ACCT202 CH 14 SB

Pam's Pet Palace is considering an investment in dog grooming equipment that would increase cash receipts by $12,000 annually. The initial cost of the equipment is $50,000. The equipment has an estimated 10 year life and will have a $5,000 salvage value. Using a discount rate of 8%, and the tables in the appendix, what is the net present value of this equipment? - $30,520 - $32,835 - $82,835 - $35,520

$32,835

Pam's Pet Palace is considering an investment in dog grooming equipment that would increase cash receipts by $12,000 annually. The initial cost of the equipment is $50,000. The equipment has an estimated 10 year life and will have a $5,000 salvage value. Using a discount rate of 8%, and the tables in the appendix, what is the net present value of this equipment? - $30,520 - $35,520 - $32,835 - $82,835

$32,835

State Bank is implementing a new marketing campaign that requires an initial investment of $35,000. If the project profitability index is 1.2, the present value of the campaign's future cash flows is $___________.

$42,000

A manager with a current ROI of 22% has been offered a project with a positive net present value and a simple rate of return of 18%. Which of the following statements are true? - The company will want the manager to reject the project. - If the manager is evaluate based on ROI they will probably reject the project. - If the manager is evaluated based on ROI they will probably accept the project. - The company will want the manager to accept the project.

- If the manager is evaluated based on ROI they will probably reject the project. - The company will want the manager to accept the project.

Select the capital budgeting approaches that use discounted cash flows. - Simple rate of return method - Net present value method - Payback method - Internal rate of return method

- Net present value method - Internal rate of return method

Typical capital budgeting cash outflows include _________. - salvage value of old equipment - cost reductions - installation costs - initial equipment investments - working capital invested

- installation costs - initial equipment investments - working capital invested

Typical capital budgeting cash inflows include __________. - salvage value - cost reductions - installation costs - working capital released

- salvage value - cost reductions - working capital released

The net present value of a project is ____________. - used in determining whether or not a project is an acceptable capital investment - the cost of an investment less the present value of the project's salvage value - the difference between the present value of cash inflows and present value of cash outflows - the present value of the project's projected annual tax savings

- used in determining whether or not a project is an acceptable capital investment - the difference between the present value of cash inflows and present value of cash outflows

A new machine requires an investment of $630,000 and will generate $100,000 in cash inflows for 7 years, at which time the salvage value of the machine will be $130,000. Using a discount rate of 10%, the net present value of the machine is rounded to the nearest dollar is $____________.

-76,510

The internal rate of return is the discount rate that results in a net present value of _________ for the investment.

0

Calderon Kitchen Supplies is planning to invest $210,000 in a new product. If the present value of the cash inflows is $266,700, the project profitability index is __________. - 3.70 - 0.787 - 0.27 - 1.27

1.27 ($266,700 / $210,000)

Joe's Moving Co. is considering purchasing a new truck that costs $24,000 and will last 6 years. It should increase net operating income by $4,000 per year and will be depreciated using the straight-line method. The payback period for the new truck is ___________ years.

3 years

Pizza Pizazz is considering purchasing a new pizza oven that costs $180,000 and will last 5 years. It should increase net operating income by $14,000 year and will be depreciated using the straight-line method. The old pizza oven will be traded in and has a salvage value of $20,000. The payback period for the new oven is _________ years. - 3.48 - 11.4 - 3.2 - 3.6

3.2

Studio Films is considering the purchase of some new film equipment that costs $150,000. It has a 5 year useful life with no salvage value. The new equipment is expected to increase revenues by $115,000 annually. Annual incremental cash operating expenses are expected to be $40,000. The simple rate of return of the equipment is _________%.

30%

Poppy's Gumball Co. is planning to invest in a new marketing campaign that requires an initial investment of $85,000 and is expected to provide incremental annual income of $27,200. The simple rate of return on the project is ________. - 212.50% - 47% - 31.20$ - 32%

32%

Bo's Baseball Equipment is planning to invest in some new equipment that has a purchase price of $30,000. The new equipment will save Bo $7,500 in operating expenses annually. The factor of the internal rate of return for this project is ___________. - 0.75 - 0.25 - 22.5 - 4

4 ($30,000 / $7,500)

Sander Technologies is considering a research project. If successful, the project is expected to lead to sales totaling $60,000 annually. The initial cost of the research is expected to be $331,500. The factor of the internal rate of return is _________. - 1.989 - 0.181 - 5.525

5.525

Spicer Dentistry is considering the purchase of a new x-ray machine that costs $2,400 and has a useful life of 10 years. It is expected to reduce operating costs by $400 per year. The payback period for the x-ray machine is ________ years.

6 years (2,400/400)

Farm Central is considering the purchase of a larger combine that costs $210,000 and has a useful life of 10 years. The combine will reduce labor costs by $25,000 per year. The payback period of the combine is ___________ years. - 8.4 - 10 - 1.2 - 1.6

8.4 ($210,000 / $25,000)

Why must future cash flows relating to a capital investment be discounted when calculating the net present value of the investment? - Future cash flows need not be discounted when calculating net present value. - Because of the time value of money, future cash flows must be discounted to be comparable to other cash flows. - It is easier to discount future cash flows when calculating net present value, even though it makes cash flows less comparable.

Because of the time value of money, future cash flows must be discounted to be comparable to other cash flows.

Which of the following is NOT a typical capital budgeting cash outflow? - Installation costs - Cost reductions - Initial equipment investment - Working capital investment

Cost reductions

Stephan Photography has an 18% required rate of return and is analyzing competing investments in new camera equipment. Option A has a project profitability index of 1.16, and Option B has a project profitability index of 1.13. The best choice for Stephan Photography is _________.

Option A

Acceptable project with a net present value of zero

The project promises a return equal to the required rate of return

Acceptable project with a positive net present value

The project promises a return greater than the required rate of return

Unacceptable project with a negative net present value

The project promises a return less than the required rate of return

Choose whether each of the following would be acceptable or unacceptable: A project with a positive net present value is __________ and a project with a negative net present value is __________.

acceptable; unacceptable

When computing the simple rate of return, the annual incremental net operating income in the numerator should ________ the investment's depreciation charges. - be increased by - be reduced by - not be changed by

be reduced by

When the cash flows associated with an investment project change from year to year, the payback period must be calculated __________. - by tracking the unrecovered investment year by year - using the average annual net cash inflow - using statistical computer software - using the equation investment required / annual net cash inflows

by the tracking the unrecovered investment year by year

The net present value of a project is the ____________. - actual return on investment - expected net operating income - difference between the present value of cash inflows and the present value of cash out-flows - sum of the present value of cash flows and the present value of cash outflows

difference between the present value of cash inflows and the present value of cash outflows

The rule used when comparing competing investments is the ______ the project profitability index, the more desirable the project. - higher - lower

higher

Spending the money on opening a new location, purchasing new equipment, implementing new programs, expending to new product lines, and conducting research are all examples of ___________. - inflows - investments - returns - revenues

investments

The internal rate of return ________. - is also known as the simple rate of return method - is the rate of return required for all investments made by a company - is the discount rate than makes NPV equal to zero for a project - does not consider the time value of money

is the discount rate that makes NPV equal zero for a project

An Eye Clinic invested in some equipment to perform corrective eye surgery that is expected to generate an internal rate of return of 24%. This equipment was chosen over equipment to perform cataract eye surgery. Thus, the internal rate of return of the cataract eye surgery equipment must have been _________. - greater than 24% - less than 24% - 0%

less than 24%

The concept of the time value of money is based on the notion that a dollar today is worth (more/less) _________ than a dollar a year from now.

more

One dollar today is worth __________ a dollar a year from now. - less than - more than - the same as

more than

Two capital budgeting approaches that use discounted cash flows are the ___________ _________ value method and the ___________ __________ of return method.

net present; internal rate

Instead of focusing on a project's profitability, the _________ period focuses on the time it takes for an investment to pay for itself.

payback

Investment required / Annual net cash inflow is the formula for the ________ period.

payback

The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the ______________ period.

payback

Investment required / Annual net cash inflow is the formula for the _________. - discount rate - payback period - simple rate of return - net present value

payback period

The term "discounting cash flows" refers to the process of calculating the ________ value of those cash flows.

present

A manager with a current ROI of 20% has been offered a project with a positive net present value and a simple rate of return of 17%. If the manager is evaluated based on ROI, the manager will probably ________ the project. - reject - accept

reject

When computing the simple rate of return, the initial investment should be reduced by any _______ value realized from the sale of the old equipment.

salvage

An investment requires committing funds today with _________. - no expectation of earning a return on those funds in the future - the expectation of earning a return on those funds in the future

the expectation of earning a return on those funds in the future

When using the internal rate of return method to rank competing investment projects __________. - the higher the internal rate of return, the more desirable the project - the higher the internal rate of return, the less desirable the project - any internal rate of return greater than zero is preferable - any internal rate of return greater than the required return in preferable

the higher the internal rate of return, the more desirable the project

Typical capital budgeting cash inflows DO NOT include ___________. - cost reductions - salvage value - working capital invested - increased revenues

working capital invested