Question 1

Eagle Company is considering the purchase of an asset for $100,000.It is expected to produce the following net cash flows.The cash flows occur evenly throughout each year.Compute the payback period for this investment.(Round to two decimal places.) $$\begin{array} { | l | r | l | } 
\hline & \begin{array} { l } 
\text { Annual Net } \
\text { Cash Flows }
\end{array} \
\hline \text { Year 1 } & \$ 40,000 & \
\hline \text { Year 2 } & \$ 40,000 & \
\hline \text { Year 3 } & \$ 35,000 & \
\hline \text { Year 4 } & \$ 35,000 & \
\hline \text { Year 5 } & \$ 30,000 & \
\hline
\end{array}$$

Accepted Answer

The cumulative cash flow reaches $100,000 between Year 2 and Year 3. By the end of Year 2, $80,000 is recovered. The remaining $20,000 is recovered in Year 3. The payback period is 2 + ($20,000/$35,000) = 2.57 years.

Question 2

Daniels Corporation is considering the purchase of new equipment costing $30,000.The projected annual after-tax net income from the equipment is $1,200,after deducting $10,000 for depreciation.The revenue is to be received at the end of each year.The machine has a useful life of 3 years and no salvage value.Daniels requires a 12% return on its investments.The present value of an annuity of 1 for different periods follows:
$$\begin{array} { l r } 
\text { Periods } & \text { l2 Percent } \
\hline 1 \ldots \ldots \ldots \ldots & 0.8929 \
2 \ldots \ldots \ldots & 1.6901 \
3 \ldots \ldots \ldots & 2.4018 \
4 \ldots \ldots \ldots& 3.0373
\end{array}$$ What is the net present value of the machine?

Accepted Answer

The answer of Daniels Corporation is considering the purchase of...

Question 3

A company is considering the purchase of new equipment for $45,000.The projected after-tax net income is $3,000 after deducting $15,000 of depreciation.The machine has a useful life of 3 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:
Period Present value of an annuity of 1 at 12%
1……) 0.8929
2……) 1.6901
3……) 2.4018
What is the net present value of this machine assuming all cash flows occur at year-end?

Accepted Answer

Present value of
Net cash flows * Present value factor net cash flows
Years 1-3…………. $18,000 2.4018 $43,232
Initial investment…. (45,000)
Net present value…. $ (1,768)
*Annual cash flows = $3,000 + $15,000 = $18,000

Question 4

An estimate of an asset's value to the company,calculated by discounting the future cash flows from the investment at an appropriate rate and then subtracting the initial cost of the investment,is known as:

Accepted Answer

Net present value (NPV) is the process of estimating the current value of cash inflows and outflows expected from an investment over a specific period of time, taking into account the time value of money. It calculates the present value of future cash flows using a discount rate and deducts the initial investment cost. A positive NPV indicates that the investment is profitable, while a negative NPV shows that it is not profitable. Therefore, NPV is an estimate of an asset's value to the company.

Question 5

A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value.The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year.If a table of present values of 1 at 12% shows values of 0.8929 for one year,0.7972 for two years,and 0.7118 for three years,what is the net present value of the cash flows from the investment,discounted at 12%?

Accepted Answer

The answer of A company can buy a machine that...

Question 6

A new manufacturing machine is expected to cost $286,000,have an eight-year life,and a $30,000 salvage value.The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation.Compute the payback period for the purchase.

Accepted Answer

Depreciation expense = $286,000 - $30,000 / 8 = $32,000
Annual cash flows = $35,000 + $32,000 = $67,000; Payback period = $286,000/$67,000 = 4.3 years

Question 7

The hurdle rate is often set at:

Accepted Answer

The hurdle rate is typically set at the company's cost of capital, which includes the rate of return required by investors to compensate for the risk of the investment. It takes into account the company's weighted average cost of capital (WACC), which is the average cost of financing for all of the company's sources of capital (including debt and equity). Choosing A, C, D or E would not accurately reflect the true cost of capital for the company.

Question 8

Sherman Company can sell all of its products A and Z that it can produce,but it has limited production capacity.It can produce 6 units of A per hour or 10 units of Z per hour,and it has 20,000 production hours available.Contribution margin per unit is $12 for A and $10 for Z.What is the most profitable sales mix for this company?

Accepted Answer

The answer of Sherman Company can sell all of its...

Question 9

After-tax net income divided by the annual average investment in an investment,is the:

Accepted Answer

Accounting rate of return = $2,850/[($60,000 + $0)/2] = 9.5%

Question 10

Trescott Company had the following results of operations for the past year:
 A foreign company (whose sales will not affect Trescott's market)offers to buy 3,000 units at $17.00 per unit.In addition to variable manufacturing costs,selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000.If Trescott accepts the offer,its profits will:

Accepted Answer

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Question 11

Monterey Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value.Monterey uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year.In calculating the accounting rate of return,what is Monterey's average investment?

Accepted Answer

Accounting rate of return = $1,500/[($25,000 + $0)/2] = 12%

Question 12

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

Accepted Answer

The internal rate of return is the rate at which the present value of the expected cash inflows from an investment equals the present value of the expected cash outflows, resulting in a net present value of zero.

Question 13

Barnes manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000 units on hand.Alternatively,it can be further processed at a cost of $12,000 and converted into 12,000 units of Exceptional and 6,000 units of Premium.The selling price of Exceptional and Premium are $30 and $20,respectively.The incremental net income of processing further would be:

Accepted Answer

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Question 14

A new manufacturing machine is expected to cost $286,000,have an eight-year life,and a $30,000 salvage value.The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation.Compute the accounting rate of return for the investment.

Accepted Answer

Accounting rate of return = $35,000/[($286,000 + $30,000)/2] = 22.2%

Question 15

The following data concerns a proposed equipment purchase:
Cost……….. $144,000
Salvage value ……….. $ 4,000
Estimated useful life ……….. 4 years
Annual net cash flows ………..$ 46,100
Depreciation method ……….. Straight-line
Assuming that net cash flows are received evenly throughout the year,the accounting rate of return is:

Accepted Answer

Annual depreciation expense = ($144,000 - $4,000)/4 = $35,000/yr.; After-tax income = $46,100 - $35,000 = $11,100; Accounting rate of return = $11,100 [($144,000 + $4,000)/2]=15%

Question 16

Saxon Manufacturing is considering purchasing two machines.Each machine costs $9,000 and will produce cash flows as follows:
End of Machine
Year A B
$$\begin{array} { r r r } 
1 \ldots \ldots \ldots \ldots \ldots & \$ 5,000 & \$ 1,000 \
2 \ldots \ldots \ldots \ldots \ldots& 4,000 & 2,000 \
3\ldots \ldots \ldots \ldots \ldots & 2,000 & 11,000
\end{array}$$ 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?

Accepted Answer

The answer of Saxon Manufacturing is considering purchasing two machines.Each...

Question 17

Axle Company can produce a product that incurs the following costs per unit: direct materials,$10; direct labor,$24,and overhead,$16.An outside supplier has offered to sell the product to Axle for $45.If Axle buys from the supplier,it will still incur 45% of its overhead cost.Compute the net incremental cost or savings of buying.

Accepted Answer

Incremental cost = Purchase price less cost savings; $45 - ($10 + $24 + (55% * $16) =
$2.20

Question 18

The accounting rate of return is calculated as:

Accepted Answer

The accounting rate of return is calculated as the after-tax income divided by the annual average investment. This measures the profitability of an investment over its entire life in terms of the income generated each year as a percentage of the investment cost. It takes into account the time value of money and the effect of taxes on profits.

Question 19

A company is considering a 5-year project.The company plans to invest $60,000 now and it forecasts cash flows for each year of $16,200.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:
Interest rate Present value of an annuity of 1 factor
10% 3.7908
12% 3.6048
14% 3.4331

Accepted Answer

Investment/Annual net cash flows = $60,000/$16,200 = 3.704
The present value factor of 3.704 falls between 10% and 12%.

Question 20

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

Accepted Answer

Net present value (NPV) is the method that considers the time value of money by discounting future cash flows to their present value at a required rate of return. This enables a comparison of alternative capital expenditures on an equal footing, which allows for the selection of the investment that provides the highest increase in shareholder wealth. The other options (A, C, D, E) do not consider the time value of money in their calculations.

Quiz 25: Capital Budgeting and Managerial Decisions