, the statement is false.

Question 3

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

Accepted Answer

The answer of If a proposed expenditure of $80,000 for...

Question 4

For Years 1-5, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively.The cash payback period is 5 years.

Accepted Answer

The cash payback period is calculated by summing the net cash flows until the initial investment is recovered. In this case, by the end of Year 4 ($90,000 + $85,000 + $75,000 + $75,000 = $325,000), the initial investment of $500,000 has not been fully recovered. By adding the Year 5 cash flow ($75,000), the total cash flow over the 5 years is $400,000, which still does not recover the initial $500,000 investment, indicating the payback period is longer than 5 years.

Question 5

A company is considering purchasing a machine for $21,000.The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500.The payback period for the new machine is 6 years.

Accepted Answer

To calculate the payback period, we divide the initial investment by the annual net cash flows:

Payback period = $21,000 / $3,500 = 6 years

Since the payback period is exactly 6 years, the statement is true.

Question 6

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period.

Accepted Answer

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the payback period. The discount period refers to the time value of money and the discount rate used to calculate the present value of future cash flows.

Question 7

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

Accepted Answer

The time expected to pass before the net cash flows from an investment would return its initial cost is actually called the payback period, not the amortization period. The amortization period refers to the time period over which the cost of an intangible asset is gradually written off or depreciated for accounting purposes.

Question 8

For Years 1-5, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively.The cash payback period is 3 years.

Accepted Answer

The cash payback period is calculated by dividing the initial investment ($250,000) by the annual net cash flows. The cash payback period for this investment is 2.78 years, which is less than 3 years, so the statement is true.

Question 9

A company is considering the purchase of a new piece of equipment for $90,000.Predicted annual net cash inflows from the investment are $36,000 Year 1, $30,000 Year 2, $18,000 Year 3, $12,000 Year 4, and $6,000 Year 5.The average income from operations over the 5-year life is $20,400.The payback period is 3.5 years.

Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflows. In this case, the payback period is 2.5 years ($90,000 / $36,000). Therefore, the statement is false.

Question 10

The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

Accepted Answer

The net present value method involves more complex computations, including discounting future cash flows to their present value, which is more involved than the simpler calculations of the average rate of return method that typically uses basic arithmetic to estimate the return as a percentage of the investment.

Question 11

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value.The company expects to sell the machine's output of 3,000 units evenly throughout each year.Total income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.The payback period for the machine is 12 years.

Accepted Answer

The payback period for the machine is actually 4 years (total cost of machine divided by annual net cash flows).

Question 12

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value.The company expects to sell the machine's output of 3,000 units evenly throughout each year.Total income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.The average rate of return for the machine is 16.7%.

Accepted Answer

To calculate the average rate of return, we use the formula:
Average Rate of Return = (Total annual net cash flows / Initial investment) x 100

Plugging in the values, we get:
Average Rate of Return = (6,000 x 6 / 24,000) x 100
Average Rate of Return = 25%

Since the given average rate of return is 16.7%, which is lower than our calculated rate of return, the machine is a good investment. Therefore, the answer is true (option A).

Question 13

The average rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

Accepted Answer

The average rate of return method calculates the average rate of return over the life of the asset, making it a useful tool for measuring capital budgeting decisions.

Question 14

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period.

Accepted Answer

This is a true statement. The cash payback period is a financial metric used to determine the amount of time it takes for a company to recover the cash it has invested in a particular capital project. Once the company has recovered the total amount of cash invested, any future cash flows associated with the project will represent a positive return on investment.

Question 15

The cash payback method can be used only when net cash inflows are the same for each period.

Accepted Answer

The cash payback method can be used when net cash inflows are uneven or different for each period. The method calculates the time required for a project's net cash inflows to recover the initial investment.

Question 16

A company is considering the purchase of a new machine for $48,000.Management expects 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.All revenues and expenses except depreciation are on a cash basis.The payback period for the machine is 6 years.

Accepted Answer

The answer of A company is considering the purchase of...

Question 17

The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset.

Accepted Answer

The average rate of return is calculated by dividing the average annual profit by the initial investment cost, not by dividing the average annual cash inflows by the average amount invested.

Question 18

If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.

Accepted Answer

The answer of If a proposed expenditure of $70,000 for...

Question 19

A company is considering purchasing a machine for $21,000.The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500.The payback period for the new machine is 10.5 years.

Accepted Answer

The payback period can be calculated by dividing the cost of the investment by the net cash flows generated per year. In this case, the payback period would be:

Payback period = $21,000 / $3,500 = 6 years

Therefore, the statement "The payback period for the new machine is 10.5 years" is false.

Question 20

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value.The company expects to sell the machine's output of 3,000 units evenly throughout each year.Total income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.The payback period for the machine is 4 years.

Accepted Answer

The payback period is the amount of time it takes for the initial investment to be recovered through the net cash inflows generated by the investment. In this case, the machine costs $24,000 and generates $6,000 in net cash inflows per year, so the payback period would be 4 years (24,000/6,000 = 4). Therefore, the statement is true.

Quiz 10: Capital Investment Analysis

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

For Years 1-5, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively.The cash payback period is 5 years.

A company is considering purchasing a machine for $21,000.The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500.The payback period for the new machine is 6 years.

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period.

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

For Years 1-5, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively.The cash payback period is 3 years.

The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

The average rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period.

The cash payback method can be used only when net cash inflows are the same for each period.

The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset.

If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.

A company is considering purchasing a machine for $21,000.The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500.The payback period for the new machine is 10.5 years.