Exam 21: Capital Budgeting and Cost Analysis

A "what-if" technique that examines how a result will change if the original predicted data are NOT achieved or if an underlying assumption changes is called ________.

Which of the following is a limitation of AARR method?

The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does NOT track cash flows and it ignores the time value of money.

A loss on the disposal of a replacement asset is an irrelevant fact when estimating relevant cash flows of a capital asset decision.

Which of the following capital budgeting methods uses discounted cash flows?

Discounted cash flow methods of evaluating capital expenditures focuses on the operating income as calculated under accrual accounting rules.

Discounted cash flow methods do not consider the present value of the cash flows after the recovery of the initial investment.

Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The machine sells for $36,586 and requires working capital of $4,000. Its estimated useful life is five years and will have a salvage value of $4,000. Recovery of working capital will be $4,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $10,000. Required: a.Compute the net present value at a 14% required rate of return. b.Compute the internal rate of return. c.Determine the payback period of the investment.

If the net present value for a project is positive, which of the following is true?

In the "make decisions by choosing among alternatives" stage of the capital budgeting process, a company determines which investment yields the greatest benefit and the least cost to the organization.

Flilane Tire Company needs to overhaul its auto lift system or buy a new one. The facts have been gathered, and they are as follows: Required: Which alternative is the most desirable with a current required rate of return of 15%? Show computations, and assume no taxes.

Post-investment audits prevent managers from overstating the expected cash inflows from projects and accepting projects they should reject.

EIF Manufacturing Company needs to overhaul its drill press or buy a new one. The facts have been gathered, and they are as follows: Required: Which alternative is the most desirable with a current required rate of return of 20%? Show computations, and assume no taxes.

Hypore Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $348,400. The annual cost savings if the new machine is acquired will be $80,000. The machine will have a 6-year life, at which time the terminal disposal value is expected to be zero. Hypore Park Department is assuming no tax consequences. What is the internal rate of return for Hypore Park Department?

A company financial analyst estimates that a project that will cost $150,000 will return the following cash flows: Year 1 $45,000 Year 2 $55,000 Year 3 $60,000 year 4 $85,000 Year 5 $90,000 Calculate the discounted payback period if required rate of return is 10%

What are the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method?

Which of the following is a component of net-initial-investment cash flows?

Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $170,000. The new machine will cost $700,000 and an additional cash investment in working capital of $115,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $150,000 in additional cash inflows during the year of acquisition and $180,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 9%? Would the hospital want to purchase the new machine?

The payback method of capital budgeting approach to an investment decision ________.

The Enor Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $99,360 and has predicted cash inflows of $20,000 per year for 8 years. It will have no salvage value. Required: a.Using a required rate of return of 10%, determine the net present value of the investment proposal. b.Determine the proposal's internal rate of return.