ACC-350 Topic 6
The following details are provided by Volvox Foundry Company: Initial investment $5,000,000 Discount rate 15% Yearly cash flows 1 $1,256,000 2 $1,362,000 3 $2,420,000 4 $1,150,000 PV of $1: 13% 14% 15% 1 0.885 0.877 0.87 2 0.783 0.769 0.756 3 0.693 0.675 0.658 4 0.613 0.592 0.572 What is the NPV of the project?
$(627,448)
Peter Smith has just won the state lottery and has the following three payout options for after-tax prize money: 1. $50,000 per year at the end of each of the next six years 2. $300,000 (lump sum) now 3. $510,000 (lump sum) six years from now The annual discount rate is 9%. Compute the present value of the third option. (Round to nearest whole dollar.) Present value of $1: 8% 9% 10% 1 0.926 0.917 0.909 2 0.857 0.842 0.826 3 0.794 0.772 0.751 4 0.735 0.708 0.683 5 0.681 0.650 0.621 6 0.630 0.596 0.564 7 0.583 0.547 0.513
$303,960
Flint Systems is considering investing in production-management software that costs $640,000, has $67,000 residual value, and leads to cost savings of $1,850,000 per year over its five-year life. Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return.
$353,500
Lloyd's Moving Company is considering purchasing new equipment that costs $728,000. Its management estimates that the equipment will generate cash flows as follows: Year 1 $206,000 2 206,000 3 254,000 4 254,000 5 156,000 Present value of $1: 6% 7% 8% 9% 10% 1 0.943 0.935 0.926 0.917 0.909 2 0.890 0.873 0.857 0.842 0.826 3 0.840 0.816 0.794 0.772 0.751 4 0.792 0.763 0.735 0.708 0.683 5 0.747 0.713 0.681 0.650 0.621 The company's annual required rate of return is 9%. Using the factors in the table, calculate the present value of the cash flows. (Round all calculations to the nearest whole dollar.)
$839,674
A company is evaluating three possible investments. Each uses the straight-line method of depreciation. Following information is provided by the company: Project A Project B Project C Investment $228,000 $52,000 $228,000 Residual value 0 10,000 34,000 Net cash flows: Year 1 56,000 24,000 86,000 Year 2 56,000 15,000 56,000 Year 3 56,000 11,000 66,000 Year 4 56,000 8,000 26,000 Year 5 56,000 0 0 What is the accounting rate of return for Project B? (Round your answer to two decimal places.)
12.90%
The following details are provided by a manufacturing company: Product line Investment $1,190,000 Useful life 12 years Estimated annual net cash inflows for first year $400,000 Estimated annual net cash inflows for second year $390,000 Estimated annual net cash inflows for next ten years $490,000 Residual value $90,000 Depreciation method Straightminus−line Required rate of return 12% Calculate the payback period for the investment. (Round your answer to two decimal places.)
2.82 years
Paramount Carpets is considering purchasing new equipment costing $736,000. The company's management has estimated that the equipment will generate cash flows as follows: Year 1 $218,000 2 218,000 3 260,000 4 260,000 5 168,000 Considering the residual value is zero, calculate the payback period. (Round your answer to two decimal places.)
3.15 years
Landmark Prints is considering an investment in new equipment costing $520,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $128,000 the first year, $160,000 the second year, and $154,000 every year thereafter until the fifth year. What is the payback period for this investment? The residual value is zero. (Round your answer to two decimal places.)
3.51 years
Caliber Lawnmowers is considering the purchase of a new machine costing $804,000. The company's management is estimating that the new machine will generate additional cash flows of $180,000 a year for ten years and have a residual value of $62,000 at the end of ten years. What is the machine's payback period? (Round your answer to two decimal places.)
4.47 years
A company is evaluating three possible investments. Each uses the straight-line method of depreciation. The following information is provided by the company: Project A Project B Project C Investment $210,000 $54,000 $210,000 Residual value 0 30,000 28,000 Net cash flows: Year 1 70,000 34,000 82,000 Year 2 70,000 25,000 52,000 Year 3 70,000 21,000 62,000 Year 4 70,000 18,000 22,000 Year 5 70,000 0 0 What is the accounting rate of return for Project C? (Round your answer to two decimal places.)
7.56%
Which of the following best describes the term capital rationing? A. a method of determining the period within which the cash invested is recouped B. a method which shows the effect of an investment on a company's accrual-based income C. a process of controlling operating costs when adequate funds are not available D. a process of ranking and choosing among alternative capital investments based on the availability of funds
a process of ranking and choosing among alternative capital investments based on the availability of funds
Which of the following most accurately describes an annuity? A. a series of unequal cash payments made at equal time intervals B. an investment which produces increasing cash flows over time C. a stream of equal cash payments made at equal time intervals D. a term that does not apply to mortgage payable or bond payable
a stream of equal cash payments made at equal time intervals
Which of the following most accurately describes an annuity? A. a term that does not apply to mortgage payable or bond payable B. a stream of equal cash payments made at equal time intervals C. a series of unequal cash payments made at equal time intervals D. an investment which produces increasing cash flows over time
a stream of equal cash payments made at equal time intervals
Which of the following is a capital budgeting method used to screen potential investments? A. acid test ratio B. accounting rate of return .C. debt-to-equity ratio D. return on assets
accounting rate of return
Which of the following is a capital budgeting method used to screen potential investments? A. return on assets B. acid test ratio C. accounting rate of return .D. debt-to-equity ratio
accounting rate of return
Discounted cash flow methods typically ________. A. assume that cash flows will be reinvested when received .B. comply with the requirements of GAAP C. use simple interest calculations D. focus on the payback period
assume that cash flows will be reinvested when received
Candela Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of five years with no residual value. The cash flows are as shown below: Year 1 $120,000 2 235,000 3 140,000 4 98,000 The present value of $1: 10% 11% 12% 13% 14% 1 0.909 0.901 0.893 0.885 0.877 2 0.826 0.812 0.797 0.783 0.769 3 0.751 0.731 0.712 0.693 0.675 4 0.683 0.659 0.636 0.613 0.592 5 0.621 0.593 0.567 0.543 0.519 The IRR of the project would be ________.
between 12% and 13%
Capital rationing is a process adopted when a company has limited resources, and it must find ways to reduce operating expenses in all of its divisions and units.
false
Managers generally use payback as the sole method for deciding whether to invest in an asset.
false
The payback method is used only when the net cash inflows from a capital investment are the same for each period.
false
When the internal rate of return is the same as the required rate of return, the net present value of an investment will be positive.
false
Which of the following is the rate of return, based on discounted cash flows, a company can expect to earn by investing in a capital asset? A. bank interest rate B. internal rate of return C. return on investment D. accounting rate of return
internal rate of return
The last step in the capital budgeting process is control, which compares the actual results with the projected results. These comparisons are known as ________. A. net cash inflows B. variance analysis C. post-audits .D. rankings
post-audits
Zane Set Designs Company has received an award which entitles it to receive annual payments of $10,000 at the end of each year for the next ten years. Which of the following is used to calculate today's value of this award?
present value of an ordinary annuity of $1
The following information is provided by Pemberton Systems: Project A Project B Project C Project D Initial investment $422,000 $212,000 $562,000 $516,000 PV of cash inflows $588,000 $380,000 $810,000 $390,000 Payback period (years) 3.6 3.2 4.0 2.0 NPV of project $166,000 $168,000 $248,000 $126,000 Which project has the highest profitability index?
project b
The discount rate used in a net present value analysis is the ________. A. rate of inflation B. rate of interest charged for debt financing of an investment C. required rate of return or the hurdle rate D. rate of interest earned on a savings account
required rate of return or the hurdle rate
Which of the following best describes the profitability index? A. the ratio of present value of net cash inflows to initial investment This is the correct answer.B. the ratio of total cash inflows to initial investment C. an index of projects based on their net income D. an array of possible investment outcomes at different discount rates
the ratio of present value of net cash inflows to initial investment
A post-audit in capital budgeting is a comparison of the actual results of capital investments with the projected results.
true
Compound interest assumes that all interest earned will remain invested and earn additional interest at the same interest rate.
true
Many service, merchandising, and manufacturing firms use discounted cash flow methods to make capital investment decisions.
true
Net cash inflows from a capital investment arise from an increase in revenues, a decrease in expenses, or both.
true
The accounting rate of return is calculated by dividing the average annual operating income by the average amount invested.
true
The accounting rate of return shows the effect of the investment on the company's accrual-based income.
true
The only difference between the present value and future value of a lump sum is the amount of interest that is earned in the intervening time span.
true
