Exam 11: Capital Budgeting

A company is considering the purchase of some equipment that in the second year of operation should cause an increase in sales of $150,000, an increase in cash expenses of $90,000, and a depreciation deduction of $45,000.If the appropriate tax rate is 20%, the after-tax effect of this equipment on cash flows in year two is _____.

Depreciation and book values are relevant operating cash flows.

An initial investment of $42,000 is expected to generate annual cash flows of $10,000, $15,000, $15,000, and $12,000, respectively.Assume straight-line depreciation and ignore income taxes.The payback period is _____.

Projects that recoup their investment quickly may be less risky than those that require a longer wait.

_____ and financing decisions are two key aspects of capital budgeting.

The only relevant cash flows are those that will differ among alternatives.

The time it will take to recoup, in the form of cash inflows from operations, the initial dollars invested in a project

A reduction in a cash outflow _____.

Nominal rate = real rate - inflation.

When considering a capital?budgeting project, a manager should first determine the _____.

Identify which one of the following statements is true.

An asset with a book value of $320,000 is sold at a $240,000 pre-tax gain in a year when the tax rate is 20%._____ is the net after-tax cash inflow resulting from this transaction.

ARR = increase in expected average annual operating income x initial required investment.

A positive NPV means that accepting the project will increase the value of the firm.

Quoted market interest rate that includes an inflation element

The decline in the general purchasing power of the monetary unit

Williams Corporation is considering the purchase of equipment for $360,000.The asset will have a 10-year life, no terminal salvage value, and straight-line depreciation will be used for tax purposes.It is expected that annual sales of the product manufactured by the equipment will be $180,000, and that there will be annual production costs, exclusive of depreciation, equal to $120,000.The tax rate applicable to the company is 40%.The annual net after-tax cash effect of operations, exclusive of depreciation, is an) _____.

The cash inflow effect of a disposal at a gain is equal to the _____.

An initial investment of $180,000 is expected to generate $100,000 in annual cost savings over the asset's expected 3-year life.Assume straight-line depreciation and ignore income taxes.The payback period is _____.

Accelerated depreciation for tax purposes will generally produce a present value of tax savings that is _____.