Question

An anticipated purchase of equipment for $1,000,000, with a useful life of eight years and no residual value, is expected to yield the following annual net incomes and net cash flows:
Year Net Income Net Cash Flow
1 $210,000 $400,000
2 180,000 320,00
3 145,000 280,000
4 125,000 270,000
5 60,000 220,000
6 60,000 220,000
7 60,000 220,000
8 60,000 220,000
1. What is the cash payback period?
2. All of the following are advantages of using the average rate of return except:
A. The average rate of return is easy to compute.
B. The average rate of return method uses present values.
C. The average rate of return method includes the entire amount of the income earned over the life of the proposal.
D. None of these choices are correct.
3. The interest rate used in net present value analysis is referred to as the
a. rate of return on investments.
b. hurdle rate.
c. internal rate of return.
d. none of these choices are correct.
4. When using capital rationing, unfunded proposals
a. are discarded for purposes of decision making for all future plans.
b. may be reconsidered if funds later become available.
c. are always considered to be unacceptable.
d. none of these choices are correct.

Answer 1

Answer:

3 years

The average rate of return method includes the entire amount of the income earned over the life of the proposal.

a. rate of return on investments

b. may be reconsidered if funds later become available.

Explanation:

Cash payback period measures how long it takes to recover the amount invested in a project from the cumulative cash flow.

Amount invested = $-1,000,000

Amount recovered in year 1 = $-1,000,000 + $400,000 = $-600,000

Amount recovered in year 2 = $-600,000 + 320,00 = $-280,000

Amount recovered in year 3 = $-280,000 + 280,000 = 0

The amount invested is recovered In the 3 year

Average accounting rate = average net income/ average book value

Net present value is the present value of after tax cash flows from an investment less the amount invested. The interest rate used is the rate of return on investments.

The hurdle rate is the least acceptable rate that a project can have for it to be acceptable.

I hope my answer helps you