Managerial 21.3

1) The method that measures the time it will take to recoup, in the form of future cash inflows, the total dollars invested in a project is called: A) the accrued accounting rate-of-return method B) payback method C) internal rate-of-return method D) the book-value method

B

3) The payback method of capital budgeting approach to the investment decision highlights: A) cash flow over the life of the investment B) the liquidity of the investment C) the tax savings of the depreciation amounts D) having as lengthy payback time as possible

B

4) Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $72,096. The annual cost savings if the new machine is acquired will be $20,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be zero. Upper Darby Park is assuming no tax consequences. Upper Darby Park has a 10% required rate of return. What is the payback period on this investment? A) 3 years B) 3.6 years C) 4.2 years D) 5 years

B

6) Springtime Flower Company provides flowers and other nursery products for decorative purposes in medium to large sized restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van has a value of $123,750 with a seven-year life. The expected additional cash inflows are $27,500 per year. What is the payback period on this investment? A) 3 years B) 4.5 years C) 6 years D) NA - project not feasible

B

5) Crystal Manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of five years and the new equipment has a value of $231,000 with a five-year life. The expected additional cash inflows are $70,000 per year. What is the payback period on this investment? A) 2.5 years B) 3 years C) 3.3 years D) 5 years

C

2) The net initial investment for a piece of construction equipment is $2,000,000. Annual cash inflows are expected to increase by $400,000 per year. The equipment has an 8-year useful life. What is the payback period? A) 8 years B) 7 years C) 6 years D) 5 years

D