Exam 11: Capital Budgeting

When using the NPV model, a world of uncertainty is assumed.

The cost of capital is sometimes referred to as _____.

Generally, the hardest part of making capital-budgeting decisions is predicting the relevant cash flows.

The lower the minimum desired rate of return, the lower the present value of each future cash inflow.

Gable Company is considering the purchase of a new $80,000 delivery van.The van will have a useful life of 5 years, no terminal salvage value, and tax depreciation will be calculated using the straight-line method.If the van is purchased, the company will be able to increase annual revenues by $90,000 per year for the life of the van, but out-of-pocket expenses will also increase by $60,000 per year.Assume a tax rate of 20% and a required after-tax rate of return equal to 10%.The annual net after-tax cash effect of operations, exclusive of depreciation, is an) _____inflow.

Errors in forecasting terminal disposal values are usually not crucial because the present value of these flows is small.

When considering the net cash inflows resulting from a capital-budgeting decision, taxes will _____.

A reduction in a cash outflow is not treated the same way as a cash inflow.

The lower the minimum desired rate of return, the _____.

A type of capital-budgeting model that focuses on cash inflows and outflows and the time value of money

In the net-present-value model, the perfect capital markets assumption means that _____.

Dove Company pays taxes of 25% on their first $30,000 of pretax income, and 40% on any taxable income in excess of $30,000.The marginal tax rate, if current pretax income is $45,000, is _____.

An asset with a book value of $160,000 is sold at a loss before taxes are considered) of $40,000.If the applicable tax rate is 20%, the net after-tax cash effect of this transaction is an) _____.

"The higher the minimum desired rate of return, the higher the price that a company will be willing to pay for cost-saving equipment." Do you agree? Explain.

A pattern of depreciation that charges a larger proportion of an asset's cost to the earlier years and less to the later years

Long-term planning for making and financing investments that affect financial results for more than the current year is called _____.

The marginal income tax rate is the tax rate paid on additional amounts of taxable income.

_____ is not a common way to recognize risk.

Used in capital budgeting, it shows the financial consequences that would occur if actual cash inflows, outflows, and project lives differed from those expected

James Corporation is considering the purchase of an asset for $400,000.It is expected that the product manufactured by the equipment can be sold for $150,000 and there will be annual production costs, exclusive of depreciation, equal to $80,000.The asset will have a 10-year life, no terminal salvage value, and straight-line depreciation will be used for tax purposes.The tax rate applicable to the company is 30%.The total net annual after-tax effect on cash resulting from the investment is a _____.