Question Details

CHAPTER 24 PLANNING FOR CAPITAL INVESTMENTS MULTIPLE CHOICE QUESTION PART 4


46.	The cash payback technique
a.	considers cash flows over the life of a project.
b.	cannot be used with uneven cash flows.
c.	is superior to the net present value method.
d.	may be useful as an initial screening device.


	47.	If an asset costs $240,000 and is expected to have a $40,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of $40,000 each year, the cash payback period is
a.	7 years.
b.	6 years.
c.	5 years.
d.	4 years.

	48.	If a payback period for a project is greater than its expected useful life, the
a.	project will always be profitable.
b.	entire initial investment will not be recovered.
c.	project would only be acceptable if the company's cost of capital was low.
d.	project's return will always exceed the company's cost of capital.


	49.	The cash payback technique
a.	should be used as a final screening tool.
b.	can be the only basis for the capital budgeting decision.
c.	is relatively easy to compute and understand.
d.	considers the expected profitability of a project.


	50.	The cash payback period is computed by dividing the cost of the capital investment by the
a.	annual net income.
b.	net annual cash inflow.
c.	present value of the cash inflow.
d.	present value of the net income.


	51.	When using the cash payback technique, the payback period is expressed in terms of
a.	a percent.
b.	dollars.
c.	years.
d.	months.


	52.	A disadvantage of the cash payback technique is that it
a.	ignores obsolescence factors.
b.	ignores the cost of an investment.
c.	is complicated to use.
d.	ignores the time value of money.


	53.	Bark Company is considering buying a machine for $240,000 with an estimated life of ten years and no salvage value.  The straight-line method of depreciation will be used.  The machine is expected to generate net income of $6,000 each year.  The cash payback period on this investment is
a.	20 years.
b.	10 years.
c.	8 years.
d.	4 years.

 
54.	A company is considering purchasing a machine that costs $400,000 and is estimated to have no salvage value at the end of its 8-year useful life.  If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. The cash payback period on the machine is
a.	8.0 years.
b.	7.5 years.
c.	6.5 years.
d.	3.2 years.


55.	Nance Company is considering buying a machine for $90,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $3,000 each year. The cash payback on this investment is
a.	15 years.
b.	10 years.
c.	7.5 years.
d.	6 years.


56.	Giraldi Company has identified that the cost of a new computer will be $48,000, but with the use of the new computer, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is:
a.	24.0 years.
b.	16.0 years.
c.	9.6 years.
d.	6.0 years.


57.	Richman Co. purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $(900). Annual cost savings were: $10,000 for year 1; $8,000 for year 2; and $6,000 for year 3. The amount of the initial investment was
	Present Value	PV of an Annuity
Year	  of 1 at 12%   			    of 1 at 12%    	
1	.893		.893
2	.797		1.690
3	.712		2.402

a.	$20,478.
b.	$18,316.
c.	$20,116.
d.	$18,678.


	58.	Use the following table,
	Present Value of an Annuity of 1
Period	  8%		  9%		 10%	
1	.926	.917	.909
2	1.783	1.759	1.736
3	2.577	2.531	2.487
A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $350,000 and is expected to generate cash inflows of $140,000 at the end of each year for three years. The net present value of this project is
a.	$354,340.
b.	$70,000.
c.	$35,436.
d.	$4,340.


	59.	The discount rate is referred to by all of the following alternative names except the
a.	accountin rate of return.
b.	cutoff rate.
c.	hurdle rate.
d.	required rate of return.


	60.	The rate that a company must pay to obtain funds from creditors and stockholders is known as the
a.	hurdle rate.
b.	cost of capital.
c.	cutoff rate.
d.	all of these.


	61.	The higher the risk element in a project, the
a.	more attractive the investment.
b.	higher the net present value.
c.	higher the cost of capital.
d.	higher the discount rate.


	62.	If 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
a.	project's rate of return exceeds 10%.
b.	project's rate of return is less than the minimum rate required.
c.	project earns a rate of return of 10%.
d.	project earns a rate of return of 0%.

 
	63.	Using 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
a.	Project Flower.
b.	Project Plant.
c.	Either project may be accepted.
d.	Neither project should be accepted.


	64.	The primary capital budgeting method that uses discounted cash flow techniques is the
a.	net present value method.
b.	cash payback technique.
c.	annual rate of return method.
d.	profitability index method.


	65.	When the annual cash flows from an investment are unequal, the appropriate table to use is the
a.	future value of 1 table.
b.	future value of annuity table.
c.	present value of 1 table.
d.	present value of annuity table.