The Capital Budgeting Process Involves All Of The Following Except

Question: The capital budgeting process involves all of the following except:

Answer: Determining which financial institution to use for financing.

Question: The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

Answer: Capital budgeting.

Question: The break-even time (BET) method is a variation of the:

Answer: Payback method.

Question: Restating future cash flows in terms of present values and then determining the payback period using these present values is known as:

Answer: Break-even time (BET)

Question: The calculation of the payback period for an investment when net cash flow is uneven is:

Answer: Determining when the cumulative total of net cash flows reaches zero.

Question: The calculation of annual net cash flow from a particular investment project should include all of the following except:

Answer: General and administrative expenses.

Question:

Answer: Depreciation on machine = $54,000/6 = $9,000Annual cash flows = $6,600 + $9,000 = $15,600; Payback period = $54,000 / $15,600 = 3.46 years

Question:

Answer: 5.16 years. Explanation

Sales$20,000 Cash expenses (2,300) Depreciation (5,900) Income before tax$11,800 Income tax expense (40%) (4,720) Net income$7,080

Annual cash flows:

Net income$7,080 Plus depreciation (add back) 5,900 Cash flows$12,980

Payback period = $67,000/$12,980 = 5.16 years

Question:

Answer: Explanation

Annual NetCash FlowsCumulativeCash FlowsYear 0 $(100,000) Year 1$40,000 $(60,000) Year 2 40,000 (20,000) Year 3 35,000 15,000 Year 4 35,000 50,000 Year 5 30,000 80,000

Paid back in year 3 = $20,000/$35,000 = 0.57 years; Payback period = 2 + 0.57 = 2.57 years

Question: The following relates to a proposed equipment purchase:

Cost$134,500 Salvage value$3,500 Estimated useful life 4yearsAnnual net cash flows$45,600 Depreciation methodStraight-line

The annual average investment amount used to calculate the accounting rate of return is:

Answer: Annual average investment = ($134,500 + $3,500)/2 = $69,000