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Exam 24: Capital Budgeting and Investment Analysis

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Question 31

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Net cash flow can be calculated by adjusting the projected net income from a project for any non-cash revenues and expenses.

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Question 32

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

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internal r...

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Question 33

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The following relates to a proposed equipment purchase: -The annual average investment amount used to calculate the accounting rate of return is:

The accounting rate of return (ARR)is computed by dividing a project's after-tax net income by the average annual investment.

A capital budgeting method that considers how quickly a project recovers costs is known as ________.An enhancement to this method that also considers the time value of money is called ________.

Presented below are terms preceded by letters a through f and followed by a list of definitions 1 through 6.Match the letter of the terms with the definitions.Use the space provided preceding each definition.

In ranking choices with the break-even time (BET)method,the investment with the longest BET gets the highest rank.

Briefly describe both the payback period method and the net present value method of comparing investment alternatives.

Porter Co.is analyzing two potential investments. -The payback period in years for Project X is:

A company is considering the purchase of a new machine for $48,000.Management predicts that the machine can produce sales of $16,000 each year for the next 10 years.Expenses are expected to include direct materials,direct labor,and factory overhead totaling $12,000 per year including depreciation of $3,000 per year.Income tax expense is $1,600 per year based on a tax rate of 40%.What is the payback period for the new machine?

A company is planning to purchase a machine that will cost $24,000 with a six-year life and no salvage value.The company uses straight-line depreciation.The company expects to sell the machine's output of 3,000 units evenly throughout each year.A projected income statement for each year of the asset's life appears below. -What is the accounting rate of return for this machine?

A project requires a $28,000 investment and is expected to generate end-of-period annual cash inflows as follows: Assuming a discount rate of 10%,what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below.

The internal rate of return method of evaluating capital investments cannot be used with uneven cash flows.

Vextra Corporation is considering the purchase of new equipment costing $35,000.The projected annual cash inflow is $11,000,to be received at the end of each year.The machine has a useful life of 4 years and no salvage value.Vextra requires a 12% return on its investments.The present value of an annuity of $1 for different periods follows: -What is the net present value of the machine?

The break-even time (BET) method is a variation of the:

Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments.The company is considering two different investments.Each require an initial investment of $15,000 and will produce cash flows as follows: The present value factors of $1 each year at 15% are: The present value of an annuity of $1 for 3 years at 15% is 2.2832 -Which investment should Alfarsi choose?

A project requires a $28,500 investment and is expected to generate end-of-period annual cash inflows of $12,000 for each of three years.Assuming a discount rate of 10%,what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below:

Identify at least three reasons for managers to favor the internal rate of return (IRR)over other capital budgeting approaches.

________ is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

In ranking choices with the break-even time (BET)method,the investment with the longest BET gets the lowest rank.