ACC-350 Topic 6

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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


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