1. Identify four reason s that capital budgeting decisions by manager are risky.
2. Identify two disadvantages of using the payback period for comparing investments.
3. Why should managers set the required rate of return higher than the rate at which money can be borrowed when making typical capita budgeting decision?
4. Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the payback period for this investment.
Year 1 Year 2 Year 3 Year 4 Year 5 Total
Net Cash Flows................60,000 40,000 70,000 125,000 35,000 330,000
5. A machine can be purchase for $150,000 and used for 5 years, yielding the following net incomes. In projecting net incomes, double-declining balance depreciation is applied, using a 5 year life and a zero salvage value. Compute the machine's payback period (ignore taxes).
Year 1 Year 2 Year 3 Year 4 Year 5
Net incomes.....................10,000 25,000 50,000 37,500 100,000
6. Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $250,000 and will yield the following expected cash flows. Management requires investments to have a payback period of three years, and it requires a 10% return on investments.
Period Cash Flow
1 47,000
2 52,000
3 75,000
4 94,000
5 125,000
(1) Determine the payback period for this investment.
(2) Determine the breakeven time for this investment
(3) Determine the net present value for this investment.