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92) A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be
depreciated over a six-year period with no salvage value. The company expects to sell the
machine's output of 3,000 units evenly throughout each year. A projected income statement for
each year of the asset's life appears below. What is the payback period for this machine?
Sales
Costs:
$ 90,000
Manufacturing
$ 52,000
Depreciation on machine
4,000
Selling and administrative expenses
30,000
(86,000 )
Income before taxes
$ 4,000
Income tax (50%)
(2,000 )
Net income
$ 2,000
A) 24 years. B) 12 years. C) 4 years. D) 6 years. E) 1 year.
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93) A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be
depreciated over a six-year period with no salvage value. The company expects to sell the
machine's output of 3,000 units evenly throughout each year. A projected income statement for
each year of the asset's life appears below. What is the accounting rate of return for this machine?
Sales
Costs:
$ 90,000
Manufacturing
$ 52,000
Depreciation on machine
4,000
Selling and administrative expenses
30,000
(86,000 )
Income before taxes
$ 4,000
Income tax (50%)
(2,000 )
Net income
$ 2,000
A) 16.7%. B) 50.0%. C) 4%. D) 8.3%. E) 33.3%.
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94) After-tax net income divided by the average amount invested in a project, is the:
A) Profit rate.
B) Accounting rate of return.
C) Net present value rate.
D) Payback rate.
E) Earnings from investment.
95) A company buys a machine for $60,000 that has an expected life of 9 years and no salvage value.
The company anticipates a yearly net income of $2,850 after taxes of 30%, with the cash flows to
be received evenly throughout each year. What is the accounting rate of return?
A) 9.50%. B) 6.65%. C) 4.75%. D) 2.85%. E) 42.75%.
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96) A company buys a machine for $76,000 that has an expected life of 6 years and no salvage value.
The company anticipates a yearly after tax net income of $1,805. What is the accounting rate of
return?
A) 42.75%. B) 6.65%. C) 9.50%. D) 2.85%. E) 4.75%.
97) Carmel Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful
life and no salvage value. Carmel uses straight-line depreciation and assumes that the annual cash
inflow from the machine will be received uniformly throughout each year. In calculating the
accounting rate of return, what is Carmel's average investment?
A) $7,000. B) $21,000. C) $6,000. D) $36,000. E) $18,000.
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98) Watson Corporation is considering buying a machine for $25,000. Its estimated useful life is 5
years, with no salvage value. Watson anticipates annual net income after taxes of $1,500 from the
new machine. What is the accounting rate of return assuming that Watson uses straight-line
depreciation and that income is earned uniformly throughout each year?
A) 8.0%. B) 12.0%. C) 10.0%. D) 6.0%. E) 8.5%.
99) The accounting rate of return is calculated as:
A) The annual average investment divided by the after-tax income.
B) The after-tax income divided by the total investment.
C) The cash flows divided by the annual average investment.
D) The cash flows divided by the total investment.
E) The after-tax income divided by the annual average investment.
100) The following data concerns a proposed equipment purchase:
Cost $ 144,000
Salvage value $ 4,000
Estimated useful life 4 years
Annual net cash flows $ 46,100
Depreciation method Straight-line
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Assuming that net cash flows are received evenly throughout the year, the accounting rate of return
is:
A) 5.0%. B) 62.3%. C) 32.0%. D) 7.7%. E) 15.0%.
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101) The following data concerns a proposed equipment purchase:
Cost $ 144,000
Salvage value $ 4,000
Estimated useful life 4 years
Annual net cash flows $ 46,100
Depreciation method Straight-line
The annual average investment amount used to calculate the accounting rate of return is:
A) $48,950 B) $72,000 C) $70,000 D) $37,000 E) $74,000
102) An estimate of an asset's value to the company, calculated by discounting the future cash flows
from the investment at the project's required rate of return and then subtracting the initial amount
of the investment, is known as:
A) Unamortized carrying value.
B) Annual net cash flows.
C) Rate of return on investment.
D) Net present value.
E) Payback period.
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103) Which of the following cash flows is not considered when using the net present value method?
A) Future year-end cash flows.
B) Future cash inflows.
C) Future cash outflows.
D) Non-uniform cash inflows.
E) Past cash outflows.
104) Which one of the following methods considers the time value of money in evaluating alternative
capital expenditures?
A) Payback period.
B) Cash flow method.
C) Net present value.
D) Return on average investment.
E) Accounting rate of return.
105) The hurdle rate is often set at:
A) The rate the company could earn if the investment were placed in the bank.
B) The rate at which the company is taxed on income.
C) The company's cost of capital.
D) 10% above the ARR of current projects.
E) 10% above the IRR of current projects.
106) Butler Corporation is considering the purchase of new equipment costing $30,000. The projected
annual after-tax net income from the equipment is $1,200, after deducting $10,000 for
depreciation. The revenue is to be received at the end of each year. The machine has a useful life of
3 years and no salvage value. Butler requires a 12% return on its investments. The present value of
an annuity of 1 for different periods follows:
Periods
12%
1
0.8929
2
1.6901
3
2.4018
4
3.0373
What is the net present value of the machine?
A) $30,000. B) $(3,100). C) $24,018. D) $(29,520). E) $26,900.
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107) Vextra Corporation is considering the purchase of new equipment costing $35,000. The projected
annual cash inflow is $11,000, to be received at the end of each year. The machine has a useful life
of 4 years and no salvage value. Vextra requires a 12% return on its investments. The present value
of an annuity of $1 for different periods follows:
Periods
12%
1
0.8929
2
1.6901
3
2.4018
4
3.0373
What is the machine's net present value?
A) $35,000. B) $3,410. C) $(3,100). D) $(33,410). E) $(1,590).
108) The following present value factors are provided for use in this problem.
Period
Present Value
of $1 at 8%
Present Value of an
Annuity of $1 at 8%
1 0.9259 0.9259
2 0.8573 1.7833
3 0.7938 2.5771
4 0.7350 3.3121
Cliff Co. wants to purchase a machine for $40,000, but needs to earn an 8% return. The expected
year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the fourth year.
What is the machine's net present value?
A) $52,000. B) $2,685. C) $(9,075). D) $(28,240). E) $42,685.
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109) The following present value factors are provided for use in this problem.
Period
Present Value
of $1 at 8%
Present Value of an
Annuity of $1 at 8%
1 0.9259 0.9259
2 0.8573 1.7833
3 0.7938 2.5771
4 0.7350 3.3121
Xavier Co. wants to purchase a machine for $37,000 with a four-year life and a $1,000 salvage
value. Xavier requires an 8% return on investment. The expected year-end net cash flows are
$12,000 in each of the four years. What is the machine's net present value?
A) $3,480. B) $(3,480). C) $40,480. D) $(2,745). E) $2,745.
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110) Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will
produce cash flows as follows:
End of
Year Machine
A
B
1
$ 5,000
$ 1,000
2
4,000
2,000
3
2,000
11,000
Turk Manufacturing uses the net present value method to make the decision, and it requires a 15%
annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years,
0.7561; 3 years, 0.6575. Which machine should Turk purchase?
A) Only Machine B is acceptable.
B) Both machines are acceptable, but B should be selected because it has the greater net present
value.
C) Neither machine is acceptable.
D) Only Machine A is acceptable.
E) Both machines are acceptable, but A should be selected because it has the greater net present
value.
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