Question 1

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

Accepted Answer

Net present value (NPV) considers the time value of money by discounting future cash flows to their present value using a discount rate. This allows for better comparison of alternative investments and considers the fact that a dollar received in the future is worth less than a dollar received today due to inflation and potential earning potential. The other methods listed (Accounting rate of return, Payback period, Return on average investment) do not explicitly consider the time value of money. While the cash flow method could consider the time value of money, it is not clear which cash flow method is being referred to and thus cannot be definitively chosen.

Question 2

What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

Accepted Answer

The answer of What is capital budgeting? Why are capital...

Question 3

Peng 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 four years and no salvage value.Peng requires a 12% return on its investments.The factors for the present value of $1 for different periods follow: $\begin{array}{lr}
\underline { \text { Periods }} & \underline { \text { 12 Percent }} \
1 & 0.8929 \
2 & 0.7972 \
3 & 0.7118 \
4 & 0.6355
\end{array}$ Calculate the break-even time for this equipment.

Accepted Answer

The break-even time is between three and four years because the cumulative present value of cash flows becomes positive between these periods.

Question 4

How does the calculation of break-even time (BET)differ from the calculation of payback period (PBP)?

Accepted Answer

The answer of How does the calculation of break-even time...

Question 5

A company bought a machine that has an expected life of six years and no salvage value.Management estimates that this machine will generate annual after-tax net income of $700.If the accounting rate of return is 10%, what was the purchase price of the machine?

Accepted Answer

Accounting rate of return = $700/ [(Purchase price + 0)/2] = 10%
Annual average investment = $700/.10 = $7,000
(Purchase price + 0)/2 = $7,000
Purchase price = 7,000 x 2 = $14,000

Question 6

In using the internal rate of return method, management must consider a hurdle rate in making its decisions.What is a hurdle rate? What factors does management have to consider in selecting a hurdle rate?

Accepted Answer

The answer of In using the internal rate of return...

Question 7

What is discounting?

Accepted Answer

The answer of What is discounting?...

Question 8

The following present value factors are provided for use in this problem: $\begin{array}{lll}

&\text { Present } \
&\text { Value } & \text { Present Value of an } \
\text { Periods } & \text { of } 1 \text { at } 8 \% & \text { Annuity of } 1 \text { at } 8 \%\
1 & 0.9259 & 0.9259 \
2 & 0.8573 & 1.7833 \
3 & 0.7938 & 2.5771 \
4 & 0.7250 & 32121
\end{array}$

Norman Co.wants to purchase a machine for $40,000 but needs to earn an 8% return.The expected year-end net cash flows are $12,000 in each of the first three years and $16,000 in the fourth year.What is the machine's net present value (rounded to the nearest whole dollar)?

Accepted Answer

To calculate the net present value (NPV), we discount each cash flow to its present value and sum them up, then subtract the initial investment. The cash flows are $12,000 for the first three years and $16,000 for the fourth year. Using the present value factors:Year 1: $12,000 * 0.9259 = $11,111Year 2: $12,000 * 0.8573 = $10,288Year 3: $12,000 * 0.7938 = $9,526Year 4: $16,000 * 0.7250 = $11,600Total present value of cash flows = $11,111 + $10,288 + $9,526 + $11,600 = $42,525NPV = Total present value of cash flows - Initial investment = $42,525 - $40,000 = $2,525Rounded to the nearest whole dollar, the NPV is $2,685.

Question 9

Holder Manufacturing is considering purchasing two machines.Each machine costs $8,000 and will produce cash flows as follows: $\begin{array}{l}
 \text {End of  }  \quad\quad\quad \text { Machine } \
\begin{array}{lrr}
\text {  Year } &\text { A } & { \text { B } } \
1 & \$ 5,000 & \$ 1,000 \
2 & 4,000 & 2,000 \
3 & 2,000 & 11,000
\end{array}
\end{array}$
 Holder 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 Holder purchase?

Accepted Answer

To calculate the net present value (NPV) for each machine, we need to discount the cash flows using the present value factors provided and then subtract the initial cost of the machine:

NPV(A) = -8000 + 5000(0.8696) + 4000(0.7561) + 2000(0.6575) + 1000(0) + 0(0) + 11000(0) = $4,640.94

NPV(B) = -8000 + 1000(0.8696) + 2000(0.7561) + 11000(0.6575) + 5000(0) + 4000(0) + 2000(0) = $3,927.06

Since both machines have positive NPVs, both are acceptable investments. However, Machine A has a higher NPV and should be selected over Machine B. Therefore, the best choice is option D: Both machines are acceptable, but B should be selected because it has the greater net present value.

Question 10

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

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 three years and no salvage value.Daniels requires a 12% return on its investments.The factors for the present value of $1 for different periods follow: $\begin{array}{lr}
\underline { \text { Periods }} & \underline { \text { 12 Percent }} \
1 & 0.8929 \
2 & 0.7972 \
3 & 0.7118 \
4 & 0.6355
\end{array}$ What is the net present value of the machine?

Accepted Answer

The net present value (NPV) is calculated by finding the present value of the cash flows and subtracting the initial investment. The cash flow each year is $11,200 ($1,200 net income + $10,000 depreciation). The present value of these cash flows over three years at 12% is: $11,200 * (0.8929 + 0.7972 + 0.7118) = $11,200 * 2.4019 = $26,920. Subtracting the initial investment of $30,000 gives an NPV of $(3,080), which is closest to option B.

Question 12

A company is considering the purchase of new equipment costing $91,000.The machine has a useful life of four years and no salvage value.The company requires a 12% return on its investments.The factors for the present value of an annuity of 1 for different periods follow: $\begin{array}{lr}
\underline { \text { Periods }} & \underline { \text { 12 Percent }} \
1 & 0.8929 \
2 & 1.690 \
3 & 2.4018 \
4 & 30373
\end{array}$ Assuming all revenue is to be received at the end of each year, what are the net cash flows for this investment if net present value equals ($11,790)?

Accepted Answer

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

Question 13

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 a method of estimating an asset's value by discounting future cash flows at an appropriate rate and subtracting the initial cost of the investment. NPV takes into account the time value of money, and helps to determine whether an investment is profitable or not. It is often used as a decision-making tool by companies when evaluating potential projects or investments.

Question 14

Which of the following cash flows is not considered when using the net present value method?

Accepted Answer

The net present value method only considers future cash inflows and outflows, not past cash outflows.

Question 15

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

Accepted Answer

The rate that yields a net present value of zero is the Internal Rate of Return (IRR). It is the rate at which the project's discounted cash inflows equal its discounted cash outflows. It is a measure of the profitability of an investment and is used in capital budgeting to analyze the potential investment.

Question 16

There are two basic steps in calculating the internal rate of return.Which of the following represents those two steps?

Accepted Answer

The two basic steps in calculating the internal rate of return are: 
1) Compute the PV factor for the project - this involves calculating the present value of the cash inflows and outflows of the project using a rate of discount.
2) Identify the discount rate - the discount rate at which NPV equals zero is the internal rate of return (IRR).

Question 17

How can management evaluate the risk of an investment?

Accepted Answer

The answer of How can management evaluate the risk of...

Question 18

Scott 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 three years and a $4,000 salvage value.Scott requires a 12% return on its investments.The factors for the present value of $1 for different periods follow: $\begin{array}{lr}
\underline { \text { Periods }} & \underline { \text { 12 Percent }} \
1 & 0.8929 \
2 & 0.7972 \
3 & 0.7118 \
4 & 0.6355
\end{array}$ What is the net present value of the machine and what is the maximum Scott would have been willing to pay for it?

Accepted Answer

The net present value (NPV) is calculated by discounting the net cash flows from the equipment and subtracting the initial investment. The NPV is $(251.52), indicating a negative value. Therefore, Scott would be willing to pay $29,748.48 ($30,000 - $251.52) for the machine.

Question 19

A company is evaluating the purchase of a machine for $750,000 with a nine-year useful life and no salvage value.The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year.In calculating the accounting rate of return, what is the company's average investment?

Accepted Answer

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

Question 20

A company is considering purchasing a machine for $123,000.The machine is expected to generate a net after-tax income of $8,200 per year.Depreciation expense would be $12,300.What is the payback period for this machine?

Accepted Answer

The answer of A company is considering purchasing a machine...

Quiz 11: Capital Budgeting and Investment Analysis