Question 1: The average carrying value (or average investment) of an asset with no salvage value is equal to:
a. The original cost of the asset divided by its estimated useful life.
b. The original cost of the asset divided by two.
c. The average annual net cash flow of the asset multiplied by the asset's estimated useful life.
d. The average annual net income of the asset multiplied by the asset's estimated useful life.
Question 2: Bronson Company is considering replacing an existing piece of machinery with newer technology. In deciding whether to replace the existing machinery, management should consider which costs as relevant?
a. Future costs which will be classified as fixed rather than variable.
b. Future costs which will be different under the two alternatives.
c. Sunk costs associated with the old machine.
d. Historical costs associated with the old machine.
Question 3: MHT, Inc. is planning to purchase a new robot, costing $300,000. The machine is expected to yield an estimated net after tax cash flow of $90,000 per year for 8 years. The estimated salvage value of the robot is zero. To determine the net present value of the robot, the company must first multiply the $90,000 by:
a. The present value of $1.
b. Future value of $1.
c. Present value of a $1 annuity.
d. The $90,000 is not multiplied by any of the above; the $300,000 is multiplied by the future value of $1.
Question 4: Young Company is considering the possibility of investing $600,000 in a special project. This venture will return $150,000 per year for 12 years in after tax cash flows. Depreciation on the project will be $100,000 per year using straight-line depreciation. The payback period for the project is:
a. 6 years.
b. 12 years.
c. 4 years.
d. 2 years.