Question 1

The payback method discounts cash flows prior to the payback date.

Accepted Answer

The payback method does not discount cash flows, it only measures the time it takes to recover the initial investment.

Question 2

Use the information below to answer the following question(s).Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition, Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company uses straight-line depreciation and has a required rate of return of 14%.Ignore income taxes.
-What is the net present value for the investment Saturn Ltd.is considering?

Accepted Answer

The answer of Use the information below to answer the...

Question 3

Which of the following is false concerning the payback method of capital budgeting?

Accepted Answer

The payback method does not use the accrual accounting rate of return. It calculates the amount of time it takes for an investment to recover its initial cost based on cash inflows.

Question 4

Use the information below to answer the following question(s).Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition, Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company uses straight-line depreciation and has a required rate of return of 14%.Ignore income taxes.
-What is the accrual accounting rate of return for the investment Saturn Ltd.is considering?

Accepted Answer

The answer of Use the information below to answer the...

Question 5

Samuel Manufacturing Inc.is evaluating new machinery in its factory.The machinery would replace existing equipment.The new machinery would cost $430,000, would last 6 years, and would have a salvage value of $36,000.The existing machinery currently has a net book value of $72,000 and could be sold for $65,000.If kept, the old machine would have a salvage value of $5,000 in 6 years time.The new machinery is expected to lower direct labour costs by $22,000 per year.The current variable overhead rate is 120% of direct labour.Other annual cost savings are projected to be $15,000.Due to the reduction in the production cycle time, working capital requirements will decrease by $8,000 during the life of the new machine.Ignore income taxes.Required:
a.Compute the net present value of replacing the existing equipment at a 12 percent required rate of return.
b.Compute the internal rate of return.
c.Comment on the efficacy of the use of internal rate of return versus net present value in making this decision.

Accepted Answer

The answer of Samuel Manufacturing Inc.is evaluating new machinery in...

Question 6

Which of the following is NOT one of the methods that aid management in analyzing the expected results of capital budgeting decisions?

Accepted Answer

Future-value cash flow is not one of the methods that aid in analyzing the expected results of capital budgeting decisions. The other options listed, such as accrual accounting rate of return, net present value, payback method, and internal rate of return, are all commonly used methods in capital budgeting analysis.

Question 7

The accrual accounting rate of return method has a significant weakness for use in making capital budgeting decisions because it does not track cash flows and it ignores the time value of money.

Accepted Answer

The statement is true. The accrual accounting rate of return method only considers accounting profits and not cash flows, which can be misleading for making capital budgeting decisions. Additionally, it does not incorporate the time value of money, which is important when evaluating the profitability of long-term investments.

Question 8

The accrual accounting rate of return is an accounting measure of income divided by an accounting measure of investment.

Accepted Answer

The statement accurately describes the accrual accounting rate of return.

Question 9

Return on investment (ROI)is also known as

Accepted Answer

ROI is sometimes referred to as the accrual accounting rate of return, which measures the profitability of an investment.

Question 10

A company is considering purchasing two different high-speed photocopiers.The regular model costs $4,500 and the deluxe model costs $6,100.The company has projected cash savings of $800 for the first year, and then $850 annually thereafter for both models, but the vendor is claiming that the deluxe model is $400 cheaper per year to operate than the regular model.What are the payback periods for the Regular and Deluxe models respectively assuming that the vendor is correct?

Accepted Answer

The answer of A company is considering purchasing two different...

Question 11

Advantages from using the payback method when capital budgeting include

Accepted Answer

The payback method is advantageous when future cash flows in later years are uncertain because it focuses on recovering the initial investment quickly, reducing the risk associated with uncertain future cash flows.

Question 12

A rental company replaces its heavy drilling machine every four years (no salvage value).It is contemplating acquiring a larger machine, at a cost of $70,000, which is guaranteed to last for seven years.The current machine can be traded-in for a $3,000 down payment on the new machine, and the company expects annual savings in operating costs of $15,000.What is the AARR for the new machine?

Accepted Answer

To calculate the AARR (Average Annual Rate of Return), we need to find out the net cash inflow and the initial investment.

Net cash inflows:
Annual savings = $15,000
Trade-in value of the old machine = $3,000
Total cash inflow per year = $15,000 + $3,000 = $18,000

Initial investment:
Cost of new machine = $70,000
Less: Trade-in value of old machine = $3,000
Net initial investment = $70,000 - $3,000 = $67,000

To calculate AARR, we need to first find out the total net cash inflow for the seven-year period.
Total net cash inflow = ($18,000 x 7) - $70,000 = $56,000

AARR = (Total net cash inflow / Net initial investment) x 100%
AARR = ($56,000 / $67,000) x 100% = 83.58%

However, since the machine is replaced every four years, we need to adjust the calculation to take only four years into account.
Total net cash inflow = ($18,000 x 4) - $67,000 = $11,000

AARR = (Total net cash inflow / Net initial investment) x 100%
AARR = ($11,000 / $67,000) x 100% = 16.42%

Therefore, the AARR for the new machine is 16.42%, which is closest to option C (7.14%). Thus, the best choice is C.

Question 13

An accounting measure of income divided by an accounting measure of investment is called

Accepted Answer

The given definition describes the accrual accounting rate of return, which is calculated by dividing accounting income by accounting investment.

Question 14

Projects with shorter paybacks always generate more cash flows.

Accepted Answer

This statement is false. Projects with shorter paybacks may generate higher cash flows in the short term, but longer payback projects may generate higher cash flows over the entire project lifespan. The payback period does not provide a complete picture of a project's profitability. It is important to consider other factors such as net present value and internal rate of return when evaluating project cash flows.

Question 15

Crofton Inc.is evaluating new machinery in its foundry.The machinery would replace existing equipment.The new machinery would cost $230,000, would last 5 years, and would have a salvage value of $28,000.The existing machinery currently has a net book value of $52,000 and could be sold for $38,000.If kept, the old machine would have a salvage value of $6,000 in 5 years' time.The new machinery is expected to lower direct labour costs by $18,000 per year.The current variable overhead rate is 120% of direct labour.Other annual cost savings are projected to be $30,000.Due to the reduction in the production cycle time, working capital requirements will decrease by $25,000 during the life of the new machine.Ignore income taxes.Required:
a.Compute the net present value of replacing the existing equipment at a 9 percent required rate of return.
b.Compute the internal rate of return.

Accepted Answer

The answer of Crofton Inc.is evaluating new machinery in its...

Question 16

The payback method allows for managers to highlight liquidity.

Accepted Answer

The payback method focuses on estimating the time it will take to recoup the initial investment, which can be seen as an indicator of liquidity.

Question 17

The net initial investment for a new mainframe computer is $2,000,000.Annual cash flows are expected to increase by $800,000 per year.The equipment has a 10-year useful life.What is the payback period?

Accepted Answer

The answer of The net initial investment for a new...

Question 18

The payback method measures the time required to recoup the total dollars invested in the project through cash inflows.

Accepted Answer

The payback method does measure the time required to recoup the total dollars invested in the project through cash inflows.

Question 19

The method that measures the time it will take to recoup, in the form of cash inflows, the total dollars invested in a project is called the

Accepted Answer

The payback method measures the time it will take to recoup the total dollars invested in a project. This method does not take into account the time value of money, but it is a simple and easy-to-understand approach for evaluating projects. The other methods listed (accrued accounting rate of return, internal rate of return, book-value, and NPV) are more complex and take into account the time value of money.

Question 20

Use the information below to answer the following question(s).Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition, Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company uses straight-line depreciation and has a required rate of return of 14%.Ignore income taxes.
-What is the payback period for the investment Saturn Ltd.is considering?

Accepted Answer

To calculate the payback period, we need to find out the length of time it takes for the annual cash savings to equal the initial investment.

Annual savings = $32,000
Initial investment = $180,000 + $5,000 + $8,500 = $193,500
Salvage value = $18,000

Payback period = (Initial investment - Salvage value) / Annual savings
Payback period = ($193,500 - $18,000) / $32,000
Payback period = 5.96875

Therefore, the payback period is approximately 6.05 years. Choice C is the closest option.

Quiz 20: Capital Budgeting: Methods of Investment Analysis