FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 11: Capital Budgeting and Investment Analysis

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 71

Short Answer

Review LaterAdd Note

Review Later

The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the project should be ____________________.

Correct Answer

verified

acquired o...

View Answer

Show Answer

Question 72

Short Answer

Review LaterAdd Note

Review Later

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

Correct Answer

verified

Show Answer

Question 73

Multiple Choice

Review LaterAdd Note

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) ?

The process of restating cash flows in terms of their present values is called discounting.

A minimum acceptable rate of return for an investment decision is called the:

Presented below are terms preceded by letters (a) through (g) and followed by a list of definitions (1) through (7) .Match the letter of the term with the definition.Use the space provided preceding each definition -The time expected to pass before the net cash flows from an investment equals its initial cost.

If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the one with more cash flows in the early years has the higher net present value.

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:

A company has a decision to make between two investment alternatives.The company requires a 10% return on investment.Predicted data is provided below: $\begin{array}{lrr}& \underline { \text { Investment Y } }& \underline { \text { Investment } Z }\\\text { Projected after-tax net income } & \$ 40,000 & \$ 43,000 \\\text { Investment costs } & \$ 600,000 & \$ 672,000 \\\text { Estimated life } & 6 \text { years } & 6 \text { years }\end{array}$ The present value of an annuity for six years at 10% is 4.3553.This company uses straight-line depreciation. Required: a.Calculate the net present value for each investment. b.Calculate the profitability index for each investment. c.Which investment should this company select? Explain.

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money.These methods are _______________ and __________________.There are also two primary methods that consider the time value of money; these are ___________________ and _______________________.

If a manager were concerned with the time value of money, from which two capital budgeting methods should the manager choose?

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

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

A company is considering a five-year project.It plans to invest $80,000 now and it forecasts cash inflows for each year of $22,857.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: $\begin{array}{lc}\underline {\text { Interest }} &\underline {\text { Present Value of an Annuity of 1 }}\\ \underline{\text { Rate }}& \underline{\text { Factor }} \\{10 \%} &{3.7908}\\12 \% & 3.6048 \\14 \% & 34331\end{array}$

A hurdle rate is the minimum acceptable rate of return for an investment.

The internal rate of return equals the rate that yields a net present value of zero for an investment.

A company purchases a machine for $62,000.The machine has an expected life of 15 years and no salvage value.The company anticipates a yearly net income of $15,000 after taxes of 29% to be received uniformly throughout each year.What is the accounting rate of return?

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

A given 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: $\begin{array} { c c c } i = 10 \% & i = 10 \% & i = 10 \% \\n = 1 & n = 2 & n = 3 \\\hline .9091 & .8264 & .7513\end{array}$