Question

Calculate the Return on Investment for a company that has net income from a product of $55.000, net cash flows of $35,000 and the average invested assets on that product was $645,000.

a 8.5%

b 5.4%

c 9.3%

d 3.1%

The future value of $1,000 invested in an investment yielding 8% in 12 years will be $2.518. True /False

Jack wants to know how much he will need to invest today to have $50,000 in his account after 8 years. To compute this, he should use the present value of an annuity table. True/ False

An annuity is a series of unequal earnings. True/ False

A lump sum is one amount or a series of unequal amounts. True/ False

Both the accounting rate of return and the payback period ignores the time value of money. True/ False

An example of a profit center would be a department where the manager is responsible for the cost, revenue and significant capital expenditures. True /False

As a general rule, a lower payback period is better than a higher one. True/ False

Answer 1

(1)ROI is return on amount invested in the company.

average amount of assets invested are considered for calculating ROI.

ROI=[Net income/average invested assets]*100

=[$55,000/$645,000]*100

=8.5%

(2) Future value of amount invested at 8% for 12 years

=PV * (1+r)^n

PV=$1,000

r=0.08

n= 12 years

=$1,000* (1.08)^12

=$1,000*2.51817

=$2,518

TRUE

(3)

True /False

Jack wants to know how much he will need to invest today to have $50,000 in his account after 8 years. To compute this, he should use the present value of an annuity table.

Annuity table is used when there is even uniform series of cash flow each year. Here, Jack has invested one time lumpsum amount if $50,000 so he will use present value table and not annuity.

FALSE

(4) An annuity is a series of unequal earnings. True/ False

annuity is uniform series of even cash flows.

annuity can not be used for unequal earnings.

FALSE

(5) A lump sum is one amount or a series of unequal amounts.

Lumpsum amount is one tiem investment that happens at the beginning of year. It also includes uneven cash flows that occur through out the useful life

TRUE

(6)

Both the accounting rate of return and the payback period ignores the time value of money. True/ False

Formula for accounting rate of return= Average net profit/average investment

payabck period = initial investment / cash flow per year

both if them uses undiscounted cash flow/net income.

They do not use discount rate.

so, TRUE they ignores time value of money.

(7) As a general rule, a lower payback period is better than a higher one. True/ False

payback period is the time within which initial investment is covered back in form of cash inflows.

lower the payback period means that initial investment can be covered back sooner, which is better for the company.

TRUE