SB 7

Farm Central is considering the purchase of a larger combine to increase productivity. Combine A 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:

$210,000/$25,000 = 8.4 years

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:

$266,700 - $210,000) = $56,700 ÷ $210,000 = 0.27

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:

$30,000/$7,500 = 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:

$331,500/$60,000 = 5.525.

Packaging Place is considering a new investment, but is unsure of the intangible benefits it will provide. The net present value excluding the intangible benefit is negative $380,990. If the present value factor is 6.145, then the minimum intangible benefit per year needed to make the investment acceptable is:

$380,990/6.145 = $62,000

Given an interest rate of 8% compounded annually, $5,000 to be received four years from today is equal to:

$5,000 x 0.7350 (PV of a dollar for 4 years at 8%) = $3,675.

Calculate the present value of a 10-year, 6% loan with annual payments of $7,500 made at the end of each year.

$7,500 x 7.360 = $55,200

If the internal rate of return is:

- less than the hurdle rate the project should be rejected - greater than the hurdle rate the project is acceptable

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 $

-76,510

Select the capital budgeting approaches that use discounted cash flows.

-net present value method -internal rate of return method

Typical capital budgeting cash outflows include:

-working capital invested -initial equipment investments -installation costs

If $1,000 is invested at 7% interest, the total value of the investment at the end of one year will be $______.

1070

View Perfect is considering an investment in a new line of windows. The project is expected to last 10 years. If the factor of the internal rate of return is 5.889, the internal rate of return is:

11% Present Value of an Annuity of $1 in Arrears - the 10 period 5.889 factor is 11%

The present value of a 5-year, 8% loan with annual payments of $4,000 made at the end of each year is $_______.

15972

An investment of $1,500 at 6% compound interest will be worth $__ at the end of 4 years.

1894

Sandy's Soda Co. is planning an investment in new cooling equipment that would cost $56,000. The new equipment would save on operating costs over 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:

2.6 years

An investment of $2,000 at 7% compound interest will be worth $__ at the end of 3 years.

2450

Building Blocks Co. is considering the purchase of a new specialty saw. The saw has a useful life of 10 years, but the salvage value is unknown. The net present value excluding the salvage value of the saw is negative $13,950. If the present value factor is 0.558, then the salvage value must be $__ in order to make this investment acceptable.

25000

Pizza Pizazz is considering purchasing a new pizza oven that will speed up cooking time and save costs. The oven 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:

3.2 years

Poppy's Gumball Co. is planning to invest in a new marketing campaign that would require an initial investment of $85,000. The project is expected to create incremental annual income of $27,200. The simple rate of return on the project is:

32%

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. Ignoring depreciation, the simple rate of return of the equipment is __%.

50

If $500 is invested at 9% interest, the total value of the investment at the end of one year will be $

545

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

6

State Bank is implementing a new marketing campaign that requires an initial investment of $35,000. If the project profitability index is 0.2, the net present value of the campaign's future cash flows is $

7000

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?

80,520 ($12,000 x 6.710) + $2,315 ($5,000 x .463) = $82,835 - $50,000 = $32,835

The factor of the internal rate of return is 5.033 for a project lasting 7 years. The internal rate of return is __%.

9

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

Acceptable; unacceptable

What assumption underlies net present value analysis?

All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate.

True or false: Preference decisions relate to whether a proposed project is acceptable based on preset criteria.

False

True or false: When a capital investment decision is being made between two or more alternatives, the project with the shortest payback period is always the most desirable investment.

False: The project with the shortest payback period will earn its investment back more quickly, but not necessarily the most desirable project between the alternatives.

When an amount is deposited today and earning interest compounded annually, the amount it is worth in 5 years is called the __ value.

Future

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?

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

When using net present value to compare projects, the total cost approach:

Is the most flexible method available to compare projects. Includes all cash inflows and outflows under each alternative.

The present value is worth _____ than the future value.

Less

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 0.16, and Option B has a project profitability index of 0.13. The best choice for Stephan Photography would be:

Option A

You will receive $110 in 1 year if you invest $100 today. The $100 represents the __ __ of the $110.

Present value

The Copy Center is considering a project that would increase cash receipts by $50,000 annually. The initial cost of the project is $175,000. Working capital of $40,000 which would be released at the end of the project is required. The project has an estimated 10 year life. If the project is added, operating expense will increase by $18,000 annually. Repairs costing $7,000 will be done in year 5. Using a discount rate of 8%, and the tables in the appendix, what is the net present value of this project?

Present value of net cash inflows: $214,720 [($50,000 - $18,000) x 6.710] + $18,520 [($40,000 x .463)] - Present value of net cash outflows: $(215,000) [Cost + Working Capital] - $(4,767) [Year 5 Repair ($7,000 x .681)] = $13,473

The cost of capital is the:

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

Which of the following statements are true?

The more frequently interest is compounded, the faster the balance grows. Compound interest means that interest is paid on interest.

Which of the following statements is false?

The net present value method assumes that cash flows are not reinvested.

True or false: The payback method is useful in industries where products become obsolete very quickly.

True

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

True or false: When calculating the payback period, the depreciation on the investment is excluded in the calculation of net cash flow.

True

Which of the following statements are true?

When using the internal rate of return method, the cost of capital is used as the hurdle rate. The cost of capital may be used to screen out undesirable projects. When the net present value method is used, the discount rate equals the hurdle rate.

The simple rate of return is also referred to as the __ or __ rate of return.

accounting, unadjusted

A postaudit is a valuable process because:

actual values can be used to determine if the project is performing as expected

When a project with a negative NPV has significant intangible benefits, the:

annual intangible benefit necessary to make the investment worthwhile should be calculated

A series of equal cash flows is a(n) _____.

annuity

An investment that pays the investor $1,000 per year for the next 10 years is an example of a(n) .

annuity

When making a capital budgeting decision, it is most useful to calculate the payback period:

as part of the screening process if a company is "cash poor"

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

be reduced by

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

To screen out undesirable investments, ________ use(s) the cost of capital.

both the net present value and internal rate of return methods

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

Future cash flows expected from investment projects:

can be difficult to estimate

Another term for the minimum required rate of return is the cost of

capital

How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called ______.

capital budgeting

How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called:

capital budgeting

When discussing capital investments, the term out-of-pocket costs refers to:

cash outlays for salaries, advertising, and other operating expenses

A postaudit involves:

checking whether expected results are actually realized

An investor deposits $100.00 and earns $6.00 of interest in the first year and $6.36 of interest in the second year. This means the investment is earning 6% __ interest.

compound

When computing the payback period for a new piece of equipment, the salvage value of the equipment being replaced is:

deducted from the cost of the new equipment

Net present value is the:

difference between the present value of a project's cash inflows and the present value of the project's cash outflows

The interest factor used to find the present value is called the __ rate.

discount

Finding the present value of a future cash flow is called .

discounting

Suppose that a project's net present value is negative, but the project would provide intangible benefits that have not yet been estimated. To estimate the annual value of intangible benefits needed to accept the project, _____ the negative net present value excluding intangible benefits by the ___________________.

divide, present value factor for an annuity

The payback method:

does not consider the time value of money is not a true measure of investment profitability ignores all cash flows that occur after the payback period.

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

earlier

Conducting a postaudit:

flags any manager's attempts to inflate benefits or downplay costs in a project proposal provides an opportunity to reinforce and possibly expand successful projects provides an opportunity to cut losses on floundering projects

The simple rate of return:

ignores the time value of money fluctuates from year to year along with fluctuations in revenue and expense

Investment required/Annual net cash inflow is the formula to find the factor that enables calculation of the:

internal rate of return

In an equipment capital budgeting decision, recovering the original investment means that the:

investment has generated enough cash inflows to completely cover the cost of the equipment

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

investment required/annual net cash inflow

When the annual net cash inflow is the same each year, the payback period equals the ___ required divided by the annual net cash ___

investment; inflow

Spending the money on opening a new location, purchasing new equipment, implementing new programs, expanding to new product lines, and conducting research are all examples of:

investments

It is important to know the present value of an investment because a dollar:

is worth more today than it will be worth a year from today

When the outcomes of the net present value method and the internal rate of return method do not agree,:

it is best to rely on the net present value method

When a capital budgeting decision does not involve any revenues, the most desirable alternative is the one with the:

least total cost from a present value perspective

A capital investment project's payback period is the:

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

The Eye Clinic of Dr. Christensen is investing in some equipment to perform corrective eye surgery. It is expected that the equipment purchase will 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:

less than the internal rate of return of the corrective eye surgery equipment

When analyzing an investment project, uncertain future cash flows:

may be estimated using computer simulations

The required rate of return is the ______ rate of return a project must yield to be acceptable.

minimum

A dollar today is ______ a dollar received a year from today.

more valuable than

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

net operating income, cash flows

Two capital budgeting approaches that use discounted cash flows are the __ __ value method and the __ ___ of return method.

net present; internal rate

Working capital:

often increases when a company takes on a new project

When making a preference decision, comparing the net present value of one project to the net present value of another project can:

only be done if the initial investments are equal

Actual cash outlays for operating expenses are:

out of pocket costs

Investment required/Annual net cash inflow is the formula for the:

payback period

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 ___.

payback period

Capital budgeting methods that focus on cash flows rather than incremental operating income are:

payback, net present value, internal rate of return

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

positive or zero

One of the two broad categories of capital budgeting decisions, a __ decision, relates to selecting from among several acceptable alternatives.

preference

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

present

Preference decisions are also called _______ decisions.

rationing ranking

A screening decision:

relates to whether a proposed project is acceptable

The internal rate of return is compared against the minimum __ rate of return when analyzing the acceptability of an investment project.

required

When using the simple rate of return, the initial investment should be reduced by the __ value of old equipment.

salvage

Typical capital budgeting cash inflows include:

salvage value working capital released cost reductions

One of the two broad categories of capital budgeting decisions, a __ decision, relates to whether a proposed project is acceptable based on a preset criterion.

screening

The cost of capital serves as a ______ tool.

screening

The two broad categories into which capital budgeting decisions fall are __ decisions and __ decisions

screening and preference

The two broad categories into which capital budgeting decisions fall are ______ and ______ decisions.

screening and preference

The internal rate of return:

the discount rate that makes the NPV of an investment zero

An investment requires committing funds today with:

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 required rate of return is:

the minimum rate of return a project must yield to be acceptable

All cash flows are included, and a net present value is computed for each alternative when using the __-__ approach.

total cost

Working capital is:

treated as a cash outflow when required at the beginning of a project. treated as a cash inflow when released at the end of a project.

The net present value of a project is:

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 for a project.

Current assets minus current liabilities is called .

working capital

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

zero