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Exam 12: Statement of Cash Flows

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Question 61

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Use the following information for questions Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below: $\begin{array}{lrr}&\text { Project Soup }&\text { Project Nuts }\\\text { Initial investment } & \$ 400,000 & \$ 600,000 \\\text { Annual net income } & 30,000 & 46,000 \\\text { Net annual cash inflow } & 110,000 & 146,000 \\\text { Estimated useful life } & 5 \text { years } & 6 \text { years } \\\text { Salvage value } & -0- & -0-\end{array}$ The company requires a 10% rate of return on all new investments. $\text { Present Value of an Annuity of } 1$ $\begin{array}{rrrr}\text { Periods }&9\%&10\%&11\%&12\%\\5 & 3.890 & 3.791 & 3.696 & 3.605 \\6 & 4.486 & 4.355 & 4.231 & 4.111\end{array}$ -The net present value for Project Nuts is

A) $635,830.
B) $200,330.
C) $100,000.
D) $35,830.

E) B) and D)
F) B) and C)

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Question 62

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The profitability index is calculated by dividing the total cash flows by the initial investment.

A) True
B) False

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Question 63

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Which of the following is based directly on accrual accounting data rather than cash flows?

When using the cash payback technique, the payback period is expressed in terms of

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments is the

The higher the risk element in a project, the

All of the following statements about the internal rate of return method are correct except that it

The capital budgeting technique that indicates the profitability of a capital expenditure is the

Use the following information for questions A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used. -The cash payback period on the equipment is

Garza Company is considering buying equipment for $320,000 with a useful life of five years and an estimated salvage value of $16,000.If annual expected income is $28,000, the denominator in computing the annual rate of return is

If a project costing $80,000 has a profitability index of 1.00 and the discount rate was 12%, then the present value of the net cash flows was

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

Use the following information for questions Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below: $\begin{array}{lrr}&\text { Project Soup }&\text { Project Nuts }\\\text { Initial investment } & \$ 400,000 & \$ 600,000 \\\text { Annual net income } & 30,000 & 46,000 \\\text { Net annual cash inflow } & 110,000 & 146,000 \\\text { Estimated useful life } & 5 \text { years } & 6 \text { years } \\\text { Salvage value } & -0- & -0-\end{array}$ The company requires a 10% rate of return on all new investments. $\text { Present Value of an Annuity of } 1$ $\begin{array}{rrrr}\text { Periods }&9\%&10\%&11\%&12\%\\5 & 3.890 & 3.791 & 3.696 & 3.605 \\6 & 4.486 & 4.355 & 4.231 & 4.111\end{array}$ -The internal rate of return for Project Nuts is approximately

The cash payback period is computed by dividing the cost of the capital investment by the

The capital budget for the year is approved by a company's

Use the following table for questions . $\text { Present Value of an Annuity of } 1$ $\begin{array}{rrrr}\text { Periods }&8\%&9\%&10\%\\1 & .926 & .917 & .909 \\2 & 1.783 & 1.759 & 1.736 \\3 & 2.577 & 2.531 & 2.487\end{array}$ -A company has a minimum required rate of return of 10%.It is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $25,000 at the end of each year for three years.The profitability index for this project is

The profitability index is computed by dividing the

Use the following information for questions Selma Inc. is comparing several alternative capital budgeting projects as shown below: $\begin{array}{lrrr}&\text { Projects A}&\text { Projects B}&\text { Projects C}\\\text { Initial investment } & \$ 80,000 & \$ 120,000 & \$ 160,000 \\\text { Present value of net cash flows } & 90,000 & 110,000 & 200,000\end{array}$ -Using the profitability index, how many of the projects are acceptable?

The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.