Exam 13: Capital Budgeting and Strategic Investment Decisions

Hay Ltd is considering the purchase of a new truck which costs $14,340. The truck is expected to save $3,600 in operating costs annually for the next 7 years. How low can the annual cost savings be and still provide a 15% return? Ignore income taxes.

AGL is considering the purchase and implementation of an enterprise-wide information system. Which of the following would be the least biased source of qualitative information about the project?

The time value of money means

Richard borrows $10,000 from his mother. He will repay her $2,000 at the end of each of the next four years and the balance at the end of the fifth year. If the interest rate is 12%, what is the amount to be paid at the end of the fifth year?

The incremental cash tax flow for a capital budgeting project is calculated using which of the following formulas?

A firm's required rate of return is the rate which makes the

The effect of a strategic investment decision on a company's reputation is often difficult to quantify.

A depreciable asset's taxable basis is calculated as its:

Lockhart Hospital is considering the purchase of new medical equipment for $25,000. The old equipment has zero salvage value. The costs associated with operating the equipment are: Labor \ 9,000 \ 4,500 Maintenance 2,000 1,200 Miscellaneous 1,500 1,300 Depreciation 8,000 4,750 If the new machine is purchased and ignoring income taxes, the payback period is:

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: Cost of new machine \ 100000 Annual cost savings in cash expenses 45000 Terminal value 8000 Maintenance required in the 4th year 5000 Book value of the old machine 20000 The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention). The present value of the cash flows from the sale of the old machine is:

Which of the following capital budgeting methods ignores the time value of money?

A company is currently buying a part at a cost of $12 each. It is considering buying a machine that will produce the part at a variable cost of $8. Each unit of input produces the part plus a by-product, which is sold for $1. The machine will cost $40,000 and will have a useful life of 5 years. The company requires an 8% return. What annual volume is necessary to justify making the investment? Ignore income taxes.

Which of the following NPV analysis methods requires adjustment of a project's terminal value for inflation? a. Yes Yes b. No No c. Yes No d. No Yes

Managers responsible for proposing a project are likely to be favourably biased in their estimates of future project cash flows.

In capital budgeting decisions, depreciation shields part of operating profit from the effect of income taxes.

Which of the following factors are subject to uncertainty in an NPV analysis? I $\quad$ Project life II $\quad$ Appropriate discount rate III $\quad$ Terminal value

Cash flows for a capital budgeting analysis are affected by inflation, but not by deflation.

Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: Cost \ 40,000 Accumulated depreciation \ 20,000 Remaining life 4 years Current salvage value \ 5,000 Salvage value in 4 years \- 0- Annual cash operating costs \ 18,000 Cost \ 19,000 Estimated useful life 4 years Salvage value in 4 years \ 5,000 Annual cash operating costs \ 14,000 The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 2015, $5,700 in 2016, $3,800 in 2017, and $1,900 in 2018. Assume Marie would purchase the new machine in December 2014 and dispose of the old machine in January 2015. Marie's 2014 depreciation tax shield for the old machine is:

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: Cost of new machine \ 100000 Annual cost savings in cash expenses 45000 Terminal value 8000 Maintenance required in the 4th year 5000 Book value of the old machine 20000 The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention). The present value of the maintenance cost in year 4 is:

The accrual accounting rate of return method does not consider the time value of money.