Financial And Managerial Accounting Ch 12 Flashcards
The following information is available for a potential capital investment:
Initial investment: 60 000 EUR
Net annual cash flow: 15 400
Net present value: 3143
Useful life: 5 years
The potential investment’s internal rate of return is approximately:
a. 5%
b. 10%
c. 4%
d. 9%
The following information is available for a potential capital investment:
Initial investment: 60 000 EUR
Net annual cash flow: 15 400
Net present value: 3143
Useful life: 5 years
The potential investment’s internal rate of return is approximately:
d. 9%
60 000 / 15 400 = 3,8961, which corresponds with approximately 9% in the table.
Jigger Ltd is considering undertaking project X, which will involve an initial outlay of £600k. The project has the following cash inflows associated with it:
Year 1: 100k
Year 2: 200k
Year 3: 300k
Year 4: 400k
What is the NPV of project X if a 12% discount rate is used?
Jigger Ltd is considering undertaking project X, which will involve an initial outlay of £600k. The project has the following cash inflows associated with it:
Year 1: 100k
Year 2: 200k
Year 3: 300k
Year 4: 400k
What is the NPV of project X if a 12% discount rate is used?
Answer: 116 700
100 000 x 0,893 = 89 300
200 000 x 0,797 = 159 400
300 000 x 0,712 = 213 600
400 000 x 0,636 = 254 400
Total: 716 700
NPV: 716 700 - 600 000 = 116 700
Best Taste Foods is considering investing in new equipment to produce fat-free snack foods. Compute the net present value of annual cash flows.
Initial investment 1 000 000 USD
Cost of equipment overhaul in 5 years 200 000
Salvage value of equipment in 10 years 20 000
Cost of capital (discount rate) 15%
Estimated annual cash flows:
Cash inflows from sales 500 000
Cash outflows from COGS 200 000
Maintenance costs 30 000
Other direct operating costs 40 000
Best Taste Foods is considering investing in new equipment to produce fat-free snack foods. Compute the net present value of annual cash flows.
Initial investment 1 000 000 USD
Cost of equipment overhaul in 5 years 200 000
Salvage value of equipment in 10 years 20 000
Cost of capital (discount rate) 15%
Estimated annual cash flows:
Cash inflows from sales 500 000
Cash outflows from COGS 200 000
Maintenance costs 30 000
Other direct operating costs 40 000
Answer: 59 825 EUR.
Net annual cash flow: 500 000 - 200 000 - 30 000 - 40 000 = 230 000.
Equipment purchase (per 0) (1 000 000)
Equipment overhaul (per 5) (99 436)
Net annual cash flow (per 1-10) 1 154 317
Salvage value 4944
Net present value 59 825
Watertown Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company estimates that annual revenues would increase by $400,000 and that annual expenses excluding depreciation would increase by $190,000. It uses the straight-line method to compute depreciation expense. Management has a required rate of return of 9%. Compute the annual rate of return
Watertown Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company estimates that annual revenues would increase by $400,000 and that annual expenses excluding depreciation would increase by $190,000. It uses the straight-line method to compute depreciation expense. Management has a required rate of return of 9%. Compute the annual rate of return
Answer: 13,3%
Estimated cash inflow 400 000
Estimated cash outflow 190 000
Depreciation 900 000 / 6 = 150 000
Annual net income 400 000 - 190 000 + 150 000 = 60 000
Average investment (900 000 + 0) / 2 = 450 000
Annual rate of return: 60 000 / 450 000 = 13,3%
The following information is available for a potential capital investment.
Initial investment 80 000 EUR
Residual value 10 000
Net annual cash flow 14 820
Present value of net annual cash flows 98 112
Net present value 18 112
Useful life 10 years
The potential investment’s profitability index is:
a. 5,4
b. 1,19
c. 1,23
d. 1,4
The following information is available for a potential capital investment.
Initial investment 80 000 EUR
Residual value 10 000
Net annual cash flow 14 820
Present value of net annual cash flows 98 112
Net present value 18 112
Useful life 10 years
The potential investment’s profitability index is:
c. 1,23
98 112 / 80 000 = 1,23
Taz Corporation has decided to invest in renewable energy sources to meet part of its energy needs for production. It is considering solar power versus wind power. After considering cost savings as well as incremental revenues from selling excess electricity into the power grid, it has determined the following.
Present value of annual cash flows
Solar: $78,580. Wind: $168,450.
Initial investment
Solar: $45,500. Wind: $125,300.
Determine the net present value and profitability index of each project. Which energy source should it choose?
Taz Corporation has decided to invest in renewable energy sources to meet part of its energy needs for production. It is considering solar power versus wind power. After considering cost savings as well as incremental revenues from selling excess electricity into the power grid, it has determined the following.
Answer: Solar.
While the investment in wind power generates the higher net present value, it also requires a substantially higher initial investment. The profitability index favors solar power, which suggests that the additional net present value of wind is outweighed by the cost of the initial investment. The company should choose solar power.
Which of the following is not an alternative name for the discount rate?
a. Hurdle rate
b. Required rate of return
c. Cutoff rate
d. All of these are alternative names for the discount rate
Which of the following is not an alternative name for the discount rate?
d. All of these are alternative names for the discount rate
a. Hurdle rate
b. Required rate of return
c. Cutoff rate
Shep Ltd is considering a possible four-year project. Details are as follows:
Initial outlay 200 000
Years 1-4 annual profit before depreciation 45 000
Years 1-4 annual profit after depreciation 27 500
Residual value of project at the end of 4 years 30 000
Calculate annual rate of return.
Shep Ltd is considering a possible four-year project. Details are as follows:
Initial outlay 200 000
Years 1-4 annual profit before depreciation 45 000
Years 1-4 annual profit after depreciation 27 500
Residual value of project at the end of 4 years 30 000
Calculate annual rate of return.
Answer: 23,9%
27 500 / ((200 000 + 30 000)/2) = 23,9%
What is the order of involvement of the following parties in the capital budgeting authorization process.
a. Plant managers, officers, capital budget committee, board of directors.
b. Board of directors, plant managers, officers, capital budgeting committee
c. Plant managers, capital budget committee, officers, board of directors
d. Officers, plant managers, capital budget committee, board of directors
What is the order of involvement of the following parties in the capital budgeting authorization process.
c. Plant managers, capital budget committee, officers, board of directors
Assume Project A has a present value of net cash inflows of $79,600 and an initial investment of $60,000. Project B has a present value of net cash inflows of $82,500 and an initial investment of $75,000. Assuming the projects are mutually exclusive, which project should management select?
a. Project A
b. Project B
c. Project A or B
d. There is not enough data to answer this question.
Assume Project A has a present value of net cash inflows of $79,600 and an initial investment of $60,000. Project B has a present value of net cash inflows of $82,500 and an initial investment of $75,000. Assuming the projects are mutually exclusive, which project should management select?
a. Project A
If an asset costs HK$240,000 and is expected to have a HK$40,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of HK$40,000 each year, the cash payback period is:
a. 7 years
b. 6 years
c. 5 years
d. 4 years
If an asset costs HK$240,000 and is expected to have a HK$40,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of HK$40,000 each year, the cash payback period is:
b. 6 years
Which of these is not a capital budgeting decision:
a. Decision to buy a new plant
b. Decision to renovate an existing facility
c. Decision to buy a piece of machinery
d. All of these are capital budgeting decisions.
Which of these is not a capital budgeting decision:
d. All of these are capital budgeting decisions
a. Decision to buy a new plant
b. Decision to renovate an existing facility
c. Decision to buy a piece of machinery
An example of intangible benefit provided by a capital budgeting project is:
a. The residual value of capital investment
b. A positive net present value
c. A decrease in customer complaints due to poor quality
d. An internal rate of return greater than zero
An example of intangible benefit provided by a capital budgeting project is:
c. A decrease in customer complaints due to poor quality
What is the weakness of the cash payback approach?
a. It uses accrual-based accounting numbers
b. It ignores the time value of money
c. It ignores the useful life of alternative projects
d. Both b and c are true
What is the weakness of the cash payback approach?
d. Both b and c are true
b. It ignores the time value of money
c. It ignores the useful life of alternative projects
Watertown Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company estimates that annual cash inflows would increase by $400,000 and that annual cash outflows would increase by $190,000. Compute the cash payback period.
Watertown Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company estimates that annual cash inflows would increase by $400,000 and that annual cash outflows would increase by $190,000. Compute the cash payback period.
Answer: 4,3 years.
Estimated annual cash outflows: 190 000.
Net annual cash flow: 400 000 - 190 000 = 210 000.
Cash payback period: 900 000 / 210 000 = 4,3 years.
Jigger Ltd is considering two alternative projects; each of which will involve an initial outlay of £600,000. Both will have a four-year life and are expected to yield the following cash inflows.
Which of the following is NOT true?
a. Project X has a payback period of 3 years.
b. Project X will always yield a higher NPV than project Y.
c. Project Y will always yield a higher NPV than project X.
d. Project Y has a payback period of 2,5 years.
Jigger Ltd is considering two alternative projects; each of which will involve an initial outlay of £600,000. Both will have a four-year life and are expected to yield the following cash inflows.
Which of the following is NOT true?
b. Project X will always yield a higher NPV than project Y.
The cash flows from Project X are weighted more towards the later years and hence the NPV of Project X will always be less than that of Project Y.
