Exam 13: Pricing Decisions

In January, Wilson Company 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?

Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: The income tax rate is 40%, and the required rate of return is 16%. Amortization is $5,000 per year for the old machine. The new machine would be amortized $7,600 in 20x5, $5,700 in 20x6, $3,800 in 20x7, and $1,900 in 20x48. Assume Bailey would purchase the new machine in December 20x4 and dispose of the old machine in January 20x5. The tax effect of selling the new machine in 20x8 would be:

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

George Shaw & Co. invested in a project that was to last for 2 years. The project has an internal rate of return of 12%. The project is expected to produce cash inflows of $70,000 in the first year and $80,000 in the second year. The project cost is:

Which of the following is the best example of a tax shield for an asset?

The payback period is deficient as a decision criterion for capital projects because it: I. Disregards relative profitability II. Ignores income beyond the payback period III. Does not take into account the time value of money

The Bonkers Corp. is contemplating the purchase of a piece of equipment with the following cash flow data: Incremental Year Initial Cost Contribution 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?

The rate of return that results in a zero net present value for a project is called the:

Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: The income tax rate is 40%, and the required rate of return is 16%. Amortization is $5,000 per year for the old machine. The new machine would be amortized $7,600 in 20x5, $5,700 in 20x6, $3,800 in 20x7, and $1,900 in 20x8. Assume Bailey would purchase the new machine in December 20x4 and dispose of the old machine in January 20x5. The net cash flow associated with selling the old machine in January 20x5 (i.e., the value of the sale and any tax consequences) would be:

In a capital budgeting analysis, nominal cash flow is generally calculated as:

Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: The income tax rate is 40%, and the required rate of return is 16%. Amortization is $5,000 per year for the old machine. The new machine would be amortized $7,600 in 20x5, $5,700 in 20x6, $3,800 in 20x7, and $1,900 in 20x8. Assume Bailey would purchase the new machine in December 20x4 and dispose of the old machine in January 20x5. The relevant annual pretax cash operating cost associated with Bailey's decision will be:

Which of the following capital budgeting methods ignores the time value of money?

Arnold Company 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 \1 00,000 Annual cost savings in cash expenses 45,000 Terminal value 8,000 Maintenance required in the 4th year 5,000 Book value of the old machine 20,000 The new machine would replace an old fully-amortized 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 amortization on all machines (ignore the half-year convention). Note: some amounts are rounded. The present value of the cash flows from the sale of the old machine is:

If nominal cash flow is calculated as real cash flow × (1 + i)^t in an NPV analysis, i denotes the:

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

The time value of money is taken into account when calculating: I. Mortgage payments II. Car payments III. Future values of savings accounts

Disquotek, Inc., 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 amortization 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 cash flow associated with disposing of the new equipment at its salvage value in 8 years?

Green Inc. has invested in a project with a cost of $36,504, annual net cash flows of $12,000, a terminal value of $4,000, and a 5-year useful life. The firm uses a 16% discount rate. Compute the internal rate of return to the nearest tenth of a percent. Ignore income taxes.

The real and nominal methods are most closely associated with:

Arnold Company 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 \1 00,000 Annual cost savings in cash expenses 45,000 Terminal value 8,000 Maintenance required in the 4th year 5,000 Book value of the old machine 20,000 The new machine would replace an old fully-amortized 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 amortization on all machines (ignore the half-year convention). Note: some amounts are rounded. The present value of the maintenance cost in year 4 is: