Question 1

The net present value (NPV) method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time using the required rate of return.

Accepted Answer

This is an accurate description of the net present value (NPV) method.

Question 2

Managers prefer projects with higher IRRs to projects with lower IRRs, if all other things are equal.

Accepted Answer

Managers prefer projects with higher IRRs (internal rates of return) because a higher IRR implies a higher return on investment. All other things being equal, a project with a higher IRR is more attractive as it leads to greater profitability and cash flow.

Question 3

If internal rate of return is less than required rate of return, the net present value is positive.

Accepted Answer

If internal rate of return is less than required rate of return, the net present value is negative.

Question 4

Which of the following methods is described as the method that measures the time it will take to recoup, in the form of future cash inflows, the total dollars invested in a project?

Accepted Answer

The payback method measures the time it will take to recoup the total dollars invested in a project in the form of future cash inflows. The other methods listed (accrued accounting rate-of-return, internal rate-of-return, and book-value) do not specifically measure the time it takes to recoup the investment in this way.

Question 5

The net initial investment for a piece of construction equipment is $2,900,000. Annual cash inflows are expected to increase by $500,000 per year. The equipment has an 10-year useful life. What is the payback period?

Accepted Answer

To calculate the payback period, we need to divide the initial investment by the annual cash inflow.

Payback period = Net initial investment / Annual cash inflow

For this particular equipment, the annual cash inflow is expected to increase by $500,000 per year and the useful life is 10 years. So the total cash inflow over 10 years is:

Total cash inflow = Annual cash inflow x Number of years
Total cash inflow = $500,000 x 10
Total cash inflow = $5,000,000

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

Payback period = $2,900,000 / $500,000
Payback period = 5.8 years

Therefore, the answer is C, which is 5.8 years.

Question 6

Malive Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $179,000. The annual cost savings if the new machine is acquired will be $35,000. The machine will have a 10-year life, at which time the terminal disposal value is expected to be zero. Malive Park is assuming no tax consequences. Malive Park has a 14% required rate of return. What is the payback period for the investment?

Accepted Answer

Payback period is the length of time required to recoup the cost of an investment. It is calculated by dividing the cost of the investment by the annual cash inflow.

In this case, the cost of the investment is $179,000 and the annual cash inflow is $35,000.

Payback Period = Cost of Investment / Annual Cash Inflow
Payback Period = $179,000 / $35,000
Payback Period = 5.1 years

Therefore, the correct choice is B.

Question 7

The three common discounted cash flow methods are net present value, internal rate of return, and payback.

Accepted Answer

The two common discounted cash flow methods are net present value and internal rate of return. The traditional payback method is not a discounted cash flow method.

Question 8

Retail Outlet is looking for a new location near a shopping mall. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location that includes considerations for the time value of money. The information is as follows:
  
The owner does not understand how the location with the highest percentage return has the lowest net present value.
Required:
Explain to the owner what is (are) the probable cause(s) of the comparable differences.

Accepted Answer

The answer of Retail Outlet is looking for a new...

Question 9

ABC Boat Company is interested in replacing a molding machine with a new improved model. The old machine has a salvage value of $10,000 now and a predicted salvage value of $4,000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $20,000.
The new machine costs $80,000 and has a predicted salvage value of $12,000 at the end of six years. If purchased, the new machine will allow cash savings of $20,000 for each of the first three years, and $10,000 for each year of its remaining six-year life.
Required:
What is the net present value of purchasing the new machine if the company has a required rate of return of 14%?

Accepted Answer

The answer of ABC Boat Company is interested in replacing...

Question 10

Discounted cash flow methods do not consider the present value of the cash flows after the recovery of the initial investment.

Accepted Answer

Discounted cash flow methods focus on all cash inflows and cash outflows for the entire expected useful life of the proposed project.

Question 11

The payback method of capital budgeting approach to an investment decision ________.

Accepted Answer

The payback method typically assumes that cash flows occur uniformly throughout the year, simplifying the calculation by not accounting for variations in cash flow timing within each period. It does not consider the time value of money (unlike methods such as NPV or IRR), it does not ignore the initial investment (as it is focused on how long it takes to recover this initial outlay), and it does not consider cash flows over the entire life of the investment if the payback period is shorter than the investment's life.

Question 12

Discounted cash flow methods of evaluating capital expenditures focuses on the operating income as calculated under accrual accounting rules.

Accepted Answer

DCF methods do not include depreciation in the operating cash flows and should account for the income tax effect of operating cash flows and depreciation.

Question 13

The net present value method can be used in situations where the required rate of return varies over the life of the project.

Accepted Answer

The net present value method takes into account the time value of money by discounting future cash flows to their present value using a required rate of return. This required rate of return may vary over the life of the project, and the net present value calculation can adjust for this by using different discount rates for different periods. Therefore, the statement is true.

Question 14

The net present value method accurately assumes that project cash flows can only be reinvested at the company's required rate of return.

Accepted Answer

The net present value method assumes that project cash flows can only be reinvested at the company's required rate of return, which is a key assumption of the method. This assumption ensures that the opportunity cost of investing in the project is reflected in the analysis.

Question 15

Flilane Tire Company needs to overhaul its auto lift system or buy a new one. The facts have been gathered, and they are as follows:
  
Required:
Which alternative is the most desirable with a current required rate of return of 15%? Show computations, and assume no taxes.

Accepted Answer

The answer of Flilane Tire Company needs to overhaul its...

Question 16

The Enor Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $99,360 and has predicted cash inflows of $20,000 per year for 8 years. It will have no salvage value.
Required:
a.Using a required rate of return of 10%, determine the net present value of the investment proposal.
b.Determine the proposal's internal rate of return.

Accepted Answer

The answer of The Enor Machine Company is evaluating a...

Question 17

EIF Manufacturing Company needs to overhaul its drill press or buy a new one. The facts have been gathered, and they are as follows:
  
Required:
Which alternative is the most desirable with a current required rate of return of 20%? Show computations, and assume no taxes.

Accepted Answer

The answer of EIF Manufacturing Company needs to overhaul its...

Question 18

Network Service Center is considering purchasing a new computer network for $82,000. It will require additional working capital of $13,000. Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs, excluding depreciation, of $15,000. At the end of eight years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not considered.
Required:
a.If the company has a required rate of return of 14%, what is the net present value of the proposed investment?
b.What is the internal rate of return?

Accepted Answer

The answer of Network Service Center is considering purchasing a...

Question 19

The Required Rate of Return (RRR) is set externally by creditors as the interest rate on long term liabilities.

Accepted Answer

The RRR is internally set, usually by upper management, and typically takes into account the cost of the company's capital and the return that an organization could expect to receive elsewhere for an investment of comparable risk.

Question 20

Which of the following methods of capital budgeting divides the average annual accrual accounting income of a project by a measure of the investment in it?

Accepted Answer

The answer of Which of the following methods of capital...

Quiz 21: Capital Budgeting and Cost Analysis