Exam 7: Capital Budgeting Decision Methods

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the project's MIRR, using the 8.50% as the reinvestment rate? Report your answer to two decimal places.

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the net operating cash flow for year 2? Round your answer to the nearest dollar.

A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4. All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project's modified internal rate of return? Calculate to two decimal places.

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the project's IRR? Report your answer to two decimal places.

The internal rate of return is best described as the discount rate that:

Independent projects:

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the project's DPB, using the 8.50% discount rate? Report your answer to two decimal places.

Which of the following items would not represent an incremental cash flow?

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the project's PB? Report your answer to two decimal places.

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the net operating cash flow for year 4? Round your answer to the nearest dollar.

A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4. All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project's net present value?

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the net operating cash flow for year 0? Round your answer to the nearest dollar.

A cost that has been incurred, or will be incurred, whether a project is accepted or rejected, is known as:

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the net operating cash flow for year 1? Round your answer to the nearest dollar.

What is the difference between the payback period and the discounted payback period?

A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4. All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project's internal rate of return? Calculate to two decimal places.

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the depreciable basis of the new machine?

A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4. All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project's discounted payback period?

Use the following data to answer questions below Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6). The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%. -What is the net operating cash flow for year 3? Round your answer to the nearest dollar.

The net present value represents: