QUESTION 1

Which of the following statements is correct regarding the payback method as a capital budgeting technique?

		The payback method considers the time value of money.
		An advantage of the payback method is that it indicates if an investment will be profitable.
		The payback method provides the years needed to recoup the investment in a project.
		Payback is calculated by dividing the annual cash inflows by the net investment.

0.625 points

QUESTION 2

Taxes are not an important consideration in developing cash flow assessments.

True

False

0.625 points

QUESTION 3

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2) QUESTIONS:

Parkways Inc. is considering the purchase of a new machine. The machine will cost $60,000 to purchase and will generate $15,000 of cash revenues per year for the next 8 years. The machine will cost $1,000 per year to operate & maintain. At the end of it's useful life, it has an estimated salvage value of $5,000. Parkways requires a minimum rate of return of 14% for this class of asset. Determine the Net Present Value of this investment proposal.

PV of $1 (14%, 8n) is .351; PVOA (14%, 8n) is 4.639

		$6,701
		$57,000
		$1,166
		$0

0.625 points

QUESTION 4

Sun Devil Corporation is adding a new product line that will require an investment of $138,000. The product line is estimated to generate net cash flows of $25,000 the first year, $23,000 the second year, and $18,000 each year thereafter for ten more years. What is the payback period?

		7.26
		5.52
		7.00
		7.67

0.625 points

QUESTION 5

Sparky Company invested in an asset with a useful life of 5 years. The companys required rate of return is 10% for this class of asset. The net cash flows are estimated to be $7,610 per year for the next 5 years and no salvage value is anticipated.

If the asset generates a positive net present value of $2,000, what was the amount of the original investment? (Round your answer to the nearest whole dollar. Do not use $ signs or commas in recording your answer. EXAMPLE: If you answer is $22,516, enter your answer as 22516).

Present Value of $1
Periods	10%	12%	14%
5	.621	.567	.519
8	.467	.404	.351
10	.386	.322	.270
Present Value of Ordinary Annuity
Periods	10%	12%	14%
5	3.791	3.605	3.433
8	5.335	4.968	4.639
10	6.145	5.650	5.216

0.625 points

QUESTION 6

Suppose Whole Foods is considering investing in warehouse-management software that costs $500,000, has $60,000 residual value and should lead to cash cost savings of $130,000 per year for its five-year life. Determine the NPV of the investment if management uses a 12% discount rate. (Round to the nearest whole number for your final answer. When recording your answer, do not use $ dollar signs or commas. EXAMPLE: If you answer is $12,251, enter 12251)

Present Value of $1
Periods	10%	12%	14%
5	.621	.567	.519
8	.467	.404	.351
10	.386	.322	.270
Present Value of Ordinary Annuity
Periods	10%	12%	14%
5	3.791	3.605	3.433
8	5.335	4.968	4.639
10	6.145	5.650	5.216

0.625 points

QUESTION 7

ABC, Corporation is looking to purchase a new piece of equipment for $121,505. The equipment has a useful life of 8 years and no expected salvage value.

The minimum desired rate of return is 10%. ABC is uncertain as to the annual net cash flows the equipment will generate.

What is the minimum annual net cash flow ABC must achieve in order to justify the purchase of this new equipment?

(Round your answer to the nearest whole dollar. Do not use $ dollar signs or commas when recording your answer.)

Present Value of $1
Periods	10%	12%	14%
5	.621	.567	.519
8	.467	.404	.351
10	.386	.322	.270
Present Value of Ordinary Annuity
Periods	10%	12%	14%
5	3.791	3.605	3.433
8	5.335	4.968	4.639
10	6.145	5.650	5.216

0.625 points

QUESTION 8

Sparky Company is considering the replacement of an old machine with the purchase of a new piece of production equipment that will reduce labor and maintenance costs by $45,000 per year. If Sparky purchases the new machine, the company will sell the old equipment for an estimated $20,000 salvage value. Data related to the new machine follows:

Initial Investment $300,000

Useful Life 10 years

Salvage value (new machine) $30,000

Hurdle Rate 12%

Assume all cash flows occur at the end of the year and ignore income taxes. Calculate the net present value of the investment in the new machine. (Round your answer to the nearest whole dollar. If you have a negative NPV, record your answer using () parenthesis. EXAMPLE: If your NPV is ($2,000), enter your answer as (2000).

Present Value of $1
Periods	10%	12%	14%
5	.621	.567	.519
8	.467	.404	.351
10	.386	.322	.270
Present Value of Ordinary Annuity
Periods	10%	12%	14%
5	3.791	3.605	3.433
8	5.335	4.968	4.639
10	6.145	5.650	5.216