30 clapton corporation is considering an investment in new equipment costing 900 000 4306833

30 clapton corporation is considering an investment in new equipment costing 900 000 4306833

30) Clapton Corporation is considering an investment in new equipment costing $900,000. The equipment will be depreciated on a straight-line basis over a ten-year life and is expected to have a salvage value of $90,000. The equipment is expected to generate net cash flows of $140,000 for each of the first five years and $100,000 for each of the last five years. What is the accounting rate of return associated with the equipment investment?

A) 8.89%

B) 9.23%

C) 8.52%

D) 7.88%

31) A company is evaluating three possible investments. Following information is provided by the company.

Project A

Project B

Project C

Investment

$200,000

$50,000

$200,000

Salvage value

0

5,000

10,000

Net cash flows:

Year 1

50,000

25,000

80,000

Year 2

50,000

16,000

50,000

Year 3

50,000

12,000

60,000

Year 4

50,000

9,000

20,000

Year 5

50,000

0

0

What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method.)

A) 3.0 years

B) 2.0 years

C) 4.0 years

D) 5.0 years

32) A company is evaluating three possible investments. Each uses straight-line method of depreciation. Following information is provided by the company.

Project A

Project B

Project C

Investment

$200,000

$50,000

$200,000

Salvage value

0

5,000

10,000

Net cash flows:

Year 1

50,000

25,000

80,000

Year 2

50,000

16,000

50,000

Year 3

50,000

12,000

60,000

Year 4

50,000

9,000

20,000

Year 5

50,000

0

0

What is the accounting rate of return for Project B?

A) 15.08%

B) 10.214%

C) 15.45%

D) 14.54%

33) A company is evaluating three possible investments. Each uses straight-line method of depreciation. Following information is provided by the company.

Project A

Project B

Project C

Investment

200,000

$50,000

$200,000

Salvage value

0

5,000

50,000

Net cash flows:

Year 1

50,000

25,000

80,000

Year 2

50,000

16,000

50,000

Year 3

50,000

12,000

60,000

Year 4

50,000

9,000

20,000

Year 5

50,000

0

0

What is the accounting rate of return for Project C?

A) 15%

B) 12%

C) 18%

D) 10%

34) Which of the following capital budgeting methods uses accrual accounting information?

A) payback

B) accounting rate of return

C) net present value

D) internal rate of return

Learning Objective 26-3

1) The fact that invested cash earns income over time is called the time value of money.

2) An annuity refers to a series of equal cash flows received or paid annually.

3) All else being equal, the shorter the investment period, the higher the total amount of interest earned.

4) Compound interest means that interest is calculated only on the principal amount.

5) Compound interest assumes that all interest earned will be reinvested at the same rate of interest at which the investment was originally made.

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