Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 11 Capital Budgeting Decisions Answer Key
True / False Questions
1.
In the payback method, depreciation is deducted from net operating income when
computing the annual net cash flow.
2.
In calculating the payback period where new equipment is replacing old equipment, any
salvage value to be received on disposal of the old equipment should be added to the cost
of the new equipment.
3.
One criticism of the payback method is that it ignores cash flows that occur after the
payback point has been reached.
4.
The payback method of making capital budgeting decisions does not give full
consideration to the time value of money.
5.
The basic premise of the payback method is that the more quickly the cost of an
investment is recovered the more desirable is the investment.
6.
When considering a number of investment projects, the project that has the shortest
payback period does not necessarily have the highest net present value.
7.
When discounted cash flow methods of capital budgeting are used, the working capital
required for a project is ordinarily counted as a cash inflow at the beginning of the project
and as a cash outflow at the end of the project.
8.
Discounted cash flow techniques do not take into account recovery of initial investment.
9.
The required rate of return is the minimum rate of return that an investment project must
yield to the acceptable.
10.
For capital budgeting decisions, the simple rate of return method is superior to the net
present value method.
11.
In preference decision situations, a project with a lower net present value may be
preferable to a project with a higher net present value.
12.
Preference decisions follow screening decisions and seek to rank investment proposals in
order of their desirability.
13.
The project profitability index is used to compare the net present values of two
investments that require different amounts of investment funds.
14.
The project profitability index is computed by dividing the present value of the cash
inflows of the project by present value of the cash outflows of the project.
15.
An investment project with a project profitability index of less than one should ordinarily
be rejected.
16.
If a project does not have constant incremental revenues and expenses over its useful life,
the simple rate of return will fluctuate from year to year.
17.
The simple rate of return method does not take into account the time value of money.
Multiple Choice Questions
18.
Which of the following will have the largest dollar effect on the net present value of a 10
year investment project?
19.
If taxes are ignored, all of the following items are included in a discounted cash flow
analysis except:
20.
In capital budgeting computations, discounted cash flow methods:
21.
The best capital budgeting method for ranking investment projects of different dollar
amounts is the:
22.
The investment required for the project profitability index should:
23.
Harrison Corporation is studying a project that would have an eight-year life and would
require a $300,000 investment in equipment which has no salvage value. The project
would provide net operating income each year as follows for the life of the project:
Sales
$500,000
Less cash variable
expenses
200,000
Contribution margin
300,000
Less fixed expenses:
Fixed cash expenses
$150,000
Depreciation expenses
37,500
187,500
Net operating income
$112,500
The company's required rate of return is 10%. The payback period for this project is
closest to:
24.
Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was
purchased for $28,000 and will have a 6-year useful life and a $4,000 salvage value.
Delivering prescriptions (which the pharmacy has never done before) should increase
gross revenues by at least $32,000 per year. The cost of these prescriptions to the
pharmacy will be about $25,000 per year. The pharmacy depreciates all assets using the
straight-line method. The payback period for the auto is closest to:
25.
A company with $600,000 in operating assets is considering the purchase of a machine
that costs $72,000 and which is expected to reduce operating costs by $18,000 each year.
These reductions in cost occur evenly throughout the year. The payback period for this
machine in years is closest to:
26.
The Zinger Corporation is considering an investment that has the following data:
Year
1
Year
2
Year
3
Year
4
Year
5
Investment
$8,000
$3,000
Cash
inflow
$2,000
$2,000
$5,000
$4,000
$4,000
Cash inflows occur evenly throughout the year. The payback period for this investment is:
27.
The management of Helberg Corporation is considering a project that would require an
investment of $203,000 and would last for 6 years. The annual net operating income from
the project would be $103,000, which includes depreciation of $30,000. The scrap value of
the project's assets at the end of the project would be $23,000. The cash inflows occur
evenly throughout the year. The payback period of the project is closest to:
28.
Neighbors Corporation is considering a project that would require an investment of
$279,000 and would last for 8 years. The incremental annual revenues and expenses
generated by the project during those 8 years would be as follows:
Sales
$224,000
Variable expenses
22,000
Contribution margin
202,000
Fixed expenses:
Salaries
25,000
Rents
38,000
Depreciation
33,000
Total fixed expenses
96,000
Net operating income
$106,000
The scrap value of the project's assets at the end of the project would be $15,000. The
cash inflows occur evenly throughout the year. The payback period of the project is
closest to:
29.
Jason Corporation has invested in a machine that cost $80,000, that has a useful life of
eight years, and that has no salvage value at the end of its useful life. The machine is
being depreciated by the straight-line method, based on its useful life. It will have a
payback period of five years. Given these data, the simple rate of return on the machine is
closest to:
30.
Fimbrez Corporation has provided the following data concerning an investment project
that it is considering:
Initial investment
$360,000
Annual cash flow
$118,000
per
year
Expected life of the
project
4
years
Discount rate
12%
The net present value of the project is closest to:
31.
Beaver Corporation is investigating the purchase of a new threading machine that costs
$18,000. The machine would save about $4,000 per year over the present method of
threading component parts, and would have a salvage value of about $3,000 in 6 years
when the machine would be replaced. The company's required rate of return is 12%. The
machine's net present value is closest to:
32.
Frick Road Paving Corporation is considering an investment in a curb-forming machine.
The machine will cost $180,000, will last 10 years, and will have a $30,000 salvage value at
the end of 10 years. The machine is expected to generate net cash inflows of $40,000 per
year in each of the 10 years. Frick's discount rate is 10%. The net present value of the
proposed investment is closest to:
33.
Czlapinski Corporation is considering a capital budgeting project that would require an
initial investment of $440,000 and working capital of $32,000. The working capital would
be released for use elsewhere at the end of the project in 4 years. The investment would
generate annual cash inflows of $147,000 for the life of the project. At the end of the
project, equipment that had been used in the project could be sold for $11,000. The
company's discount rate is 7%. The net present value of the project is closest to:
