Chapter 26 – Capital Budgeting
Financial and Managerial Accounting, 17/e 26-7
CHAPTER 26 NAME #
10-MINUTE QUIZ B SECTION
Physician’s Pharmacy is considering the purchase of a copying machine which it will
make available to customers at a per-copy charge. The copying machine has an initial
cost of $7,500, an estimated useful life of five years, and an estimated salvage value of
$500. The estimated annual revenue and expenses relating to operation of the machine
are as follows:
Revenue ………………………………………………………………………………………………… $8,000
Expenses other than depreciation …………………………………………………………….. $5,500
All revenue will be received in cash; expenses other than depreciation will be paid in
cash. Depreciation will be computed by the straight-line method.
Answer the following questions. If you select answer d, indicate the correct amount in
the space provided.
1 Refer to the above data. Acquisition of the copying machine is expected to
increase Physician’s annual net income by:
a $1,100. c $600.
b $500. d Some other amount.
2 Refer to the above data. The annual net cash flow expected from the investment
in the machine is:
a $1,000. c $500.
b $600. d $2,500.
3 Refer to the above data. The payback period on this investment is estimated at:
a 1.125 years. c 3 years.
b 7.5 years. d None of these answers.
4 Refer to the above data. The expected rate of return on average investment is:
a 27.5%. c 60%.
b 33 1/3%. d Some other rate.
5 Refer to the above data. The net present value of the proposed investment,
discounted at an annual rate of 15% and rounded to the nearest dollar, is (tables
show that using a discount rate of 15%, the present value of $1 due in five years
is 0.497, and the present value of a five-year $1 annuity is 3.352):
a $528. c $(1,405).
b $1,128.50. d Some other amount.
Chapter 26 – Capital Budgeting
CHAPTER 26 NAME # _________________________
10-MINUTE QUIZ C SECTION
Port Pharmacy is considering the purchase of a copying machine, which it will make available to
customers at a per-copy charge. The copying machine has an initial cost of $8,500, an estimated
useful life of five years, and an estimated salvage value of $2,500. The estimated annual revenue
and expenses relating to operation of the machine are as follows:
Revenue …………………………………………………………………………………………………………………….. $9,000
Expenses other than depreciation …………………………………………………………………………………. $5,500
All revenue will be received in cash; expenses other than depreciation will be paid in cash.
Depreciation will be computed by the straight-line method.
Compute for this proposal the expected:
a Annual increase in Port’s net income: $____________
b Annual net cash flow: $____________
c Payback period: ____________ years
d Return on average investment: ___________ %
e Net present value (round to the nearest dollar) of the proposed investment, discounted at an
annual rate of 15% (Tables show that the present value of $1 to be received in five periods,
discounted at 15%, is 0.497 and that the present value of a five-year annuity of $1, discounted
at 15%, is 3.352): $____________
Chapter 26 – Capital Budgeting
Financial and Managerial Accounting, 17/e 26-9
CHAPTER 26 NAME #
10-MINUTE QUIZ D SECTION
Beacon Manufacturing, Inc. is planning to buy a new cutting machine. The machine costs
$125,000, has an estimated life of ten years and no salvage value. The machine is expected
to have the following impact:
Increment revenue ……………………………………………………….………………………………….. $30,000
Incremental expenses:
Expenses other than depreciation …………………………………………………………………… (8,000)
Straight-line depreciation ………………………………………………………………………………. (12,500)
Incremental net income ……………………………………………………………………………………. $9,500
All revenue and expenses other than depreciation will be received or paid in cash. Compute
the following for this proposal:
1 What is the annual net cash flow expected from the cutting machine investment?
$____________
2 What is the expected payback period of the cutting machine investment? ______ years
3 What is the expected return on average investment associated with the cutting machine?
____________%
4 What is the net present value of the cutting machine discounted at an annual rate of 10%, if
the present value of a ten–year $1 annuity discounted at 10% is 6.145? $____________
5 What is the net present value of the cutting machine discounted at an annual rate of 20%, if
the present value of a ten–year $1 annuity discounted at 20% is 4.192? $____________
Chapter 26 – Capital Budgeting
SOLUTIONS TO CHAPTER 26 10-MINUTE QUIZZES
Quiz A Learning Objective: 1, 2, 3, 4 Quiz B Learning Objective: 3, 4
QUIZ C
a $9,000 – $5,500 – [($8,500 – $2,500)/5 years] = $2,300
Learning Objective: 3, 4
QUIZ D
1: $9,500 incremental income + $12,500 depreciation expense = $22,000
Chapter 26 – Capital Budgeting
Financial and Managerial Accounting, 17/e 26-11
Assignment Guide to Chapter 26
Brief Exercises
Exercises
Problems
Cases
Net
1 – 10
1 – 15
1
2
3
4
5
6
7
8
9
1
2
3
4
Time estimate (in minutes)
< 15
< 15
40
40
25
30
25
40
30
30
30
25
60
20
30
Difficulty rating
E
E
M
M
M
M
M
M
M
M
M
S
S
M
M
Learning Objectives:
6
1, 2, 3, 6, 7,
8, 9, 10, 15
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1. Explain the nature of capital
investment decisions.
2. Identify nonfinancial factors in
capital investment decisions.
6, 10
1, 2, 7, 9,
10, 13, 15
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√
√
√
√
√
√
√
√
√
√
3. Evaluate capital investment
proposals using (a) payback period,
(b) return on investment, and (c)
discounted cash flows.
1, 2, 3, 4, 5, 7, 9
1, 2, 3, 4, 5,
6, 7, 8, 10,
11, 12, 13,
14, 15
√
√
√
√
√
√
√
√
√
√
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4. Discuss the relationship between net
present value and an investor’s
required rate of return.
3, 7
1, 7
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5. Explain the behavioral issues
involved in capital budgeting and
identify how companies try to
control the capital budgeting
process.
8
1, 9, 10
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