Exam 19: Capital Investment

If the net present value is greater than zero, the investment is profitable and acceptable.

Joyous Corporation is considering an investment in equipment for $25,000. Data related to the investment are as follows: Cash Flow before Year Depreciation and Taxes 1 \ 12,500 2 12,500 3 12,500 4 12,500 Joyous uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent. What is the payback period in years approximated to two decimal points?

Which of the following is an example of an independent project?

The accounting rate of return considers the profitability of a project as well as the time value of money.

Net present value (NPV) is the difference between the present value of cash inflows and outflows associated with a project.

Independent projects directly affect the cash flows of other projects once accepted or rejected.

Core Corp. is considering the purchase of a new machine for $85,000. The machine would generate an annual cash flow of $25,500 per year for six years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the net present value of the machine, assuming no taxes are paid? (Round your answers to two decimal places.)

A firm is considering a project requiring an investment of $200,000. The project would generate an annual cash flow of $55,478 for the next five years. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The approximate internal rate of return for the project is

Information about a project Dalwhinnie Company is considering is as follows: Investment \ 1,500,000 Revenues \ 700,000 Variable costs \ 140,000 Fixed out-of-pocket costs \ 80,000 Cost of capital 12\% Tax rate 40\% The property is considered 5-year property for tax purposes. The company plans to use MACRS and dispose of the property at the end of the sixth year. No salvage value is expected. Assume all cash flows occur at the end of the year. Round amounts to dollars. The tax savings from depreciation in Year 2 would be

Vendome Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: Acquisition cost \ 500,000 Annual cash flow \ 180,000 Annual operating costs \ 30,000 Expected salvage value \ 0 Cost of capital 12\% Tax rate 40\% Vendome plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.) The tax savings from depreciation in Year 3 would be

Bodacious Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the annual net after-tax cash flow (rounded)?

Bellamy Company is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: Decreased waste \ 300,000 Increased quality 400,000 Decrease in operating costs 600,000 Increase in on-time deliveries 200,000 The system will cost $9,000,000 and will last ten years. The company's cost of capital is 12 percent. Which of the following best describes the IRR for this project?

Projects that, if accepted preclude the acceptance of all other competing projects are called:

Somozas Manufacturing Company is considering the following investment proposal: Original investment \ 12,500 Operations (per year for four years): Cash receipts \ 10,000 Cash expenditures 5,500 Salvage value of equipment after four years \ 1,000 Discount rate 12\% The firm uses the straight-line method of depreciation with no mid-year convention. What is the net present value for the investment, assuming no taxes are paid?

Los Gatos Shop is considering the purchase of a used wide-format printer costing $9,600. The wide-format printer would generate a net cash inflow of $4,000 per year for three years. At the end of three years, the printer would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid?

The process of making capital investment decisions is often referred to as:

Discounting models for making capital decisions ignore the time value of money.

If the tax rate is 55 percent and the income of a company 650,000, then a depreciation deduction of $80,000 would result in tax savings of:

A firm is evaluating a project that has a net present value of $0 when a discount rate of 8 percent is used. A discount rate of 6 percent will result in a

Anselmo Corp. is considering the purchase of a new machine for $76,000. The machine would generate an annual cash flow of $23,214 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention. What is the payback period in years for the machine approximated to two decimal points, assuming no taxes are paid?