The payback reciprocal can be used to approximate a project's
Answer(s): D
The payback reciprocal (1 ÷ payback) has been shown to approximate the internal rate of return (IRR) when the periodic cash flows are equal and the life of the project is at least twice the payback period
The bailout payback method
The payback period equals the net investment divided by the average expected cash flow, resulting in the number of years required to recover the original investment. The bailout payback incorporates the salvage value of the asset into the calculation. It determines the length of the payback period when the periodic cash inflows are combined with the salvage value. Hence, the method measures risk. The longer the payback period, the more risky the investment.
Whatney Co. is considering the acquisition of a new, more efficient press. The cost of the press is $360,000, and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax rate. In evaluating equipment acquisitions of this type, Whatney uses a goal of a 4-year payback period. To meet Whatney's desired payback period, the press must produce a minimum annual before4ax operating cash savings of
Answer(s): B
Payback is the number of years required to complete the return of the original investment. Given a periodic constant cash flow, the payback period equals net investment divided by the constant expected periodic after-tax cash flow. The desired payback period is 4 years1 so the constant after-tax annual cash flow must be $90,000 ($360,000 ÷ 4). Assuming that the company has sufficient other income to permit realization of the full tax savings, depreciation of the machine will shield $60,000 ($360000 ÷ 6) of income from taxation each year, an after-tax cash savings of $24000 ($60,000 x 40%). Thus, the machine must generate an additional $66,000 ($90,000 -- $24,000) of after-tax cash savings from operations. This amount is equivalent to $1 10,000 [$66,000 ÷ (1 .0 -- .4)] of before-tax operating cash savings.
Which one of the following planning techniques is most likely to be used to determine which business units will receive additional capital and which will be divested?
Business units may be treated as elements of an investment portfolio. A portfolio should be efficient in balancing the risk with the rate of return on the portfolio. The expected rate of return of a portfolio is the weighted average of the expected returns of the individual assets in the portfolio. The variability (risk) of a portfolio's return is determined by the correlation of the returns of individual portfolio assets. To the extent the returns are not perfectly positively correlated, variability is decreased. Thus, business units should be selected that increase returns and diversify and reduce risk.
Barker, Inc. has no capital rationing constraint and is analyzing many independent investment alternatives. Barker should accept all investment proposals
A company should accept any investment proposal, unless some are mutually exclusive, that has a positive net present value or an internal rate of return greater than the company's desired rate of return.
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