11 Jan Question 4. (TCO 7) Assume that a

Week 6 quiz

1. Question : (TCO 7) The payback capital budgeting technique considers the following.

Time Value of Money Income Over Entire Life of Project

Yes Yes

Yes No

No Yes

No No

Question 2. Question : (TCO 7) The Valley Corporation is considering (as of 1/1/08) the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation through 2011. If Valley decides to replace the old machine, Baker Company has offered to purchase it for $50,000 on the replacement date. The disposal value of the old machine would be zero at the end of 2011. Valley uses the straight-line method of depreciation for all classes of machinery.

If the replacement occurs, a new machine would be acquired from Busby Industries on January 2, 2008. The purchase price of $500,000 for the new machine would be paid in cash at the time of replacement. Due to increased efficiency of the new machine, estimated annual cash savings of $150,000 would be generated through 2011, the end of its expected useful life. The new machine is expected to have a zero disposal price at the end of 2011.

All operating cash receipts, operating cash expenditures, and applicable tax payments and credits are assumed to occur at the end of the year. Valley uses the calendar year for reporting purposes.

Discount tables for several different interest (discount) rates that are to be used in any discounting calculations are given below. Unless told otherwise, assume that Valley is not subject to income taxes.

Period 6% 8% 10% 12% 14%

1 .94 .93 .91 .89 .88

2 .89 .86 .83 .80 .77

3 .84 .79 .75 .71 .68

4 .79 .74 .68 .64 .59

5 .75 .68 .62 .57 .52

Present Value of an Annuity of $1.00 Received at the End of Each Period

Period 6% 8% 10% 12% 14%

1 0.94 0.93 0.91 0.89 0.88

2 1.83 1.78 1.73 1.69 1.65

3 2.67 2.58 2.49 2.40 2.32

4 3.47 .3.31 3.17 3.04 2.91

5 4.21 3.99 3.79 3.61 3.43

The payback period to replace the old machine with the new machine is

3.3 years.

3.0 years.

4.0 years.

2.5 years.

Question 3. Question : (TCO 7) The Valley Corporation is considering (as of 1/1/08) the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation through 2011. If Valley decides to replace the old machine, Baker Company has offered to purchase it for $50,000 on the replacement date. The disposal value of the old machine would be zero at the end of 2011. Valley uses the straight-line method of depreciation for all classes of machinery.

If the replacement occurs, a new machine would be acquired from Busby Industries on January 2, 2008. The purchase price of $500,000 for the new machine would be paid in cash at the time of replacement. Due to increased efficiency of the new machine, estimated annual cash savings of $150,000 would be generated through 2011, the end of its expected useful life. The new machine is expected to have a zero disposal price at the end of 2011.

All operating cash receipts, operating cash expenditures, and applicable tax payments and credits are assumed to occur at the end of the year. Valley uses the calendar year for reporting purposes.

Discount tables for several different interest (discount) rates that are to be used in any discounting calculations are given below. Unless told otherwise, assume that Valley is not subject to income taxes.

Present Value of $1.00 Received at the End of the Period

Period 6% 8% 10% 12% 14%

1 .94 .93 .91 .89 .88

2 .89 .86 .83 .80 .77

3 .84 .79 .75 .71 .68

4 .79 .74 .68 .64 .59

5 .75 .68 .62 .57 .52

Present Value of an Annuity of $1.00 Received at the End of Each Period

Period 6% 8% 10% 12% 14%

1 0.94 0.93 0.91 0.89 0.88

2 1.83 1.78 1.73 1.69 1.65

3 2.67 2.58 2.49 2.40 2.32

4 3.47 .3.31 3.17 3.04 2.91

5 4.21 3.99 3.79 3.61 3.43

The accrual accounting rate of return on initial investment to the nearest percent is

0%.

11.0%.

5.6%.

30%.

Question 4. (TCO 7) Assume that a required rate of return of 12% is used to compute the NPV of a project. If NPV is positive, IRR is greater than 12%.

True

False

Question 5. (TCO 7) If the income tax rate for a profitable company is 30%, a depreciation deduction of $10,000 results in a tax savings of $7,000 (before considering the time value of money).

True

False