Exam 12: Statement of Cash Flows

Johnson Corp.has an 8% required rate of return.It's considering a project that would provide annual cost savings of $50,000 for 5 years.The most that Johnson would be willing to spend on this project is Present Value PV of an Annuity Year of 1 at 8\% of 1 at 8\% 1 .926 .926 2 .857 1.783 3 .794 2.577 4 .735 3.312 5 .681 3.993

The internal rate of return method is, like the NPV method, a discounted cash flow technique.

If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are

If project A has a lower payback period than project B, this may indicate that project A may have a

The internal rate of return factor is also the

The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.

Using the net present value method, a net present value of zero indicates that the project would not be acceptable.

One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.

A company's discount rate is based on the

Which of the following does not consider a company's required rate of return?

Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns.

A project with an initial investment of $70,000 and a profitability index of 1.239 also has an internal rate of return of 12%.The present value of net cash flows is

Use the following information for questions Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return. $\text { Present Value of an Annuity of } 1$ Period 8\% 9\% 10\% 11\% 12\% 15\% 6 4.623 4.486 4.355 4.231 4.111 3.784 -What is the approximate profitability index associated with this equipment?

A project with a zero net present value indicates that it is

Companies often assume that the risk element in the discount rate is

Net annual cash flow can be estimated by

Use the following table for questions . $\text { Present Value of an Annuity of } 1$ Periods 8\% 9\% 10\% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 -A company has a minimum required rate of return of 9%.It is considering investing in a project that costs $210,000 and is expected to generate cash inflows of $84,000 at the end of each year for three years.The net present value of this project is

Which of the following will cause the internal rate of return to increase?

A company projects an increase in net income of $30,000 each year for the next five years if it invests $300,000 in new equipment.The equipment has a five-year life and an estimated salvage value of $100,000.What is the annual rate of return on this investment?

Discounted cash flow techniques include all of the following except