Question :
95.Why the payback period often criticized?
A.It requires trial and error : 1302831
95.Why is the payback period often criticized?
A.It requires trial and error to determine the quantitative amount on which to make a decision.
B.It ignores the cash flows after the end of the payback period.
C.It requires the estimate of a hurdle rate that is subject to uncertain economic effects.
D.It is based on accounting income, which most likely differs from the actual cash flows.
96.Which of the following statements about the payback period method is true?
A.All other things being equal, a company would prefer a project with a longer payback period.
B.The payback period method ignores the time value of money.
C.The payback period method is more sophisticated and yields better decisions than the internal rate of return method.
D.The payback period method takes into account the total stream of cash flows, which are difficult to predict.
97.Hammer Saw Tools is considering a $7,000 investment. Which of the following alternative cash inflows has the shortest payback period?
A.$8,000 in Year 5
B.$0 in Year 1, $8,000 in Year 2
C.$1,500 per year for Years 1 through 5
D.$3,000 in year 1, $2,500 per year for Years 3 and 4
98.JT Corp. has a cost of capital of 6.2% and a required rate of return of 7.9%. The company evaluated an investment and determined the IRR to be zero. Should JT accept or reject the investment and why?
A.Accept, because the investment will generate the minimum required return
B.Reject, because the investment will not generate any cash flows.
C.Accept, because the required rate of return is greater than the cost of capital
D.Reject, because investment will generate a return that is less than the minimum required rate of return
99.An investment project has an accounting rate of return of 10.8%. The initial outlay for the investment is $91,000. The hurdle rate is 10.2%. Which of the following indicates a proper interpretation?
A.The investment earns a net income of 10.8 cents on each dollar invested.
B.The investment earns a cash return of 10.8 cents on each dollar invested.
C.The investment earns a net income of 10.8 cents on each dollar of sales generated.
D.The investment earns a cash return of 10.8 cents on each dollar of sales generated
100.Why might the accounting rate of return be low in the initial years of an investment?
A.Because the depreciation tax shield is negative
B.Because customers are not willing to spend money in the initial years
C.Because the investment base will be higher in the initial years
D.Because the company must pay for the investment at the beginning of the first year
101.A company with $800,000 in operating assets is considering purchasing a machine that costs $300,000 with an estimated salvage value of $40,000. The acquisition is expected to reduce operating costs by $55,000 in year 1, with a $5,000 increase in cost savings per year for each of the remaining years of its 6-year life. How long is the payback period?
A.4.7 years
B.5.7 years
C.5.5 years
D.4.4 years
*102.Oakridge Appliances is deciding whether to purchase a machine for $84,000 that is expected to yield the following net cash flow savings:
Year 1 $25,000
Year 2 $40,000
Year 3 $45,000
What is the internal rate of return on this project?
A.43.7%
B.13.4%
C.29.8%
D.23.6%
103.Redrum Hotel is considering a project with a 5-year life and which would require a $325,000 investment in equipment with no salvage value. The project would provide income each year as follows for the life of the project:
Sales $225,000
Variable costs$80,000
Fixed costs 95,000 175,000
Income before taxes $ 50,000
The income tax rate is 30%. Depreciation is included in the fixed costs amount. The company’s required rate of return is 8%. Calculate the payback period for this project.
A.3.25 years
B.6.50 years
C.2.83 years
D.9.29 years
104.Hurlizter Pianos has just purchased a piece of equipment at a cost of $345,000. This equipment will reduce cash operating costs by $65,000 each year for the next 5 years. This equipment has a salvage value of $20,000. Ignoring income taxes, how long will it take for the company to recover its entire cash investment?
A.5.23 years
B.5.00 years
C.4.92 years
D.The company will never recover its entire investment.
