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Exam 11: Capital Budgeting

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Question 61

True/False

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Independent projects are unrelated to one another,so that investing in one project does not affect the choice about investing in another project.

A) True
B) False

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Question 62

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The accounting rate of return is also called all of the following except:

A) annual rate of return.
B) required rate of return.
C) simple rate of return.
D) unadjusted rate of return.

E) All of the above
F) B) and C)

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Question 63

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Patterson Corp.is considering the purchase of a new piece of equipment,which would have an initial cost of $500,000,a 7-year life,and $150,000 salvage value.The increase in net income each year of the equipment's life would be as follows: What is the payback period?

A problem in which you must calculate the worth to you today of receiving a certain amount at some time in the future is a:

If the hurdle rate is greater than the internal rate of return,the net present value will be:

Surf Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income of $50,000.The equipment will have an initial cost of $600,000 and have an 8-year life.The equipment has no salvage value.The hurdle rate is 10%.Ignore income taxes.Answer the following: a.What is the accounting rate of return? b.What is the payback period? c.What is the net present value? d.What would the net present value be with a 15% hurdle rate? e.Based on the NPV calculations,in what range would the equipment's internal rate of return fall?

Norwood,Inc. ,which has a hurdle rate of 12%,is considering three different independent investment opportunities.Each project has a seven-year life.The annual cash flows and initial investment for each of the projects are as follows: a.What is the present value of the annual cash flows for each of the three projects? b.What is the net present value of each of the projects? c.What is the profitability index of each of the projects? (Round to two decimal places. ) d.In what order should Norwood prioritize investment in the projects?

You won the lottery,and the jackpot was $12,000,000.You can either receive the $12,000,000 in equal installments over 20 years,or you can receive a lump sum today.The amount of the lump sum you'll receive today is based on the present value of the equal installment payments. a.What is the present value of the lottery winnings taken in equal installments over 20 years at 8% interest? b.What is the present value of the lottery winnings taken in equal installments over 20 years at 10% interest? c.Which interest rate yields the greatest amount of cash today?

How does the accounting rate of return differ from the return on investment formula?

A positive net present value indicates that a project will:

Wilson Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $50,000.The equipment will have an initial cost of $600,000 and have an 8-year life.The salvage value of the equipment is estimated to be $100,000.If the hurdle rate is 10%,what is the internal rate of return? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

The profitability index is calculated as the present value of future cash flows divided by the initial investment.

Sensitivity analysis helps determine whether changing the underlying assumptions would affect the decision.

Briar Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $200,000.The equipment will have an initial cost of $1,200,000 and have an 8-year life.The salvage value of the equipment is estimated to be $200,000.The hurdle rate is 8%.Ignore income taxes.Answer the following: a.What is the accounting rate of return? b.What is the payback period? c.What is the net present value? d.What would the net present value be with a 12% hurdle rate? e.Based on the NPV calculations,in what range would the equipment's internal rate of return fall?

Lexington Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $100,000.The equipment will have an initial cost of $500,000 and have an 8-year life.There is no salvage value of the equipment.The hurdle rate is 8%.Ignore income taxes.Calculate the following: a.Accounting rate of return b.Payback period

Wright Corp.is considering the purchase of a new piece of equipment,which would have an initial cost of $1,000,000 and a 5-year life.There is no salvage value for the equipment.The increase in cash flow each year of the equipment's life would be as follows: What is the payback period?

Major Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $100,000.The equipment will have an initial cost of $500,000 and have an 8-year life.The equipment has no salvage value.The hurdle rate is 8%.Ignore income taxes.Answer the following: a.What is the net present value? b.What would the net present value be with a 12% hurdle rate? c.Based on the NPV calculations,in what range would the equipment's internal rate of return fall?

Imagine you are a managerial accountant in charge of operations for an architectural firm whose work focuses on green building initiatives.To be consistent with the firm's principles,you propose three separate green initiatives to the board.The first proposal is to install low-water plumbing throughout the building.The second proposal is to install solar panels on the south-facing side of the building to reduce electric costs.The third proposal is to eliminate food and package waste from the break area by partnering with a sustainable food pantry.All three initiatives would include educational materials for clients,architects,and staff of the firm to underscore the firm's commitment to environmental matters.To convince the board of directors of the viability of these options,you prepare the following analysis. a-f.Fill in the missing spaces within the table above. Which project would the board of directors choose if it values: g.a fast payback period? h.internal rate of return? i.net present value? j.initial cost outlay? k.If you make your recommendation based on the profitability index,in which order would you recommend the projects be prioritized?

Homer Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $100,000.The equipment will have an initial cost of $400,000 and have a 5-year life.If the salvage value of the equipment is estimated to be $75,000,what is the annual net cash flow?

How much will you have in a savings account in ten years,if you deposit $1000 in the account at the end of each year and the account earns 6% interest,compounded annually? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )