Questions 525828910.

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1 There are several capital budgeting decision models that do not use discounted cash flows.
What is the name of the simple technique that calculates the total time it will take to recover,
using cash inflows from operations, the amount of cash invested in a project?
a. Recovery period b. Payback model c. External rate of return d. Accounting rate of return

2 Local Company is planning to spend $40,000 for a new machine. It will depreciate the machine on the
straight-line basis over 5 years with no salvage value. The related cash flow from operations,
net of income taxes, is expected to be $10,000 per year. What is the payback period?
a. 4 years b. 7.6 years c. 7.8 years d. 8.0 years

3 Local Corp. will replace a delivery truck two years from today. The new truck will cost of $40,000.
Local has just sold some vacant land and wants to be sure the funds will be available for replacement
of the truck without going into debt. Assume that Local will earn interest at an annual rate
of 6% compounded annually. How much should Local set aside today for truck replacement?
a. $14,720 b. $31,577 c. $35,600 d. $31,686

4 Ciraulo recently acquired a machine at a cost of $64,000. It will be depreciated on a straight-line basis over
eight years with no estimated salvage value. This machine will produce an annual net cash inflow (before
income taxes) of $18,000. Assuming an income tax rate of 50%, what is the approximate payback period?
a. 3.6 years b. 4.9 years c. 7.1 years d. 12.8 years e. none of these

5 Energy Co. will spend $84,000 for a new machine which it will depreciate on the straight-line basis over ten years
with no salvage value. The related cash flow from operations, net of income taxes, is expected to be $10,000 a year
for each of the first six years and $12,000 for each of the next four years. What is the payback period?
a. 4.4 years b. 7.6 years c. 7.8 years d. 8.0 years

6 Super Sales Sam has just presented the following information to a potential customer:
Internal rate of return is 10%. Life is 9 years. Annual after-tax cash inflows: $10,000
Sam neglected, however, to tell his customer the price of the equipment. What price did Sam assume?
a. $ 58,473.70 b. $ 57,590.20 . c. $75,333 d. $42,800 e. $20,000.

7 The Apex Co. is evaluating a capital budgeting proposal for the current year. The initial investment would
be $30,000. It would be depreciated on a straight- line basis over six years with no salvage value.
The before tax annual cash flow due to this investment is $10,000, and the income tax rate is 40% paid in the
same year as incurred. The desired rate of return is 15%. All cash flows occur at the end of the year.
What is the after-tax accounting rate of return?
a. 10% b. 16-2/3% c. 26-2/3% d. 33-1/3%

8 On January 1, Waxhaw Inc. purchased for $520,000 a new machine with a useful life of eight years and no
salvage value. The machine will be depreciated using the straight-line method and it is expected to produce
annual cash flow from operations, net of income taxes, of $100,000. Assuming that Waxhaw uses a time
adjusted rate of return of 8% what is the net present value?
a. $ 36,680 b. $ 54,664 c. $12,490 d. $13,493

9 Hamilton Co. invested in a two year project having an internal rate of return of 12%. The project will produce
cash flow from operations, net of income taxes, of $60,000 in first year and $70,000 in the second year.
How much will the project cost (approximate)?
a. $103,610 b. $109,370 c. $116,090 d. $122,510

10 Neu Co. is considering the purchase of an investment that has a positive net present value
based on Neu’s 12% hurdle rate. The internal rate of return would be
a. 0 b. 12% c. >12% d. <12%
Date: 05/28/2021 File: 525828910.xls Page 2 of 2

1 B Payback Model
2 A Payback method -- with after tax cash flows given
Cost of investment $40,000
After tax cash flow per year $10,000
Payback period 4
3 C Invest for period 2 years
Interest Rate 6%
Compounding Annual
Future value $ 40,000
Time Period $ 2
Factor 0.89
Present Value $ 35,600.00
4 B Cost of Project 64,000
Life in years 8
Cash Flow from Operations 18,000
Depreciation Expense 8,000
Taxable Income 10,000
Tax Rate 50%
Income Tax 5,000
Net Income After Taxes 5,000
Add: Depreciation Expense 8,000
Equals net after-tax cash flow 13,000
Cost of Project 64,000
Annual Cash flow-after taxes 13,000
Payback Period 4.92
5 D
6 B Cost of Equipment $ 57,590.00
Life 9
Interest rate 15%
Annual net cash flows 10,000
Factor 5.75900
7 A Cost of Project 30,000
Life in years 6
Cash Flow from Operations 10,000
Depreciation Expense 5,000
Taxable Income 5,000
Tax Rate 40%
Income Tax 2,000
Net Income After Taxes 3,000
Add: Depreciation Expense 5,000
Equals net after-tax cash flow 8,000
Cost of Project 30,000
Net Income After Taxes 3,000
Acct. Rate of Return 10%
8 B Compute Net Present Value for a new machine
Cost of Machine $ 520,000
Life of machine 8 yrs
Discount rate 8%
Annual after-tax cash flow 100,000
Annuity factor for present value - 8% 5.7466
Present value 574,664
Cost of Machine (520,000)
Net present Value $ 54,664
9 B Cash flow-Yr 1 0.89286 $ 60,000 $ 53,571.60
Cash flow-Yr 2 0.79719 $ 70,000 $ 55,803.30
$ 109,374.90
10 C Positive NPV with 12% hurdle rate means IRR exceeds 12%.