. Which of the following statements about capital budgeting is true?

1. Which of the following statements about capital budgeting is true? (Points : 5)

The payback method is used to compute how profitable one project is compared to another.

If cash flows are not equal every year, the internal rate of return will be easier to compute than the net present value method.

Other things being equal, if a project is acceptable using the net present value method, it will be also acceptable using the internal rate of return method.

A company’s “cost of capital” is the same thing as the interest rate it pays on long-term debt.

2. The Salty Snacks Co. is considering launching a new product that is expected to have a life of 7 years. The initial investment in equipment will cost $480,000. The projected cash revenues and cash expenses for the product are:

Year Revenues Expenses

1 $200,000 $120,000

2 250,000 130,000

3 270,000 120,000

4 220,000 130,000

5 220,000 160,000

6 200,000 130,000

7 200,000 150,000

The payback period for this project is closest to: (Points : 5)

2 years.

3 years.

4 years.

5 years.

3. Jones and Company has just purchased a new piece of equipment, the cost characteristics of which are given below:

Purchase cost when new: $30,000

Annual cost savings: $ 6,000

Salvage value: $ -0-

Life of the equipment: 15 years

The company uses a required rate of return of 10% and depreciates equipment using the straight-line method.

The net present value of the investment is: (Points : 5)

$60,000.

$45,636.

$24,000.

$15,636.

4. Nikki O’Teen quit smoking on her 25th birthday. She has decided to deposit the money she saves by not smoking into a mutual fund at the end of each year for the next 40 years. She hopes to “take a nice trip when she retires” with the money. She estimates she has been spending $500 per year on cigarettes and believes her mutual fund will earn 8% per year. How much will Nikki have for her trip? (Points : 5)

$238,492

$129,528

$ 86,400

$ 20,000

5. The City of Miami is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs. Which of the following items, all related to the transaction, would not be considered in the decision? (Points : 5)

Savings in operating costs as a result of the new vehicle.

Proceeds from disposal of the old vehicle.

Purchase price of the new vehicle.

Purchase price of the old vehicle.

6. Lido manufactures products A and B from a common raw material and have a joint process cost of $80,000. Ten thousand pounds of B can be sold at split-off for $15 per pound or processed further at an aIDitional cost of $20,000 and later sold for $16. If Lido decides to process B beyond the split-off point, operating income will: (Points : 5)

decrease by $10,000.

decrease by $20,000.

increase by $10,000.

increase by $20,000.

7. You estimate that it will take five years to complete your college education. Your parents are going to invest $18,025 today in an account that earns 12%. How much money can you withdraw at the end of each of the next five years, if you wish to have nothing left at the end? (Points : 5)

$2,833.

$10,206.

$3,600.

$5,000.

8. Pearson Co. is considering the purchase of a $200,000 machine that is expected to reduce operating cash expenses by $65,000 per year. This machine, which has no salvage value, has an estimated useful life of 5 years and will be depreciated on a straight-line basis. For this machine, the simple rate of return would be: (Points : 5)

12.5%.

10.0%.

32.5%.

20.0 %.

9. Which of the following choices correctly notes how a project’s depreciation is treated under the simple rate of return method and the internal-rate-of-return method? (Points : 5)

Simple Rate of Return: Ignored

Internal Rate of Return: Considered

Simple Rate of Return: Considered

Internal Rate of Return: Considered

Simple Rate of Return: Ignored

Internal Rate of Return: Ignored

Simple Rate of Return: Considered

Internal Rate of Return: Ignored

10. Xebex Company is considering whether to make or buy a component that is used in the production of fax machines. The annual cost of producing the 100,000 units needed by the company is as follows:

Variable manufacturing costs $300,000

Fixed manufacturing costs 100,000

Allocated corporate overhead 50,000

If Xebex were to discontinue production of the component, fixed manufacturing costs would be reduced by 80%.

Xebex should buy the 100,000 components if the per-unit cost of purchasing is less than what amount? (Points : 5)

$3.00

$3.50

$3.80

$4.50