26 the method that measures the time it will take to recoup in the form of cash infl 4302698


26) The method that measures the time it will take to recoup, in the form of cash inflows, the total dollars invested in a project is called

A) the accrued accounting rate of return method.

B) payback.

C) internal rate of return method.

D) the book-value method.

E) the NPV.

27) The net initial investment for a new mainframe computer is $2,000,000. Annual cash flows are expected to increase by $800,000 per year. The equipment has a 10-year useful life.

What is the payback period?

A) 4.00 years

B) 2.50 years

C) 2.00 years

D) 1.75 years

E) 0.75 years


28) Problems encountered when the payback method is used may include

A) it is only useful when future cash flows are certain.

B) it promotes long-term projects.

C) it neglects the time value of money.

D) it emphasizes short-term projects.

E) it is easy to use.


29) Which of the following is false concerning the Payback method of capital budgeting?

A) It uses the accrual accounting rate of return.

B) The payback method highlights liquidity.

C) Its major strength is that it that it is easy to use.

D) It does not project cash flows after the recovery of the initial investment.

E) Shorter payback periods give an organization more flexibility.


30) A company is considering two different purchases from a vendor, for a high-speed photocopier. The regular model costs $4,500 and the deluxe model costs $6,100. The company has projected cash savings of $800 for the first year, and then $850 annually thereafter for the regular model, but the vendor is claiming that the deluxe model is $400 cheaper per year to operate than the regular model. What are the payback periods for the Regular and Deluxe models, respectively?

A) 4.88 years; 5.63 years

B) 5.08 years; 5.29 years

C) 5.29 years; 4.88 years

D) 5.29 years; 5.63 years

E) 5.35 years; 4.92 years


31) An accounting measure of income divided by an accounting measure of investment is called

A) accrual accounting rate of return.

B) bailout payback.

C) book-value method.

D) rate of return on assets method.

E) net previous value.


32) A rental company replaces its heavy drilling machine every four years (no salvage value). It is contemplating acquiring a larger machine, at a cost of $70,000, which is guaranteed to last for seven years. The current machine can be traded-in for a $3,000 down payment on the new machine, and the company expects annual savings in operating costs of $15,000.

What is the AARR for the new machine?

A) 2.86%

B) 6.85%

C) 7.14%

D) 20.55%

E) 21.43%


33) Return on investment (ROI) is also known as

A) internal rate of return.

B) accrual accounting rate of return.

C) payback.

D) net present value.

E) time-adjusted rate of return.


34) Alberta Ltd. is considering the purchase of new machinery which costs $147,800. The machine is expected to save $42,300 in operating costs annually for the next 7 years. By how much can the annual cost savings fall (to the nearest hundred dollars) and still provide a 16% return? Ignore income taxes.

A) $5,700

B) $36,600

C) $21,200

D) $42,300

E) $0


35) Saturn Ltd. wants to automate one of its production processes. The new equipment will cost $180,000. In addition, Saturn will incur installation and testing costs of $5,000 and $8,500 respectively. The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000. The annual cash savings are estimated at $32,000. The company's required rate of return is 14%. Ignore income taxes. What is the net present value of this investment?

A) ($25,246)

B) $80,500

C) ($11,746)

D) ($45,056)

E) ($38,746)



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