08 Oct 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