Capital Budgeting Paper 19

1

If a $1,000 bond sells for $1,125, which of the following statements are correct?
I. The market rate of interest is greater than the coupon rate on the bond.
II. The coupon rate on the bond is greater than the market rate of interest.
III. The coupon rate and the market rate are equal.
IV. The bond sells at a premium.
V. The bond sells at a discount.






2

Para Co. is reviewing the following data relating to an energy saving investment proposal:
Cost $50,000
Residual value at the end of 5 years 10,000
Present value of an annuity of 1 at 12% for 5 years 3.60
Present value of 1 due in 5 years at 12% 0.57
What would be the annual savings needed to make the investment realize a 12% yield?






3

Para Co. is reviewing the following data relating to an energy saving investment proposal:
Cost $50,000
Residual value at the end of 5 years 10,000
Present value of an annuity of 1 at 12% for 5 years 3.60
Present value of 1 due in 5 years at 12% 0.57
What would be the annual savings needed to make the investment realize a 12% yield?






4

On December 31, 2013, Jet Co. received a $10,000 note receivable from Maxx, Inc. in exchange for services rendered. Interest is calculated on the outstanding balance at the interest rate of 3% compounded annually and payable at maturity. The note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, 2013, was 8%. The compound interest factors are as follows:
Future value of $1 due in nine months at 3% 1.0225
Future value of $1 due in five years at 3% 1.1593
Present value of $1 due in nine months at 8% .944
Present value of $1 due in five years at 8% .680
At what amounts should this note receivable be reported in Jet’s December 31, 2013 balance sheet?






5

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest






6

At what stage of the capital budgeting process would management most likely apply present value techniques?






7

How is the discounted payback method an improvement over the payback method in evaluating investment projects?






8

The capital budgeting technique known as payback period uses
Depreciation expense . . . . Time value of money






9

Which of the following is a strength of the payback method?






10

Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is ten years, with no residual value, and would be depreciated by the straight-line method. The payback period is






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