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Exam 13: Capital Budgeting Decisions

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Question 1

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What is the payback period for this investment?

A) 2.50 years.
B) 2.75 years.
C) 3.00 years.
D) 5.00 years.

E) A) and C)
F) A) and D)

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Question 2

Multiple Choice

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(Appendix 13A) What is the net present value of project X? (Do not round your intermediate calculations and round your final answer to the nearest whole number. )

A) ($11,708) .
B) $2,910.
C) $5,283.
D) $6,314.

E) A) and B)
F) B) and D)

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Question 3

Multiple Choice

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(Appendix 13B) Consider a machine that costs $115,000 now and has a useful life of seven years.This machine will require a major overhaul at the end of the fourth year that will cost X dollars.If the tax rate is 40%,and if the after-tax cash outflow for this overhaul is $3,600,what is the amount of X in dollars?

(Appendix 13A) What is the net present value of the alternative of overhauling the present system? (Do not round your intermediate calculations and round your final answer to the nearest whole number. )

(Appendix 13B)The working capital required at the start of an investment is a tax deductible cash outflow.

(Appendix 13A and 13B) A company anticipates a taxable cash receipt of $20,000 in year 3 of a project.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of this future cash flow? (Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )

The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value.The company has projected the following annual cash flows for the investment. Assuming that the cash inflows occur evenly over the year,what is the payback period for the investment? (Ignore income taxes in this problem. )

The Higgins Company has just purchased a piece of equipment at a cost of $120,000.This equipment will reduce operating costs by $40,000 each year for the next eight years.This equipment replaces old equipment that was sold for $8,000 cash.What is the new equipment's payback period? (Ignore income taxes in this problem. )

(Appendix 13A) The net present value of the project is closest to which of the following? (Do not round your intermediate calculations. )

(Appendix 13B)If a company operates at a profit,the after-tax cost of a tax-deductible cash expense is determined by multiplying the cash expense by one minus the tax rate.

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $450,000 and would have a ten-year useful life.Unfortunately,the new machine would have no salvage value.The new machine would cost $20,000 per year to operate and maintain,but would save $100,000 per year in labour and other costs.The old machine can be sold now for scrap for $50,000.The simple rate of return on the new machine is closest to which of the following? (Ignore income taxes in this problem. )

(Appendix 13A) What is the net present value of ALL cash flows associated with this investment,rounded to the nearest dollar? (Do not round your intermediate calculations. )

(Appendix 13A)Mark Stevens is considering opening a hobby and craft store.He would need $100,000 to equip the business and another $40,000 for inventories and other working capital needs.Rent for the building to be used by the business will be $24,000 per year.Mark estimates that the annual cash inflow from the business will amount to $90,000.In addition to building rent,annual cash outflow for operating costs will amount to $30,000.Mark plans to operate the business for only six years.He estimates that the equipment and furnishings could be sold at that time for 10% of their original cost.Mark uses a discount rate of 16%.(Ignore income taxes in this problem. ) Required: Would you advise Mark to make this investment? Use the net present value method.

(Appendix 13A) The present value of all future annual operating cash inflows is closest to which of the following? (Do not round your intermediate calculations. )

If new equipment is replacing old equipment,any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment.

(Appendix 13A) Horn Corporation is considering investing in a four-year project.Cash inflows from the project are expected to be as follows: Year 1,$2,000;Year 2,$2,200;Year 3,$2,400;Year 4,$2,600.If using a discount rate of 8%,the project has a positive net present value of $500,what was the amount of the original investment? (Ignore income taxes in this problem. ) (Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )

(Appendix 13B) What is the approximate annual after-tax savings in cash operating costs?

(Appendix 13B)To determine the effect of income taxes on a project,multiply the net present value of the project by one minus the tax rate.

The payback period on the new machine is closest to which of the following?

(Appendix 13B)Not all cash inflows are taxable.