Capital Budgeting Paper 12


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


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


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


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


The bailout payback method


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


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?


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


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


The bailout payback method


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