5. Which of the following capital budgeting methodsignores the time value of money?
A. Accounting rate of return
B. Internal rate of return
C. Net present value
D. Profitability index
6. Eagle Corporation is considering the purchase of anew machine. The machine cost $550,000 and will generate an annualnet cash inflow of $100,000. What is the paybackperiod?
A. 4 years and 6 months
B. 5 years
C. 5 years and 6 months
D. 6 years and 1 month
7. Cardinal Company purchased a new machine for$125,000. The machine will last eight years and will be depreciatedusing the straight-line method. The estimated residual value of themachine is zero and should generate a yearly cash inflow of$30,000. Ignoring taxes, what is the accounting rate ofreturn?
A. 3.65%
B. 11.50%
C. 23.00%
D. 24.00%
8. Which of the following decision rules is a correctstatement?
A. If the net present value is positive, do not invest in thecapital asset.
B. If the internal rate of return is less than the required rateof return, invest in the asset.
C. Investments with longer payback periods are more desirable,all else being equal.
D. If the net present value is positive, invest in the capitalasset.
9. Which of the following is NOT a factor whenconsidering the time value of money?
A. The interest rate
B. The principal amount
C. The payback period
D. The number of periods
10. The final step in the capital budgeting process isto:
A. identify potential capital investments.
B. engage in capital rationing, if necessary, to choose amongalternative investments.
C. utilize decision rules when screening out undesirableinvestments.
D. perform post-audits after making capital investments.
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