Chapter 7 - Capital Budgeting

$10,000 cash savings = Annual depreciation deduction * tax rate = 50000 * 20%

Wallis Company has an annual depreciation deduction of $50,000. At a tax rate of 20%, what is the impact of the annual depreciation deduction?

less than the minimum required rate of return

A negative net present value indicates that the project's return is ________.

$12,688 = Present Value of annual additional cash flow=Annual cash flow x present value factor for an annuity at 8% for 10 periods = 85,000 = Annual Cashflow x 6.71 = 85,000 / 6.71 = 12,688

A new investment project currently under consideration has a negative net present value of $85,000. The project has a life of 10 years and the minimum required rate of return is 8%. The present value factor for an annuity at 8% for 10 periods is 6.71. What is the amount of annual additional cash flow that is required to make this investment attractive?

17.5% = Net annual income / Initial investment = [250,000 - 100,000 - (400,000/5)] / 400,000 = 70,000/400,000

Addison Corporation is considering the purchase of equipment that would increase sales revenues by $250,000 per year and cash operating expenses by $100,000 per year. The equipment would cost $400,000 and have a 5-year life with no salvage value. The simple rate of return on the investment is closest to ________.

future value

An investment of $10,000 today is estimated to return $11,500 a year from now. The $11,500 is called the ________ of the investment.

5 years = PBP = investment required/ annual net cash inflow = 100,000 / 20,000 = 5

An investment proposal with an initial investment of $100,000 generates annual net cash inflow of $20,000 for a period of 10 years. The project has a net present value of $10,000. What is this investment proposal's payback period?

Least-cost decisions

In situations where no revenues are involved, which of the following is the most desirable alternative?

$50,000 = Present Value of cash inflows - initial investment - additional working capital = 275,000 - 200,000 - 25,000 = 50,000

Project Marvel is a five-year project. The project has a total cash inflow of $350,000. The present value of such inflows is $275,000. The project requires an initial investment of $200,000 and additional working capital of $25,000. What is the net present value of the project?

$70,000

Robot, Inc. is expecting a taxable cash flow of $100,000. If Robot has a tax rate of 30%, the after-tax benefit of this cash flow is ________.

compound interest

The phenomenon of earning interest on both the interest and the amount invested is known as ________.

accounting rate of return

The simple rate of return is also called all of the following except ________. a. annual rate of returnun b. adjusted rate of return c. accounting rate of return

more desirable

When using the internal rate of return method to rank competing investment projects, an investment that has an internal rate of return of 20% is ________ than an investment that has an internal rate of return of 17%.

Profitability Index

Which method should be used when ranking competing projects with different initial investments?

Payback Period

Which of the following ignores the time value of money? a. Net Present Value b. Internal Rate of Return c. Payback Period d. Profitability Index

Salvage value affects depreciation calculations.

Which of the following is NOT a taxable income assumption when using income taxes in net present value analysis? a. Taxable income equals net income for financial reporting purposes. b. Straight-line depreciation is used. c. Salvage value affects depreciation calculations. d. Tax rates are flat.

Screening Decision Making

Which of the following is NOT another term used to describe preference decision making? Rationing decisions Screening decisions Ranking decisions

Selection decisions

Which of the following is NOT one of the two broad categories of capital budgeting decisions? a. Selection decisions b. Screening decisions c. Preference decisions

The simple rate of return method uses accounting income.

Which of the following is a limitation of the simple rate of return? a. The simple rate of return method uses accounting income. b. The simple rate of return method uses cash flows. c. The simple rate of return method considers the time value of money.

Internal Rate of Return

Which of the following is the term used to describe the discount rate at which the present value of a project's cash inflows will equal the present value of its cash outflows?

Uses estimated data.

Which of the following statements about a postaudit is not true? a. Involves checking whether or not expected results are actually realized. b. Uses estimated data. c. Reinforces successful projects.

4 years

Year 1 Investment $14,000 Cash Inflow $6,000 Year 2 Cash Inflow $4,000 Year 3 Investment $4,000 Cash Inflow $0 Year 4 Cash Inflow $8,000 Year 5 Cash Inflow $9,000 Year6 Cash Inflow $12,000 Year 7 Cash Inflow $2,000 Given here are the cash flows of an investment under consideration. What is the payback period of this investment?

$102,775

You are expecting a series of annual cash flows of $25,000 for six years. What is the present value of this annuity if the discount rate is 12%?