The payback period is the amount of time for the investment to generate enough net cash flow to return the initial cost of Investment True or False True False Using a profitability Index allows management to rank projects of similar risks with different investment amounts. True or False True False A company's required rate of return, typically its cost of capital is called the Multiple Choice Internal rate of return Average rate of return Hurdle rate Maximum rate Payback rate The capital budgeting process involves all of the following except Multiple Choice O Having department or plant managers submit new investment proposals. Determining which financial institution to use for financing Evaluating the submitted proposals. Forming a capital budget committee that includes occounting and finance members Approving or rejecting new investment proposals. The time value of money concept: Multiple Choice Means that a dollar today is worth less than a dollar tomorrow. Means that a dollar tomorrow is worth more than a dollar today, Means that a dollar today is worth more than a dollar tomorrow Means that Time is money" Does not involve the concept of compound interest The rate that yields a net present value of zero for an investment is the Multiple Choice Internal rate of return Accounting rate of return Net present value rate of return Zero rate of return Payback rate of return; A project requires a $30,000 investment and is expected to generate end-of-period annual cash inflows as follows: Year 1 $12,000 Year 2 $8,000 Year 3 $10,000 Total $30,000 Assuming a discount rate of 10%, what is the net present value of this Investment? Selected present value factors for a single sum are shown in the table below: 105 n1 0.9091 104 n2 0.8264 1109 n = 3 0.7513 Multiple Choice $0.00 521000.00 A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year Annual depreciation expense would be $1,500. What is the payback period for the new machine? Multiple Choice 4 years 6 years 10.5 years 14 years After-tax net income divided by the average amount invested in a project, is the Multiple Choice Net present value rate. Payback rate Accounting rate of retum. Earnings from investment Profit rate A company buys a machine for $67,000 that has an expected life of 9 years and no salvage value. The company uses straight Iine depreciation. The company anticipates a yearly net income of $3,200 after taxes of 34%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return? Multiple Choice 4.78% O 0.55% 630N 325 The following present value factors are provided for use in this problem Periods 1 2 *3 Present Value of $1 at 80 0.9259 0.8573 0.7938 0.7350 Present Value of an Annuity of $1 at 89 0.9259 1.7833 2.5771 3.3121 Xavier Co. wants to purchase a machine for $37,200 with a four year life and a $1,200 salvage value Xavier requires an 8% return on investment. The expected year-end net cash flows are $12,200 in each of the four years. What is the machine's net present value? Multiple Choice $4,090 $3200 Alfarsi Industries uses the net present value method to make Investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15.700 and will produce cash flows as follows: End of Year - 1 2 3 Investment B $8,700 $ 0 8,700 0 8,700 26,100 The present value factors of $1 each year at 15% are: 1 2 3 0.8696 0.7561 0.6575 The present value of an annuity of $1 for 3 years at 15% is 2.2832 The net present value of Investment Bisi Multiple Choice Division X makes a part with the following characteristics Production capacity Selling price to outside customers Variable cost per unit Fixed cost, total 28 32,000 units s 32 5 25 $107.000 Division of the same company would like to purchase 10,070 units each period from Division X Division Y now purchases the part from an outside supplier at a price of $31 each. Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $31 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be Multiple Choice O worse off by $70.490 each period better off by $10.070 each period Division Pof Launch Corporation has the capacity for making 78,500 wheel sets per year and regularly sells 63,500 each year on the outside market. The regular sales price is $135 per wheel set, and the variable production cost per unit is $93. Division of Launch Corporation currently buys 33,500 wheel sets of the kind made by Division P) yearly from an outside supplier at a price of $125 per wheel set. If Division Q were to buy the 33,500 wheelsets it needs annually from Division P at $115 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be Multiple Choice $635.000 $295.000 $1072.000 $142.000 Holo Company reported the following financial numbers for one of its divisions for the year, average total assets of $5,880,000, sales of $5,455,000; cost of goods sold of $3,265,000; and operating expenses of $1,155,000. Assume a target Income of 15% of average invested assets. Compute residual income for the division Multiple Choice 5155,250 $216 750 $155.300 $153.000 Holo Company reported the following financial numbers for one of its divisions for the year, average total assets of $6,100,000 sales of $6,275,000; cost of goods sold of $3,525,000; and operating expenses of $1,267,000. Compute the division's return on investment Multiple Choice 28.3% 20.2% 24.3% 17.4% If a company reports profit margin of 33.0% and investment turnover of 130 for one of its investment centers, the return on Investment must be Multiple Choice 25.38% O 42 90% 34 30% o 3170 " Praat 72 13 NA Sammy Company is considering eliminating its commercial division. The company allocates fixed costs based on division sales. If the commercial division is dropped, $113,000 of the fixed costs allocated to it could be eliminated. The impact on Sammy's operating income from eliminating the commercial division would be Salos Variable costs Contribution margin Fixed costs Net income (10ss) Garden Farm $684,000 $959,000 385, 900 427,000 298, 100 532,000 260, 200 348,500 37,900 183,500 Commercial $ 731,000 662,800 68,200 300,400 (232,200) Multiple Choice 56,200 decrease $27.000 increase Glon Company is considering eliminating its windows division, which reported an operating loss for the recent year of $114,000 Division sales for the year were $1,200,000 and its variable costs were $1,065,000. The fixed costs of the division were $250,000. If the windows division is dropped, 60% of the fixed costs allocated to it could be eliminated. The impact on Gion's operating income from eliminating this business segment would be Multiple Choice $32.500 decrease $15.000 increase 3150,000 decreare $150 000 increase Valdez Company is considering eliminating its kitchen division, which reported an operating loss of $68,000 for the past year Kitchen division sales for the year were $1,190,000, and its variable costs were $790,000. The fixed costs of the division were $336,000. If the kitchen division is dropped, 75% of the fixed costs allocated to it could be eliminated. The impact on Valdez's operating income from eliminating this business segment would be Multiple Choice 5148,000 decrease 5268,000 increase O $472,500 decrease 5148,000 increase A company can buy a machine that is expected to have a three-year life and a $20,000 salvage value. The machine will cost $1760,000 and is expected to produce a $190,000 after-tax net income to be received at the end of each year. If a table of present values of $1 at 12% shows values of 08929 for one year, 07972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the Investment, discounted at 12%? Multiple Choice $103,699 5562322 5613,844 $687533 A company is considering the purchase of new equipment for $102,000. The projected annual net cash flows are $39,900. The machine has a useful life of 3 years and no salvage value Management of the company requires a 8% return on investment. The present value of an annuity of $1 for various periods follows: Period 30 Present value of an annuity of $1 at 8s 0.9259 1.7833 2.5771 What is the net present value of this machine assuming all cash flows occur at year-end? Multiple Choice 534000 54,900 Alfarsi Industries uses the net present value method to make Investment decisions and requires a 15% annual return on all Investments. The company is considering two different Investments. Each require an initial investment of $15,500 and will produce cash flows as follows: 16 End of Year 1 2 3 Investment B $8,500 $ 0 8,500 0 8,500 25,500 The present value factors of $1 each year at 15% are 1 112 3 0.8696 0.7561 0.6575 The present value of an annulty of $1 for 3 years at 15% is 2 2832 The net present value of Investment Bis Multiple Choice Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all Investments. The company is considering two different investments. Each require an initial investment of $15,100 and will produce cash flows as follows: End of Year 1 2 3 Investment B $8,100 $ 0 8,100 0 8,100 24,300 The present value factors of $1 each year at 15% are: 1 2 3 0.8696 0.7561 0.6575 The present value of an annuity of S1 for 3 years at 15% is 22832 The net present value of investment Als: Multiple Choice Sub The following present value factors are provided for use in this problem Periods 1 2 Present Value of $1 at 89 0.9259 0.8573 0.7938 0.7350 Present Value of an Annuity of $1 at 8 0.9259 1.7833 2.5771 3.3121 19 4 Xavier Co wants to purchase a machine for $36,900 with a four year life and a $1,200 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $11.900 in each of the four years. What is the machine's net present value? Multiple Choice O $3.396 $2,514