Reference no: EM132621644
Questions -
Q1. An anticipated purchase of equipment for $490,000 with a useful life of 8 years and no residual value is expected to yield the following annual net incomes and net cash flows:
|
Year
|
Net Income
|
Net Cash Flow
|
|
1
|
$60,000
|
$110,000
|
|
2
|
50,000
|
100,000
|
|
3
|
50,000
|
100,000
|
|
4
|
40,000
|
90,000
|
|
5
|
40,000
|
90,000
|
|
6
|
40,000
|
90,000
|
|
7
|
40,000
|
90,000
|
|
8
|
40,000
|
90,000
|
What is the cash payback period?
a. 4 years
b. 5 years
c. 3 years
d. 6 years
Q2. The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment:
|
Year
|
Income from Operations
|
Net Cash Flow
|
|
1
|
$100,000
|
$180,000
|
|
2
|
40,000
|
120,000
|
|
3
|
20,000
|
100,000
|
|
4
|
10,000
|
90,000
|
|
5
|
10,000
|
90,000
|
The net present value for this investment is
a. $25,200
b. $(99,600)
c. $(126,800)
d. $16,400
Q3. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 37.5%.
True
False
Q4. The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment:
|
Year
|
Income from Operations
|
Net Cash Flow
|
|
1
|
$100,000
|
$180,000
|
|
2
|
40,000
|
120,000
|
|
3
|
40,000
|
100,000
|
|
4
|
10,000
|
90,000
|
|
5
|
10,000
|
120,000
|
The net present value for this investment is
a. $(16,170)
b. $36,400
c. $(126,800)
d. $55,200
Q5. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.
True
False
Q6. Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of
a. variable cost analysis
b. variable cost analysis
c. capital investment analysis
d. sales mix analysis
Q7. In calculating the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.
True
False
Q8. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 for the 5 years. The expected average rate of return on investment is 25.0%.
True
False
Q9. The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.
True
False
Q10. Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows?
a. cash payback method
b. internal rate of return method
c. average rate of return method
d. net present value method