Question

33. The cash payback method can be used only when net cash inflows are the same for each period.

true or false

34.

The average rate of return method of analyzing capital investment decisions measures the average rate of return from using the asset over its entire life.

True

False

35.

A company is considering purchasing a machine for $21,000. The machine will generate operating income of $2,000; annual net cash inflows from the machine will be $3,500. The cash payback period for the new machine is 6 years.

True

False

Answer 1

33. Answer- False

Explanations-

The cash payback method is it tools to evaluate the capital projects to decide whether to invest or not in a particular project. The cash payback method estimate how long a project will take to cover its original or initial investment. Whether the net cash flow are same or not in each period does not effects the use of this method. It may be possible the net cash flows are different in different periods over the useful life of the projects and still the cash payback method can be used.

34. Answer- True

Explanations-

Average rate of return is also known as accounting rate of return (ARR). It means the percentage of return expected on any investment or asset in comparison with the amount initially invested.

It divides the average revenue from the Asset by the company's initial investment in order to find out the ratio of return that can be expected or generated over the lifetime of any asset or such related project. Thus we can say that the average rate of return method of analyzing capital investment decisions measures the average rate of return from using the asset over its entire life.

35. Answer- True

Explanations-

Cash payback period is a period in which the project recover its original or initial investment. In the given question initial investment = $21,000.

And annual net cash inflows = $3500.

Thus , Cash payback period= cost of capital investment ÷ net annual cash flow.

= $ 21,000 / $ 3,500.

= 6 years.

Hence, the given statement is true that the cash payback period for the new machine is 6 years.