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Exam 9: Capital Budgeting Decisions

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Question 41

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An annuity is

A) the time period in which the cash flows paid out for an investment will be recovered.
B) a series of equal payments.
C) necessary in order to calculate the net present value.
D) used to calculate depreciation in order to provide a tax shield.

E) All of the above
F) A) and B)

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Question 42

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Which of the following pairs of techniques use the time value of money concept?

A) Payback period method and the internal rate of return method
B) Internal rate of return method and the accounting rate of return method
C) Accounting rate of return method and the payback period method
D) Internal rate of return method and the net present value method

E) None of the above
F) C) and D)

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Question 43

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Present value techniques are developed to equate future dollars to current dollars.

Event Supplies is evaluating a renovation of its retail store.The cost of the renovation is estimated to be $290,000 and will be depreciated over 8 years using the straight-line method.The renovation is expected to generate additional annual revenue of $86,500, annual operating cash flows are expected to increase by $50,775, and net income is expected to increase by $14,525 per year.The company's income tax rate is 30% and its minimum required rate of return is 9%.To which of the following amounts is the internal rate of return of the renovation closest?

Which one of the following is a soft benefit?

If the internal rate of return is used to calculate the net present value of a project, the net present value will be zero.

If the required rate of return is greater than the internal rate of return of a potential investment, the company should deem the investment acceptable.

Which of the following statements about the payback period method is true?

The net present value method equates cash inflows to revenues, and cash outflows to expenses, as if occurring in the same accounting period.

In net present value analysis, the purchase of equipment today results in a cash outflow that is not discounted.

Maude Company's required rate of return on capital budgeting projects is 9%.The company is considering an investment that would yield a cash flow of $12,000 per year for five years.Ignoring taxes, what is the most that the company will be willing to invest in this project?

Why does depreciation have an indirect effect on cash flows?

In evaluating an investment opportunity, a company must know how much cash it receives from or pays for an investment and the timing of the cash flows because receipts and payments that occur in the future are worth more than those that occur earlier.

Projects with a negative net present value will always have a(n)

What does the cost of capital represent?

Objective Products' required rate of return on capital budgeting projects is 9%.The company is considering an investment that would yield net annual operating cash flows of $30,000 for 3 years.What is the maximum amount that the company will be willing to invest in this project?

The following data pertain to an investment proposal: $\begin{array} { l r } \text { Required equipment investment } & \$ 124,000 \\\text { Annual cash savings } & \$ 52,000 \\\text { Projected life of investment } & 4 \text { years } \\\text { Projected salvage value } & \$ 0 \\\text { Required rate of return } & 8 \%\end{array}$ The income tax rate is 28%.To which amount is the internal rate of return on this investment closest?

The cash inflows expected during a project's life are equal in amount.In determining the internal rate of return, how is the present value factor calculated?

Since present value analysis is concerned with cash flows, which of the following is not true?

The more risky a potential investment is, the lower the company's required rate of return will be.