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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.
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:
