- In the payback method, depreciation is deducted from net operating income when computing the annual net cash flow.

True False

- In calculating the payback period where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be added to the cost of the new equipment.

True False

- One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached.

True False

- The net present value and internal rate of return methods of capital budgeting are superior to the payback method because they:

are easier to implement.

consider the time value of money.

require less data.

reflect the effects of depreciation and income taxes.

- (Ignore income taxes in this problem.) The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000. The equipment would have a useful life of six years, with a salvage value of $29,000. This new equipment would be depreciated over its useful life by the straight-line method. It would replace existing equipment which is fully depreciated. The existing equipment has a salvage value now of $38,000. The anticipated annual revenues and expenses associated with the new equipment are:

Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project.

- The payback period is closest to:

5.7 years

4.0 years

2.3 years

1.8 years

- For this investment, the simple rate of return to the nearest tenth of a percent is:

43.7%

25.3%

30.4%

17.6%