Exam 23: Capital Investment Decisions

SkiTime Photos plans to spend $74,400 for a new machine, which is expected to generate cash inflows of $18,600 per year over its useful life of 10 years. The new machine will be depreciated on a straight-line basis over 10 years with no salvage value. What is the payback period?

In general, which of the following is true of the impact of income taxes on the internal rate of return?

Linex Corporation is considering the purchase of a new machine that costs $18,000, has an expected useful life of 10 years, and has no salvage value. Linex estimates that the machine will save the company $3,000 per year over the 10-year life. The company's hurdle rate is 12%. The present value annuity factors of 10, 12, and 14% for 10 years are 6.145, 5.650, and 5.216, respectively. The present value of $1 discounted for 10 years at 12% is 0.322. Given the data provided, the internal rate of return on the machine is:

A company with an average income tax rate of 35% sold a piece of equipment with a book value of $80,000 for $70,000 cash. What is the after-tax cash flow of this transaction?

Curritt Company purchased equipment for $360,000 that is expected to generate cash inflows from operations of $108,000 in each of the next 5 years. The machine will be depreciated on a straight-line basis with no salvage value. What is the payback period for the investment by Curritt Company?

A $240,000 asset that is being depreciated at a rate of 10% per year and will increase a company's annual net income by $40,000 a year provides an approximate unadjusted rate of return of:

Curritt Company purchased equipment for $360,000 that is expected to increase revenues $115,200 in each of the next 5 years. The machine will be depreciated on a straight-line basis with no salvage value. What is the unadjusted rate of return on the initial investment by Curritt Company?

What is the average cost of a firm's debt and its equity?

Sensitivity analysis can be used to evaluate the uncertainty of:

Which of the following is a characteristic of the unadjusted rate of return?

A company may decide to invest in a project even if the investment returns less than the cost of capital. The qualitative reasons for doing so include all BUT which of the following?

Carroll Corporation is considering the purchase of a new machine that costs $144,000, has an expected useful life of 10 years, and has no salvage value. Merriam estimates that the machine will give the company a net income of $24,000 per year over the 10-year life. The company's hurdle rate is 12%.

If the tax rate is 40% and a company has $200,000 of pre-tax income, a depreciation deduction of $40,000 would result in a tax savings of:

A profitability index is a method of:

If the tax rate is 40% and a company has $400,000 of pre-tax income, a depreciation deduction of $25,000 would result in a tax savings of:

Speedy Movers is considering the purchase of a new moving truck that will reduce fuel and maintenance costs as well as increase revenues. Data related to the new truck follows: Assume all cash flows occur at the end of the year and the company will depreciate the truck using straight-line depreciation. Calculate the net present value of the truck. Should the company purchase the new truck? Explain your answer.

Tootie Clothing Store is considering opening a new store. The expected purchase price is $270,000, expected annual revenues are $150,000, and expected annual costs are $90,000, including $22,500 of depreciation. The store has an unadjusted rate of return of approximately:

Hildale Hotels has been told that it must install a fire sprinkler system. System A would cost $400,000 immediately, but it would not add to annual operating costs. System B costs only $250,000, but it would add $25,000 a year to operating costs. Both systems have a useful life of 10 years. The hotel's hurdle rate is 12%. Given the data provided, with a present value of an annuity for 10 years at 12% of 5.650 and a present value of $1 for 10 years at 12% of 0.322, the company should:

If the tax rate is 40% and a company has $400,000 of pre-tax income, the company would have an after-tax income of:

The "true" discount rate of a capital investment is calculated by using the: