Short Questions
105. For each of the capital budgeting methods listed below, place an X in the correct column, indicating the measurement basis of each, the ability to make comparison among projects, and whether each method reflects or ignores the time value of money.
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Measurement Basis
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Comparison among Projects
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Time Value of Money
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Cash Flows
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Accrual Income
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Allows Comparison
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Difficult to Compare
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Reflects Time Value of Money
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Ignores Time Value of Money
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Payback period
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Accounting rate of return
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Net present value
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Internal rate of return
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106. Bower Co. is reviewing a capital investment of $50,000. This project's projected cash flows over a five-year period are estimated at $20,000 each year.
Required:
a. Calculate the payback period.
b. Calculate the break-even time. Assume a 12% hurdle rate and use the table below:
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Present Value
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Periods
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of 1 at 12%
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1
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0.8929
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2
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0.7972
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3
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0.7118
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4
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0.6355
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5
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0.5674
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c. Using the results in (a) and (b) make a recommendation for the project.
107. A company is considering purchasing a machine for $75,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $7,500. What is the payback period for this machine?
108. A company is considering purchasing a machine for $123,000. The machine is expected to generate a net after-tax income of $8,200 per year. Depreciation expense would be $12,300. What is the payback period for this machine?
109. A company is considering purchasing a machine for $600,000. The machine is expected to generate a net after-tax income of $15,000 per year. Depreciation expense would be $60,000. What is the payback period for this machine?