1)George Company has the opportunity to purchase an asset that costs $40,000. Th
ID: 2597266 • Letter: 1
Question
1)George Company has the opportunity to purchase an asset that costs $40,000. The asset is expected to increase net income by $10,000 per year. Depreciation expense will be $5,000 per year. Based on this information the payback period is:
Multiple Choice
2.67 years.
8 years.
4 years.
2.5 years.
2)
Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below:
The company's hurdle rate is 12%. What is the present value index of Investment B? Use Appendix Table 1. (Do not round your intermediate calculations. Round your answer to two decimal points.)
Multiple Choice
1.01
1.16
0.86
None of these answers is correct.
Year Investment A Investment B 0 $ (15,000 ) $ (9,000 ) 1 5,000 5,000 2 5,000 4,000 3 5,000 3,000 4 4,000 1,000Explanation / Answer
1.Annual cash flow=Depreciation+Net icome
=(10000+5000)=$15000
Hence payback=Intitial investment/Annual cash flow
=(40000/15000)=2.67 years(Approx)
2.
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=5000/1.12+4000/1.12^2+3000/1.12^3+1000/1.12^4
=$10423.92
PI=Present value of inflows/Present value of outflows
=$10423.92/$9000
which is equal to
=1.16(Approx).
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