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Exam 11: Capital Budgeting and Investment Analysis

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Question 61

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The ________ is computed by discounting the future net cash flows from the investment at the project's required rate of return and then subtracting the initial amount invested.

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Question 62

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

A) Future cash inflows.
B) Future cash outflows.
C) Past cash outflows.
D) Non-uniform cash inflows.
E) Future year-end cash flows.

F) A) and E)
G) B) and C)

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Question 63

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

If two projects have the same risks, the same payback periods, and the same initial investments, they are equally attractive.

Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected. $\begin{array} { | l | c | r | } \hline & \text { Project X } & \text { Project Y } \\\hline \text { Cost of machine } & \$ 77,000 & \$ 55,000 \\\hline \text { Net cash flow: } & & \\\hline \text { Year 1 } & 28,000 & 2,000 \\\hline \text { Year 2 } & 28,000 & 25,000 \\\hline \text { Year 3 } & 28,000 & 25,000 \\\hline \text { Year 4 } & 0 & 20,000 \\\hline\end{array}$ If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

Trevoline Company is deciding between two projects. Each project requires an initial investment of $350,000. The projected net cash flows for the two projects are listed below. The revenue is to be received at the end of each year. Trevoline requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below. Use net present value to determine which project should be pursued and explain why. $\begin{array} { c c c c c } \text { Periods } & \begin{array} { c } \text { Project A } \\\text { CashFlows }\end{array} & \begin{array} { c } \text { Project B } \\\text { Cash Flows }\end{array} & \begin{array} { c } \text { Present Value } \\\text { of } 1 \text { at } 10 \%\end{array} & \begin{array} { c } \text { Present Value of an } \\\text { Annuity of } 1 \text { at } 10 \%\end{array} \\1 & \$ 50,000 & \$ 160,000 & 0.9091 & 0.9091 \\2 & \$ 200,000 & \$ 175,000 & 0.8264 & 1.7355 \\3 & \$ 250,000 & \$ 175,000 & 0.7513 & 2.4869\end{array}$

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

All capital investment evaluation methods use the time value of money concept.

For projects financed from borrowed funds, the hurdle rate must exceed the interest rate paid on the borrowed funds.

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

The accounting rate of return is calculated as:

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

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

A company produces two boat models, Flyer and Skimmer. Both products are being considered for major investment projects next year. Relevant data follow: Flyer Skimmer New investment ……………….. $424,000 $380,000 Expected 3-year net cash flows: Year 1 150,000 130,000 Year 2 160,000 130,000 Year 3 170,000 130,000 Required: Use the payback period to evaluate these two investment projects.

The accounting rate of return uses cash flows in its calculation.

A company purchases a machine for $800,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly after-tax net income of $60,000 to be received uniformly throughout each year. What is the accounting rate of return?

Capital budgeting decisions are generally based on:

Carmel Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value. Carmel uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Carmel's average investment?

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

The time value of money concept works on the principle that a dollar tomorrow is worth more than a dollar today.