Exam 13: Capital Budgeting and Strategic Investment Decisions

Protiviti is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. What is the internal rate of return on this investment?

Christoph wants to purchase a machine for a new product line that costs $138,750. The company's engineering department estimates the machine will last 10 years and provide an annual contribution margin of $25,000. Ignore income taxes. The internal rate of return to the nearest tenth of a percent is:

In January, Thomas Ltd purchased a new machine for $80,000 that has a useful life of 10 years and a terminal value of $5,000. Annual cash operating savings from the machine are $20,000. The income tax rate is 40%. What is the after-tax payback period?

The time value of money is important in completing a net present value analysis.

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 total savings (excluding the maintenance in year 4) in annual cash operating costs is:

Axios is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: Purchase cost \ 12,000 \ 36,000 Annual depreciation 1,500 4,500 Remaining useful life (years) 8 8 Current selling price 14,400 not applicable Selling price in 8 years 1,000 2,000 Annual operating costs 14,000 8,000 What is the relevant after-tax annual cash operating cost associated with this decision?

The nominal method of NPV analysis adjusts future cash flows for the impact of inflation.

In completing a sensitivity analysis for a capital budgeting project, which of the following would typically be varied? I $\quad$ Disconnt rate II $\quad$ Future cash flows III $\quad$ Future accrual-basis revernues ard expenses

Qualitative factors often influence strategic investment decisions. Which of the following is the best example of such a factor?

Philipp would like to automate its calligraphy operation. The equipment will cost $150,000 plus freight, installation, and testing costs of $5,500. The expected life of the project is 8 years, with annual cost savings of $20,000. The minimum rate of return is 12% and estimated terminal value is $3,000. Ignore income taxes. The profitability index of the project is

If the internal rate of return exceeds the discount rate, the net present value is:

Some of the steps in the process for addressing capital budgeting decisions are listed below. Which lettered choice puts the steps in the proper order? 1 Identify relevant cash flows. 2 Perform sensitivity analysis. 3 Apply quantitative techniques.

Sapient Ltd is contemplating the purchase of a piece of equipment with the following cash flow data: Incremental Terminal Value 0 \ 84,000 1 \ 30,000 2 25,000 3 20,000 4 15,000 \ 9,000 Ignoring income taxes, what is the payback period?

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 for year 4 is:

Inflation refers to the:

The tax savings cash flows are treated differently under the nominal and real methods. Which of the following reflects this treatment? a. Inflated Deflated b. Deflated Used as is c. Used as is Deflated d. Deflated Inflated

Melvin Ltd has the following equity structure: Long-term debt Preference shares Ordinary shares \ 300,000 500,000 200,000 10\% 10 15 6\% 10 15 Melvin's weighted average cost of capital is:

Which of the following is the best example of a capital budgeting decision?

Managers should consider qualitative information in making capital budgeting decisions.

Last semester a class gave a teacher $810 to fly to Bali. However, he decided not to go until he had enough money to fly back, an additional $690. If he invests the $810 at 8%, when can he make the trip, assuming no change in ticket prices?