Capital Budgeting Paper 20


All of the following capital budgeting analysis techniques use cash flows as the primary basis for the calculation except for the


Which of the following is an advantage of the accounting rate of return method of evaluating investment returns?


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 equipmentís estimated useful life is ten years, with no residual value, and it would be depreciated by the straight-line method. Tamís predetermined minimum desired rate of return is 12%. The present value of an annuity of 1 at 12% for ten periods is 5.65. The present value of 1 due in ten periods at 12% is .322. Accrual accounting rate of return based on the initial investment is


Lin Co. is buying machinery it expects will increase average annual operating income by $40,000. The initial increase in the required investment is $60,000, and the average increase in required investment is $30,000. To compute the accrual accounting rate of return, what amount should be used as the numerator in the ratio?


The capital budgeting technique known as accounting rate of return uses
Revenue over life of project . . . Depreciation expense


If an investment project has a profitability index of 1.15, then the


The net present value (NPV) method of investment project analysis assumes that the projectís cash flows are reinvested at the


A projectís net present value, ignoring income tax considerations, is normally affected by the


The discount rate (hurdle rate of return) must be determined in advance for the


The internal rate of return is the


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