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Exam 15: Capital Budgeting

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Question 21

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The payback period is the

A) length of time over which the investment will provide cash inflows.
B) length of time over which the initial investment is recovered.
C) shortest length of time over which an investment may be depreciated.
D) shortest length of time over which the net present value will be positive.

E) B) and D)
F) B) and C)

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Question 22

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If a project generates a net present value of zero,the profitability index for the project will

A) equal zero.
B) equal 1.
C) equal -1.
D) be undefineD.

E) B) and D)
F) A) and B)

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Question 23

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When information on actual project results is gathered and compared to actual results,the process is referred to as a(n)______________________________________.

An investment project is expected to yield $10,000 in annual revenues,has $2,000 in fixed costs per year,and requires an initial investment of $5,000.Given a cost of goods sold of 60 percent of sales,what is the payback period in years?

A ratio comparing the present value of a project's net cash inflows to the project's net investment is referred to as the ____________________________________.

The net present value method of evaluating proposed investments

What factors influence the present value of the depreciation tax benefit?

The profitability index is

The accounting rate of return considers the time value of money.

Which of the following capital budgeting techniques may potentially ignore part of a project's relevant cash flows?

For a profitable company,an increase in the rate of depreciation on a specific project could

Webber Corporation is interested in purchasing a state-of-the-art stamping machine for its manufacturing plant.The new machine has been designed to basically eliminate all errors and defects in the production process.The new machine will cost $180,000,and have a salvage value of $80,000 at the end of its eight-year useful life.Stone has determined that cash inflows for years 1 through 8 will be as follows: $33,000;$58,000;$28,000;$39,000;$27,000;$22,000,$27,000 and $29,000,respectively.Maintenance will be required in years 3 and 6 at $14,000 and $9,000 respectively.Webber uses a discount rate of 12 percent and wants projects to have a payback period of no longer than six years. Present value tables or a financial calculator are required. a. $\text { Compute the net present value of the new machine }$ b. $\text { Compute the firm's profitability index }$ c. $\text { Compute the payback period }$ d. $\text { Evaluate this investment proposal for Webber Company. }$

Does a project that generates a positive internal rate of return also have a positive net present value? Explain.

Capital budgeting uses both financial and non-financial criteria when evaluating projects.

A decision in which projects are ranked according to their impact on achieving company objectives is a preference decision.

Which method of evaluating capital projects assumes that cash inflows can be reinvested at the discount rate?

The pre-tax and after-tax cash flows would be the same for all of the following items except

Weaver Corporation Weaver Corporation is considering an investment in a new product line.The investment would require an immediate outlay of $100,000 for equipment and an immediate investment of $200,000 in working capital.The investment is expected to generate a net cash inflow of $100,000 in year 1,$150,000 in year 2,and $200,000 in years 3 and 4.The equipment would be scrapped (for no salvage)at the end of the fourth year and the working capital would be liquidated.The equipment would be fully depreciated by the straight-line method over its four-year life. Refer to Weaver Corporation.What is the payback period for the investment?

Broncho Industries is considering the purchase of a $100,000 machine that is expected to result in a decrease of $15,000 per year in cash expenses.This machine,which has no residual value,has an estimated useful life of 10 years and will be depreciated on a straight-line basis.For this machine,the accounting rate of return would be

The weighted average cost of capital represents the