Exam 13: Capital Investment Decisions: Appraisal Methods

In computing the net present value of a project, a manager uses a cost of capital number that is too low. This error causes the manager to compute a net present value that:

Dale Davis Company is evaluating a proposal to purchase a new machine that would cost £100,000 and have a salvage value of £10,000 in four years. It would provide annual operating cash savings of £10,000, as follows: If the new machine is purchased, the old machine will be sold for its current salvage value of £20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of £2,000. The old machine's present book value is £40,000. If kept, in one year the old machine will require repairs predicted to cost £35,000. Dale Davis's cost of capital is 14 per cent. Required: Should the new machine be purchased? Why or why not?

The accounting rate of return is calculated as

A firm is evaluating a project that has a net present value of £0 when a discount rate of 8 per cent is used. A discount rate of 10 per cent will result in

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 per cent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

Figure 13-3 Glady, Inc., is considering the purchase of production equipment that costs £800,000. The equipment is expected to generate annual cash inflows of £250,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 14 per cent. -Refer to Figure 13-3. If depreciation is £190,000 per year, Glady's accounting rate of return based on the average investment would be

Which of the following methods assumes a reinvestment rate equal to the discount rate?

A capital investment project requires an investment of £75,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Required: a. Compute payback assuming that the cash flows occur evenly throughout the year. b. Compute the net present value of the project using a 12 per cent discount rate.

A firm is considering a project with an annual cash flow of £200,000. The project would have a 7-year life, and the company uses a discount rate of 10 per cent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable?

Figure 13-6 JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent. -Refer to Figure 13-6. JD's approximate internal rate of return of the project is

The Bradshaw Company is considering purchasing equipment for £78,000. This equipment will save the company £22,000 in operating costs annually. The payback period for this equipment is

A firm is considering a project requiring an investment of £14,150. The project would generate annual cash inflows of £3,300 per year for the next seven years. The approximate internal rate of return for the project is

____ are capital budgeting models that identify criteria for accepting or rejecting projects without considering the time value of money.

Figure 13-1 A project requires an investment of £90,000 in equipment. Annual cash inflows of £15,000 are expected to occur for the next ten years. No salvage value is expected. -Refer to Figure 13-1. Using the initial capital investment, the accounting rate of return for the project would be

Figure 13-6 JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent. -Refer to Figure 13-6. If depreciation is £90,000 per year, JD's accounting rate of return based on the average investment would be

A firm is considering two projects with the following cash flows: Each project requires an investment of £120,000. Which project will have the higher net present value?

A firm is considering a project requiring an investment of £100,000. The project would generate annual cash inflows of £26,380 per year for the next five years. The approximate internal rate of return for the project is

The internal rate of return model assumes that all net cash inflows are reinvested at the:

The present value of £10,000 to be received five years from now and earning a 12 per cent return is

What is a weakness of the payback method?