Capital Budgeting Paper 12

1

A characteristic of the payback method (before taxes) is that it






2

The length of time required to recover the initial cash outlay of a capital project is determined by using the






3

Which one of the following statements about the payback method of investment analysis is correct? The payback method






4

The payback reciprocal can be used to approximate a project’s






5

The bailout payback method






6

Whatney Co. is considering the acquisition of a new, more efficient press. The cost of the press is $360,000, and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax rate. In evaluating equipment acquisitions of this type, Whatney uses a goal of a 4-year payback period. To meet Whatney’s desired payback period the press must produce a minimum annual before-tax operating cash savings of






7

The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins’ plant will cost $12000 . Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4,000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Dickins has a marginal tax rate of 40%. What is the approximate payback period on Dickins’ new machine?






8

Fitzgerald Company is planning to acquire a $250,000 machine that will provide increased efficiencies, thereby reducing annual operating costs by $80,000. The machine will be depreciated by the straight-line method over a 5-year life with no salvage value at the end of 5 years. Assuming a 40% income tax rate the machine’s payback period is






9

When ranking two mutually exclusive investments with different initial amounts, management should give first priority to the project






10

The bailout payback method






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