charter oak acc102 week 13 test part 1

1. Which of the following is not an important financial consideration in capital budgeting?

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2. When using the net present value method for evaluating an investment, an increase in the required rate of return will:

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3. Which method of project selection gives consideration to the time value of money in a capital budgeting decision?

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4. Stanley Company is considering the possibility of investing $800,000 in a special project. This venture will return $200,000 per year for 12 years in after tax cash flows. Depreciation on the project will be $100,000 per year using straight-line depreciation. The payback period for the project is:

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Use the following to answer question 5:

Dover Corporation is evaluating a proposal to invest in a machine costing $72,000. The machine has an estimated useful life of ten years, and an estimated salvage value of $10,000. The machine will increase the company's net income by approximately $6,000 per year. All revenue and expenses other than depreciation will be received and paid in cash.

5. Refer to the information above. The payback period of the machine is:

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Use the following to answer questions 6-7:

London Corporation is considering investing $40,000 in equipment to produce a new product. The useful service life of the equipment is estimated to be ten years, with no salvage value. Straight-line depreciation is used. The company estimates that production and sale of the new product will increase net income by $6,000 per year.

6. Refer to the information above. The payback period of this investment is:

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7. Refer to the information above. The expected rate of return on average investment in this equipment is:

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Use the following to answer questions 8-9:

Buckley Company is considering an investment of $760,000 in heavy equipment which will enable the company to be more competitive in the construction industry. The useful service life of the equipment is estimated to be 10 years, with $60,000 salvage value. Straight-line depreciation is used. The company estimates that net income will increase by $82,000 per year as a result of the company's ability to handle a wider range of projects with the new equipment.

8. Refer to the information above. The payback period for this investment is approximately:

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9. Refer to the information above. The expected rate of return on average investment will be approximately:

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Use the following to answer questions 10 - 12:

Downhill Gear is planning to expand its product line, which requires investment of $360,000 in special-purpose machinery. The machinery has a useful life of six years and no salvage value. The estimated annual results of offering the new products are as follows:

All revenue from the new products and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.

10. Refer to the information above. The payback period for this proposed investment is:

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11. Refer to the information above. The return on average investment for this proposed investment is:

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12. Refer to the information above. Compute the net present value of this proposed investment, using a discount rate of 12%. (An annuity table shows that the present value of $1 received annually for six years, discounted at 12%, is 4.111.)

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