Exam 9: Capital Budgeting and Cash Flow Analysis

The set of investment projects arranged in descending order according to their expected rates of return is known as the ____.

The Weis Corp. purchased a new conveyor system to replace an older less automated system. The old system, which was 10 years old, was being depreciated on a straight line basis over its 20-year life at $25,000 per year. The new system will be depreciated as a 7-year asset for MACRS purposes. The more efficient machine, which costs $520,000 installed, will reduce operating costs by $74,000 per year. Compute the net cash flows in year 3 for the new system. Assume a 40% tax rate. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Most firms choose accelerated depreciation methods because

Which of the following would not be classified as a capital expenditure for decision-making purposes?

There is neither a gain or a loss on the sale of a depreciable asset for an amount exactly equal to its ____.

A firm's cost of capital is:

Which of the following is not a major step in the capital budgeting process?

Jim Bo's currently has annual cash revenues of $240,000 and annual operating expenses of $185,000 including $35,000 in depreciation. The firm's marginal tax rate is 40 percent. A new cutting machine can be purchased for $120,000 will increase revenues by $50,000 per year while operating expenses would increase to $205,000, including $42,000 in depreciation. Compute Jim Bo's annual incremental after-tax net cash flows.

Martin Tartans, Inc. is considering the purchase of a new argyle sock knitting machine to replace a less automated one. The new machine will cost $220,000 plus $30,000 for shipping and installation. The machine being replaced was purchased five years ago for $140,000 and depreciated as a 7-year MACRS property. It can be sold for $24,000. Boll Mills has a marginal tax rate of 35%. Compute the NINV for the project. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9000.The equipment's $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.

Pixaire purchased a new mixer to replace an older system. The older system which cost $100,000 is 5 years old now and was being depreciated over a MACRS life at 7 years. The new mixer, which will cost $270,000, will also be depreciated as a 7 year asset for MACRS purposes. The new mixer is expected to increase revenues by $64,000 with no additional operating expenses. Determine the net operating cash flows in year 2 for the new mixer. Assume a 40% tax rate. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

There are four ways tax consequences may affect the after-tax net proceeds received from the sale of an asset. Describe the four ways and the tax impact.

List the reasons that the marginal cost of capital schedule increases as more funds are sought in the capital markets.

A term meaning that the firm has limited funds and must choose only those projects that will be profitable is:

Which of the following is not a major difficulty in implementing the basic capital budgeting model?

Which of the following items is not considered as a part of the net investment calculation?

When managers knowingly bias estimates of cash flows from investment projects in order to serve their personal objectives, they are ____.

The net cash flows for any year during the life of capital expenditure project are equal to the change in ____ plus the change in ____.

Cash flows for all investment projects should be projected over the ____ of the project.

An investment project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annual depreciation from the project is $30,000 and the firm's tax rate is 40 percent. Determine the project's annual net cash flows.