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objective 21 2 1 discounted cash flow methods for capital budgeting focus on a cash 4301149

 

Objective 21.2

 

1) Discounted cash flow methods for capital budgeting focus on ________.

A) cash inflows and required rate of return

B) operating income and required rate of return

C) operating income and cost of capital

D) working capital and cost of capital

2) Net present value is calculated using the ________.

A) internal rate of return

B) discount rate

C) risk-free rate

D) predetermined overhead cost rate

 

3) Which of the following capital budgeting methods uses discounted cash flows?

A) accrual accounting rate-of-return method

B) net present value method

C) projected income method

D) payback method

 

4) The capital budgeting method which calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return is the ________.

A) payback method

B) accrual accounting rate-of-return method

C) sensitivity method

D) net present value method

 

5) Assume your goal in life is to retire with  $2,500,000. How much would you need to save at the end of each year if interest rates average 7% and you have a 20-year work life?

A) $30,130

B) $60,983

C) $250,205

D) $832,952

6) Assume your goal in life is to retire with two million dollars. How much would you need to save at the end of each year if interest rates average 6% and you have a 25-year work life?

A) $43,118

B) $55,596

C) $36,453

D) $75,503

 

7) Assume your goal in life is to retire with 3 million dollars. How much would you need to save at the end of each year if investment rates average 8% and you have a 14-year work life?

A) $41,159

B) $ 123,891

C) $ 175,706

D) $ 82,582

Answer the following questions using the information below:

 

Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $100,000. The new machine will cost $350,000 and an additional cash investment in working capital of $100,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $110,000 in additional cash inflows during the first year of acquisition and $250,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.

 

8) What is the net present value of the investment, assuming the required rate of return is 10%? Would the company want to purchase the new machine?

A) $144,240 ; yes

B) $180,000 ; yes

C) $(180,000); no

D) $(144,240); no

 

9) What is the net present value of the investment, assuming the required rate of return is 20%? Would the company want to purchase the new machine?

A) $(62,600); yes

B) $(59,880); no

C) $59,880; yes

D) $62,600; no

Answer the following questions using the information below:

 

Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $80,000. The new machine will cost $600,000 and an additional cash investment in working capital of $25,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $200,000 each additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.

 

10) What is the net present value of the investment, assuming the required rate of return is 11%? Would the hospital want to purchase the new machine?

A) $(59,050); no

B) $55,430 no

C) $59,050; yes

D) $55,430; yes

 

 

 

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