Question 1

Globe Enterprises purchased a new machine with a total cost of $30,450 and a useful life of 6 years.The machine will produce net cash inflows of $7,250 over its useful life and has a residual value of $2,125.What is the payback period for the new machine?

Accepted Answer

C)$30,450 / $7,250 = 4.20 years

Question 2

Buxton Corporation is evaluating a capital investment project which would require an initial investment of $240,000 to purchase new machinery.The annual revenues and expenses generated specifically by this project each year during the project's nine year life would be:

The residual value of the machinery at the end of the nine years would be $15,000.The payback period of this potential project in years would be closest to

Accepted Answer

A)
Investment/Annual cash flows
$240,000 / (67,000 + 25,000)= 2.6 yrs

Question 3

Sparky the Electrician specializes in rewiring historic houses.Sparky recently purchased a new wire-pulling device that will decrease the time to complete each job and increase total revenues.The device will cost $4,375 and will increase net cash flows by $1,750 per year.The new device has a useful life of 7 years and a residual value of $250.What is the payback period for the new wire-pulling device?

Accepted Answer

B)
Investment/Annual cash flows
4,375 / 1,750 = 2.5 years

Question 4

The principal amount,the interest rate,and the number of periods are all factors needed to calculate the time value of money.

Accepted Answer

The time value of money formula requires the principal amount, interest rate, and number of periods to be inputted in order to determine the present value or future value of an investment.

Question 5

Pro-Am Audio is a company that is contracted to DJ private events.Due to a recent increase in bookings,Pro-Am is considering the purchase of another mobile DJ unit.Pro-Am uses the payback method to evaluate its investments.The mobile DJ unit will cost $12,000,has a useful life of 10 years,and will generate $2,000 in net cash inflows per year.The residual value of the unit is $1,000.What is the payback period for the mobile DJ unit?

Accepted Answer

C)
Investment/Annual cash flows
12,000 / 2,000 = 6 years

Question 6

Siesta Manufacturing has asked you to evaluate a capital investment project.The project will require an initial investment of $88,000.The life of the investment is 7 years with a residual value of $4,000.If the project produces net annual cash inflows of $16,000,what is the accounting rate of return?

Accepted Answer

B)
($88,000 - 4,000)/7 years = $12,000 annual depreciation expense
$16,000 - $12,000/$88,000 = 4.55%

Question 7

The net present value method does not incorporate the time value of money.

Accepted Answer

The net present value method incorporates the time value of money by discounting future cash flows back to their present value.

Question 8

Abdul Corporation bought a new machine,which cost $90,000,has a useful life of 10 years,and will generate annual cash inflows of $25,000.The residual value of the machine is $5,500.What is the payback period?

Accepted Answer

The answer of Abdul Corporation bought a new machine,which cost...

Question 9

The Hawn Corporation bought a new machine that cost $150,000 with a 10-year life and a residual value of $20,000.The company plans to generate annual cash inflows of $40,000 over 10 years.Calculate the accounting rate of return.

Accepted Answer

The answer of The Hawn Corporation bought a new machine...

Question 10

Buller Manufacturing is considering acquiring another facility for a cost of $610,000.The required payback period is 4.5 years.Assume annual net cash inflows are $150,000 for the first two years and $125,000 for years 3 and 4.What must the inflow be in the fifth year to meet the 4.5 year payback period?

Accepted Answer

The answer of Buller Manufacturing is considering acquiring another facility...

Question 11

Sicily,Inc. ,is considering investing $160,000 in a machine that may last 4 years with no residual value.The new machine will generate annual operating income of $60,000 per year for 4 years.What is the accounting rate of return?

Accepted Answer

The answer of Sicily,Inc. ,is considering investing $160,000 in a...

Question 12

When computing the present value of a future sum,the interest rate must always be expressed as an annual rate.

Accepted Answer

The interest rate can be expressed in different compounding periods (e.g., monthly, quarterly) as long as it is consistent with the period used in the present value calculation.

Question 13

Speedy Print Shop bought a new high-speed photo copier to offer customers the opportunity to make high-quality copies out of their digital pictures.Its useful life is 6 years.The copier cost $7,740 and will generate annual cash inflows of $2,150.The residual value of the copier is $1,320.The payback period in years is closest to

Accepted Answer

B)
Investment/Annual cash flows
$7,740/2,150 = 3.6 yrs

Question 14

The Toth Company bought a new specialty machine that cost $100,000 with a 4-year life with no residual value.The company plans to generate annual cash inflows of $30,000 each year for 4 years.Calculate the accounting rate of return.

Accepted Answer

The answer of The Toth Company bought a new specialty...

Question 15

GlenGary Investment Corporation is analyzing a proposal to build condo units in southern Florida.The project will require an initial investment of $500,000.The building has a useful life of 20 years,a residual value of $200,000,and is depreciated on a straight-line basis.GlenGary uses the accounting rate of return model to evaluate investment projects.What is the minimum annual operating income that must be generated by this project to achieve the 9% accounting return required by GlenGary?

Accepted Answer

B)
(Annual net cash flow - depreciation)/Investment = Accounting rate of return
Annual net cash flow/500,000 = 9%
Annual net cash flow = 9% × 500,000 = 45,000.

Question 16

The managerial accountant at New Jewelry considers an investment in a gem cleaning piece of equipment that may increase the value of gems because it fills in the fractures of lower-value gems.The initial cost of the equipment is $1,480,000;whereas the annual net cash inflow is $425,000.The managerial accountant projects a useful life of 13 years.The resale value of the equipment is forecasted at $450,000.Calculate the annual depreciation expense.What is the expected payback period of this investment?

Accepted Answer

The answer of The managerial accountant at New Jewelry considers...

Question 17

Calculating interest on the principal and on all the interest earned to date is called compound interest.

Accepted Answer

This is the definition of compound interest.

Question 18

One dollar to be received in the future is worth more than one dollar today.

Accepted Answer

This statement is false. One dollar received today is worth more than one dollar received in the future due to the time value of money and the possibility of earning interest or returns on the investment of that dollar over time.

Question 19

Bonneville Manufacturing is considering an investment that would require an initial net investment of $650,000.The following revenues/expenses relate exclusively to the investment:

The investment will have a residual value of $50,000 at the end of its 15 year useful life.What is the payback period for this investment?

Accepted Answer

D)
Investment/Annual cash flows
$650,000 / (222,000 + 40,000)= 2.48 yrs

Question 20

Smith & Cramer,Computer Repair,is considering an investment in computer and network equipment costing $254,000.This equipment would allow them to offer new programming services to clients.The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $60,000.Using the accounting rate of return model,what is the minimum average annual operating income that must be generated from this investment in order to achieve an 11% accounting rate of return?

Accepted Answer

D)
(Annual net cash flow - depreciation)/Investment = Accounting rate of return
Annual net cash flow/254,000 = 11%
Annual net cash flow = 11% × 254,000 = 27,940.

Quiz 12: Capital Investment Decisions and the Time Value of Money