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1. The capital budgeting method that divides a project's annual incremental net operating income by the initial investment is the: A) internal rate of return method. B) the simple rate of return method. C) the payback method. D) the net present value method. 2. The Whitton Company uses a discount rate of 16%. The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years. The machine would have no salvage value. The net present value of this machine to the nearest whole dollar is: A) $22,460 B) $4,460 C) $(9,980) D) $12,000 3. Arthur operates a part-time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of $2,100 in Year 1, $3,200 in Year 2, and $4,000 in Year 3. If Arthur's discount rate is 10%, then the most he would be willing to pay for the new computer system would be: A) $6,652 B) $6,984 C) $7,747 D) $7,556 4. Glassett Corporation is considering a project that would require an investment of $62,000. No other cash outflows would be involved. The present value of the cash inflows would be $70,060. The profitability index of the project is closest to: A) 0.13 B) 1.13 C) 0.87 D) 0.12 5. A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year. The payback period for this machine in years is closest to: A) 0.27 years B) 10.7 years C) 3.75 years D) 40 years

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