Question

1. The length of time required to recover the initial cash outlay for a project is determined by using the:

discounted cash flow method.

net present value method.

simple rate of return method.

payback method.

2. A preference decision in capital budgeting:

is concerned with whether a project clears the minimum required rate of return hurdle.

involves using market research to determine customers' preferences.

comes before the screening decision.

is concerned with determining which of several acceptable alternatives is best.

3. Some investment projects require that a company increase its working capital. Under the net present value method, the investment and eventual recovery of working capital should be treated as:

both an initial cash outflow and a future cash inflow.

irrelevant to the net present value analysis.

a future cash inflow.

an initial cash outflow.

4. The best capital budgeting method for ranking investment projects of different dollar amounts is the:

net present value method.

payback period.

project profitability index.

simple rate of return method.

5.The capital budgeting method that recognizes the time value of money by discounting cash flows over the life of the project, using the company's required rate of return as the discount rate is called the:

payback method.

financing method.

simple rate of return method.

net present value method.

6.The management of Kunkel Company is considering the purchase of a $25,000 machine that would reduce operating costs by $6,000 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 11%.

Required:

1. Determine the net present value of the investment in the machine.

2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?

Answer 1