Use the following information to answer questions 15-18
A company is considering investing in two projects; Classy and Sassy with initial investments of $200,000 and $80,000, respectively. Each project is expected to have a life of five (5) years and an ending book value of $120,000. The expected profits generated by the projects are as follows:
Profits after tax and depreciation
Project Classy
|
Project Sassy
|
$
|
$
|
60,000
|
20,000
|
60,000
|
40,000
|
30,000
|
80,000
|
30,000
|
22,000
|
60,000
|
38,000
|
240,000
|
200,000
|
15. The average profit per annum for project Classy would be?
a. $60,000
b. $48,000
c. $240,000
d. $200,000
16. The average profit per annum for project Sassy would be?
a. $40,000
b. $38,000
c. $80,000
d. $20,000
17. he accounting rate of return (ARR) on average capital for project Classy would be?
a. 20%
b. 12.5%
c. 30%
d. 40%
18. The accounting rate of return (ARR) on average capital for project Sassy would be?
a. 50%
b. 33%
c. 20%
d. 40%
19. The following data relates to a company’s decision on whether to purchase a machine costing $200,000. The salvage value is estimated at $12,000 and the annual after-tax net income is $45,000.
Determine the machines’ accounting rate of return, assuming even receipt of its net cash flows during the year and use of straight line depreciation.
a) 45%
b) 42.5%
c) 22.5%
d) 23.5%
20. Which statement best describes capital budgeting?
a) The potential benefit lost by choosing between two alternatives
b) The decision to accept or reject additional projects
c) The pay-back period on investments
d) The process of deciding how to allocate the firms scarce resources