ACCT 212 Read & Interact Wild & Shaw Chapter 11 Capital Budgeting solutions complete answers

ACCT 212 Read & Interact Wild & Shaw Chapter 11 Capital Budgeting solutions complete answers 

 

Match the capital budgeting method to its specific characteristic.

 

Of the four capital budgeting methods, which ones reflect the time value of money? (Check all that apply).

 

Which of the following are correct statements about the internal rate of return (IRR)? (Check all that apply.)

 

A capital investment evaluation method that measures the expected time until the present value of the net cash flows equals the initial investment is:

 

Match the capital investment method to its specific characteristic.

 

The decision rule for NPV includes: (Check all that apply).

 

The discount rate that results in a net present value of $0 is the:

 

A company's required rate of return computed as an average of the rate the company must pay to its lenders and investors is called:

 

If a company uses straight-line depreciation, the average investment is calculated as: (Check all that apply.)

 

A company is considering two capital investments. Each requires an initial investment of $15,000 and has a 4 year useful life. Investment A has expected cash inflows of $5,000 each year for the 4 years for total cash inflows of $20,000. Investment B has the following expected cash flows: Year 1: $8,000; Year 2: $6,000; Year 3: $4,000; Year 4: $2,000; Total cash flows: $20,000. Calculate the payback period for Investment B.

 

The capital budgeting evaluation method that measures the expected amount of time to recover the initial investment amount is the:

 

The capital investment evaluation method that subtracts the initial investment from the discounted future net cash flows from the investment at the required rate of return is the: 

 

The formula to calculate the accounting rate of return is:

 

A company is considering a capital investment of $16,000 in new equipment which will improve production and increase cash flows for the next five years at the following amounts: Year 1: $8,000; Year 2: $6,000; Year 3: $5,000; Year 4: $6,000; Year 5: $5,000. The payback period is   years.

 

A company is considering an investment opportunity with a cost of $5,000 that will provide future cash flows of $8,000. The cash flows for the investment for the next 4 years are: $1,000, $2,000, $3,000 and $2,000. Assume a required rate of return of 10%. The NPV is $       (rounded to nearest dollar).

 

 

Place the following cash flows in the order that they would occur in a capital investment:

 

Capital budgeting is used to evaluate the purchase of:

 

The capital investment evaluation method that compares the present value of the net cash flows to the initial amount invested is the:

 

All of the following are outflows of cash over the life of an asset except:

 

The process of evaluating and planning for long-term investments is called        budgeting.

 

A capital investment evaluation method that measures the expected time for the present value of the net cash flows to equal the initial cost of the investment is the:

 

A company is considering several investment opportunities. The investments have been evaluated using payback period and break-even time. Only one project will be chosen and time value of money is important. The company should choose the project which the:

 

A company needs to choose between two investment opportunities. Project 1 has a cost of $500,000 and expected NPV of cash flows of $450,000. Project 2 has a cost of $800,000 and expected NPV of cash flows of $750,000. Using profitability index as the evaluation method, the company should choose:

 

When comparing investment opportunities with approximately the same cost and risk level, choose the investment with the: 

 

An investment's        period is the expected time period to recover the initial investment amount.

 

The rate of return that results in a net present value of $0 is the:

 

Consider the following projects: Project A: cost = $30,000, NPV of cash flows = $10,000; Project B: cost = $45,000, NPV of cash flows = $10,000; Project C: cost = $30,000, NPV of cash flows = $20,000; Project D: cost = $40,000, NPV of cash flows = $5,000. Using profitability index as the evaluation method, rank the projects in order of preference with the best choice on top.

 

A company has evaluated several projects using net present value. All projects are similar in amount invested and risk. Rank the projects in the order they should be accepted. 

 

A company is considering an investment opportunity with a cost of $5,000 that will provide future cash flows of $8,000. The cash flows for the investment for the next 4 years are: $1,000, $1,000, $2,000 and $4,000. Assume a required rate of return of 10%. The NPV is $       (rounded to nearest dollar).

 

It is appropriate to use the profitability index to evaluate investment decisions when: 

 

An investment that costs $5,000 will produce annual cash flows of $3,000 for 3 years. Using a required return of 8%, the investment will generate a NPV of $       (rounded to nearest dollar).

 

The capital budgeting evaluation method that considers only the recovery of the initial investment and ignores additional cash flows and the timing of the cash flows is the: 

 

An investment that costs $30,000 will produce annual cash flows of $10,000 for 4 years. Using a required return of 8%, the investment will generate (rounded to the nearest dollar) a:

 

The formula to calculate the profitability index is:

 

Which of the following are correct statements about the internal rate of return? (Check all that apply.)

 

An estimate of an asset's value to the company, calculated by discounting the future cash flows from the investment at the project's required rate of return and then subtracting the initial amount of the investment, is known as:

 

The hurdle rate is set at:

 

The following present value factors are provided for use in this problem.

Periods PV of $1 @ 8%. PVA of $1 @ 8%

1 0.9259 0.9259

2 0.857 1.7833

3 0.7938 2.5771

4 0.7350 3.3121

Cliff Company wants to purchase an asset for $40,000 but needs to earn a return of 8%. 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 (round to the nearest whole dollar)?

 

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 $14,500 and will produce cash flows as follows:

The present value factors of $1 each year at 15% are:

1 - 0.8696

2 - 0.7561

3 - 0.6575

The present value of an annuity of $1 for 3 years at 15% is 2.2832The net present value of Investment B is:

 

A new manufacturing machine is expected to cost $277,200, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual income of $35,000. Annual depreciation expense is $31,000 per year. Compute the payback period for the purchase.

 

Nestor Company is considering the purchase of an asset for $137,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the break-even time (BET) period for this investment. (Round to two decimal places.)

 

The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

 

A company is evaluating an investment which has an initial investment of $4,000. Annual net cash flows is expected to be $2,000 over the next three years. The company requires a 10% annual return. The present value of an annuity factor for 10% and 3 periods is 2.4869. The present value of $1 factor for 10% and 3 periods is 0.7513. The net present value is $_____

 

Which of the following is the approximate internal rate of return for an investment that costs $45,880 and has net cash flows of $4,000 for 20 years?

 

A predetermined, minimum acceptable rate of return is known as a:

 

A company is considering two investment projects. Both have an initial cost of $50,000. One project has even cash flows and the other uneven cash flows. Which evaluation method would be most appropriate?

 

Which of the following is the approximate internal rate of return for an investment that costs $12,680 and has net cash flows of $4,000 for 4 years?

 

A company is considering a capital investment of $45,000 in new equipment which will improve production and increase cash flows by $15,000 per year for 6 years. The company has a hurdle rate of 10%. The break-even time is approximately:

 

A company is considering two similar investment projects. One has an initial cost of $50,000 and the other an initial cost of $450,000. Which evaluation method would be most appropriate?

 

A company is evaluating an investment which has an initial investment of $4,000. Annual net cash flows are expected to be $2,000 over the next three years. The company requires a 10% annual return. The present value of $1 factor for 10% and 1 period is 0.9091; 2 periods is 0.8264; and for 3 periods is 0.7513. The break-even time is between: