Chapter 12

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%, what is the net present value of this equipment? Multiple choice question.

$32,835

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 Blank______. Multiple choice question.

1.27

Joe's Moving Co. is considering purchasing a new truck that costs $24,000 and will last 6 years. The old truck will be traded in and has a salvage value of $6,000. The annual net cash inflow for Joe's Moving Co. is $6,000. The payback period for the new truck is ______ years.

3

Sandy's Soda Co. is planning to purchase new equipment that costs $56,000 and will save on operating costs for the next 5 years as follows: $21,500 in year 1; $23,100 in year 2; $19,000 in year 3; $13,900 in year 4; and $15,200 in year 5. The payback period for the cooling equipment is ______ years.

3

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 ______. Multiple choice question.

3.2 years

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 on the equipment is ____%. (Enter your answer as a whole number.)

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 Blank______.

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 Blank______.

4

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 Blank______. Multiple choice question.

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. (Enter your answer as a whole number.)

6

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 Blank______ years.

8.4

Why must future cash flows relating to a capital investment be discounted when calculating the net present value of the investment?

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

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 $____. (Enter your answer as a whole number.)

Blank 1: 42,000 or 42000

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 $____. (Base your answer on the tables in the appendix).

Blank 1: 76510

Another term for the minimum required rate of return is the cost of ____. (Enter only one word per blank.)

Blank 1: capital

When the annual net cash inflow is the same each year, the payback period equals the ____ required divided by the annual net cash ____. (Enter only one word per blank.)

Blank 1: investment Blank 2: inflow or flow

Two capital budgeting approaches that use discounted cash flows are the ____ ____ value method and the ____ ____ of return method. (Enter only one word per blank.)

Blank 1: net Blank 2: present Blank 3: internal Blank 4: rate

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.

Blank 1: payback

Which of the following are true regarding the time value of money?

By collecting a project's return quickly, the investor has the opportunity to re-invest that money to earn even more. Projects that provide earlier returns are preferable to those that promise later returns.

Which of the following is NOT a typical capital budgeting cash outflow?

Cost reductions

True or false: When a conflict between capital budgeting methods exists, the most reliable method to use for making preference decisions is the internal rate of return.

False

Select the capital budgeting approaches that use discounted cash flows.

Internal rate of return method Net present value method

Which of the following capital budgeting decision tools focuses on net operating income rather than cash flows?

Simple rate of return

Which of the following statements are true?

The net present value method automatically provides for return of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

True or false: To verify the internal rate of return (IRR) compute the project's net present value using the IRR as the discount rate to determine if it is zero. True false question.

True

The cost of capital is the Blank______.

average rate of return a company must pay its long-term creditors and shareholders for the use of their funds

When computing the simple rate of return, the annual incremental net operating income in the numerator should Blank______ the investment's depreciation charges. Multiple choice question.

be reduced by

When the cash flows associated with an investment project change from year to year, the payback period must be calculated Blank______. Multiple choice question.

by tracking the unrecovered investment year by year

Because of the time value of money, projects that promise ______ returns are preferable to those that promise the opposite.

earlier

True or false: When a conflict between capital budgeting methods exists, the most reliable method to use for making preference decisions is the internal rate of return. True false question.

false

Typical capital budgeting cash outflows include Blank______.

initial equipment investments installation costs working capital invested

Investment required ÷ Annual net cash inflow is the formula to find the factor that needed to calculate the Blank______. Multiple choice question.

internal rate of return

When net cash inflow is the same every year, the equation used to calculate the factor of the internal rate of return is Blank______.

investment required ÷ annual net cash inflow

The internal rate of return Blank______.

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

A capital investment project's payback period is the Blank______.

length of time it takes for the project to recover its initial cost from the net cash inflows generated

The simple rate of return method focuses on ______, rather than ______.

net operating income, cash flows

When a conflict between capital budgeting methods exists, the most reliable method to use for making preference decisions is ______.

net present value

The capital budgeting methods that focus on cash flows rather than incremental operating income are Blank______.

payback net present value internal rate of return

Investment required ÷ Annual net cash inflow is the formula for the Blank______. Multiple choice question.

payback period

If the original investment in a capital project has been recovered, the net present value will be ______.

positive or zero

The term discounting cash flows refers to the process of calculating the ______ value of those cash flows. (Enter only one word per blank.)

present

When computing the simple rate of return, the initial investment should be reduced by any ____ value realized from the sale of the old equipment. (Enter only one word per blank.)

salvage

The capital budgeting method that focus on incremental operating income rather than cash flows is Blank______. Multiple choice question.

simple rate of return

The net present value of a project is Blank______.

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

The internal rate of return is Blank______.

the rate of return of an investment project over its useful life

Typical capital budgeting cash inflows DO NOT include Blank______.

working capital invested

Typical capital budgeting cash inflows DO NOT include Blank______. Multiple choice question.

working capital invested

Typical capital budgeting cash inflows include Blank______.

working capital released salvage value cost reductions

The internal rate of return is the discount rate that results in a net present value of ____ for the investment. (Enter only one word per blank.)

zero