Exam 16: Capital Expenditure Decisions

Upton evaluates future projects by using the profitability index. The company is currently reviewing five similar projects and must choose one of the following: Which project should Upton select if the decision is based entirely on the profitability index?

Barton Company can acquire a $900,000 machine now that will benefit the firm over the next 6 years. Annual savings in cash operating costs are expected to total $190,000. If the hurdle rate is 8%, the investment's net present value is:

A company that is using the internal rate of return (IRR) to evaluate projects should accept a project if the IRR:

The internal rate of return equates the present value of a project's cash inflows with the present value of the cash outflows.

There is no adjustment in the payback method for the time value of money.

A new asset is expected to provide service over the next four years. It will cost $500,000, generates annual cash inflows of $150,000, and requires cash operating expenses of $30,000 each year. In addition, a $10,000 overhaul will be needed in year 3. If the company requires a 10% rate of return, the net present value of this machine would be:

Nominal dollars is another name for real dollars.

When income taxes are considered in capital budgeting, the cash flows related to a company's depreciation expense would be correctly figured by taking the cash paid for depreciation and:

A new machine is expected to produce a MACRS deduction in three years of $50,000. If the company has a 12% after-tax hurdle rate and is subject to a 30% income tax rate, the correct discounted net cash flow to include in an acquisition analysis would be:

If a company desires to be in compliance with current income tax law and write off the cost of its assets rapidly, the firm would use:

A company that uses accelerated depreciation:

Twilight Corporation will evaluate a potential investment in an advanced manufacturing system by use of the net-present-value (NPV) method. Which of the following system benefits is least likely to be omitted from the NPV analysis?

San Marco has a $4,000,000 asset investment and is subject to a 30% income tax rate. Cash inflows are expected to average $600,000 before tax over the next few years; in contrast, average income before tax is anticipated to be $500,000. The company's after-tax accounting rate of return is:

Grenada Company is contemplating the acquisition of a machine that costs $50,000 and promises to reduce annual cash operating costs by $11,000 over each of the next six years. Which of the following is a proper way to evaluate this investment if the company desires a 12% return on all investments?

Discounted-cash-flow analysis focuses primarily on:

Which of the following tools is sometimes used to rank investment proposals?

A company's cash flows for income taxes are normally affected by:

A cash flow measured in nominal dollars is:

Valid methods exist for ranking independent investment projects with positive net present values.

Barrel Corporation, which is subject to a 30% income tax rate, is considering a $420,000 asset that will result in the following over its six-year life: Average revenue: $920,000 Average operating expenses (excluding depreciation): $770,000 Average depreciation: $70,000 The after-tax accounting rate of return on the initial investment is: