1. A company buys a machine for $76,000 that has an expected life of 6 years and no salvage value. The company anticipates a yearly after tax net income of $1,805. What is the accounting rate of return?
2. Watson Corporation is considering buying a machine for $20,000. Its estimated useful life is 5 years, with no salvage value. Watson anticipates annual net income after taxes of $2,100 from the new machine. What is the accounting rate of return assuming that Watson uses straight-line depreciation and that income is earned uniformly throughout each year?
3. Which of the following cash flows is not considered when using the net present value method?
A. Future cash inflows.
B. Future cash outflows.
C. Past cash outflows.
D. Non-uniform cash inflows.
E. Future year-end cash flows.
4. Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?
A. Accounting rate of return.
B. Net present value.
C. Payback period.
D. Cash flow method.
E. Return on average investment.
5. The hurdle rate is often set at:
A. The rate at which the company is taxed on income.
B. 10% above the IRR of current projects.
C. The rate the company could earn if the investment were placed in the bank.
D. The company's cost of capital.
E. 10% above the ARR of current projects.
6. The following present value factors are provided for use in this problem.
Periods Present Value of $1 at 8% Present Value of an Annuity of $1 at 8%
1 0.9259 0.9259
2 0.8573 1.7833
3 0.7938 2.5771
4 0.7350 3.3121
Xavier Co. wants to purchase a machine for $36,000 with a four year life and a $1,200 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $11,300 in each of the four years. What is the machine's net present value? (round to the nearest whole dollar)
7.Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $14,800 and will produce cash flows as follows:
End of Investment
Year A B
1 $9,200 $0
2 9,200 0
3 9,200 27,600
The present value factors of $1 each year at 15% are:
The present value of an annuity of $1 for 3 years at 15% is 2.2832
The net present value of Investment A is:
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