Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project’s life are:
Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project’s life are:
Year Net Annual Cash Flow
1 $3,000
2 8,000
3 15,000
4 9,000
The cash payback period is
2.29 years
2.40 years
2.60 years
2.31 years
Question 2A disadvantage of the cash payback technique is that it
ignores obsolescence factors
is complicated to use
ignores the cost of an investment
ignores the time value of money
Question 3If a company’s required rate of return is 10% and, in using the net present value method, a project’s net present value is zero, this indicates that the
project’s rate of return exceeds 10%
project earns a rate of return of 10%
project earns a rate of return of 0%
project’s rate of return is less than the minimum rate required
Question 4Using the profitability index method, the present value of cash inflows for Project Flower is $88,000 and the present value of cash inflows of Project Plant is $48,000. If Project Flower and Project Plant require initial investments of $90,000 and $40,000, respectively, and have the same useful life, the project that should be accepted is
Either project may be accepted
Netiher project should be accepted
Project Flower
Project Plant
Question 5Mini Inc. is contemplating a capital project costing $47,019. The project will provide annual cost savings of $18,000 for 3 years and have a salvage value of $3,000. The company’s required rate of return is 10%. The company uses straight-line depreciation.
Year Present Value
of 1 at 10% PV of an Annuity
of 1 at 10%
1 .909 .909
2 .826 1.736
3 .751 2.487
This project is
acceptable because it has a positive NPV
unacceptable because it has a negative NPV
acceptable because it has a zero NPV
unacceptable because it earns a rate less than 10%
Question 6The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments is the
net present value method
profitability index
internal rate of return method
cash payback method
Question 7If a project’s profitability index is equal to 1, then
its internal rate of return is greater than the discount rate
it should be rejected
its net present value is zero
its net present value is positive
Question 8Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return.
Present Value of an Annuity of 1
Period 8% 9% 10% 11% 12% 15%
6 4.623 4.486 4.355 4.231 4.111 3.784
What is the approximate internal rate of return for this investment?
10%
12%
11%
9%
Question 9The capital budgeting technique that indicates the profitability of a capital expenditure is the
internal rate of return method
profitability index method
annual rate of return method
net present value method
Question 10In capital budgeting, intangible benefits should be
excluded entirely
included only when benefits are known with certainty
included using optimistic estimated values
included using conservative estimated values
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