Exam 19: Capital Investment

Capital investment decisions are concerned with planning, setting goals, arranging financing, and the selection of __________ assets.

Clementine Company is considering the purchase of a new machine for $160,000. The machine would generate an annual cash flow before depreciation and taxes of $62,588 for four years. At the end of four 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 per year?

Mutually exclusive projects do not affect the __________ of other projects.

Missoula Office Services is considering the purchase of a new server to replace the one in operation. Data on the new server are as follows: Cost \ 12,000 Salvage value at the end of five years \ 1,000 Useful life, in years 5 Annual operating cost \ 4,000 If the existing server is kept and used, it would require the purchase of additional hardware a year from now costing $2,000. After the use of the server for five years, the salvage value would be $300. Additional information on the existing system is as follows: Additional years of use 5 Annual operating costs \ 9,000 Remaining book value \ 12,000 Current salvage value \ 3,000 Cost of capital 12\% The company uses the straight-line method of depreciation with no mid-year convention. Required: Should the new server be purchased? Why or why not?

Hollister Company is considering the purchase of a new machine for $60,000. The machine would generate an annual cash flow before depreciation and taxes of $25,647 for four years. At the end of four 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 accounting rate of return on the original investment in the machine approximated to two decimal points?

Spiritlight Ventures is considering the following investment: Investment \ 140,000 Annual revenues \ 96,000 Annual variable costs \ 32,000 Annual fixed out-of-pocket costs \ 20,000 Salvage value \ 12,000 Discount rate 12\% Expected life of project 8 years Ignore income taxes. The present value of the annual cash flow (rounded) is

Fill in the lettered blanks in the following table: Investment A Investment B Investment C Amount of investment \ 80,000 () \ 20,000 Economic life in years 10 5 8 Annual cash flow \ 10,000 () \ 2,500 Payback period in years () 4 (d) Present value of cash flows () \ 66,000 () Net present value \ 5,500 \ 6,000 (\ 1,000)

A project requires an investment of $40,000 in equipment. Annual cash flows of $8,000 are expected to occur for the next eight years. No salvage value is expected. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The accounting rate of return on the original investment for the project is

Which of the following statements is true about internal rate of return?

The time required by a firm to recover its original investment is called the __________ period.

In an independent project, the required rate of return is used to calculate the future value of future cash flows.

Computation of cash flows is the most critical step in the capital investment process.

A firm is considering two mutually exclusive projects with the following cash flows: Project X Project Y Year 1 \ 40,000 \ 120,000 Year 2 80,000 80,000 Year 3 120,000 40,000 Each project requires an investment of $100,000. The cost of capital is 10 percent. Which project will have the higher net present value?

Beduin Services is considering an investment of $25,000. Data related to the investment are as follows: Year Cash Flow 1 \ 10,000 2 11,000 3 8,000 4 15,000 5 15,000 Cost of capital is 14 percent. What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

A firm is evaluating a project that has a net present value of $0 when a discount rate of 9 percent is used. A discount rate of 7 percent will result in a

Information about a project Wunderbar Company is considering is as follows: Investment \ 600,000 Revenues \ 380,000 Variable costs \ 100,000 Fixed out-of-pocket costs \ 50,000 Cost of capital 8\% 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

Five mutually exclusive projects had the following information: \ 200 \ 400 \ 2,000 \ 1,000 \ (400) IRR 11\% 13\% 10\% 12\% 8\% Which project is preferred?

Chinchilla Company is considering the purchase of a new machine for $57,000. The machine would generate an annual cash flow of $18,228 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 internal rate of return for the machine rounded to the nearest percent, assuming no taxes are paid?

Spaniel 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 accounting rate of return on the original investment in the machine approximated to two decimal points?

A firm is considering a project with an annual cash flow of $240,000. The project would have an 8-year life, and the company uses a discount rate of 12 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?