Exam 21: Capital Budgeting and Cost Analysis

List the capital budgeting methods used to analyze financial information.

Discuss a range of factors that managers may have to consider when making capital budgeting decisions that are strategic in nature.

Bock Construction Company is considering four proposals for the construction of new loading facilities that will include the latest in ship loading/unloading equipment. After careful analysis, the company's accountant has developed the following information about the four proposals: Required: How can this information be used in the decision-making process for the new loading facilities? Does it cause any confusion?

In using the net present value method, only projects with a zero or positive net present value are acceptable because ________.

The net present value method accurately assumes that project cash flows can only be reinvested at the company's required rate of return.

Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is referred to as ________.

Cast Iron Stove Company wants to buy a molding machine that can be integrated into its computerized manufacturing process. It has received three bids for the machine and related manufacturer's specifications. The bids range from $3,500,000 to $3,550,000. The estimated annual savings of the machines range from $260,000 to $270,000. The payback periods are almost identical and the net present values are all within $8,000 of each other. The president just doesn't know what to do about which vendor to choose since all of the selection criteria are so close together. Required: What suggestions do you have for the president?

The accrual accounting rate-of-return method is a discounted cash flow approach to analyzing possible capital budget expenditures.

Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $120,000. The new machine will cost $650,000 and an additional cash investment in working capital of $105,000 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 $130,000 in additional cash inflows during the year of acquisition and $110,000 each additional year of use. The new machine has a five-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 16%? Would the hospital want to purchase the new machine?

The income taxes saved as a result of depreciation deductions are irrelevant because they decrease cash outflows.

Network Service Center is considering purchasing a new computer network for $82,000. It will require additional working capital of $13,000. Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs, excluding depreciation, of $15,000. At the end of eight years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not considered. Required: a.If the company has a required rate of return of 14%, what is the net present value of the proposed investment? b.What is the internal rate of return?

Difend Cleaners has been considering the purchase of an industrial dry-cleaning 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 $360,000 and an additional cash investment in working capital of $170,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $130,000 in additional cash inflows during the first year of acquisition and $290,000 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 6%? Would the company want to purchase the new machine?

Sam's Structures desires to buy a new crane and accessories to help move and install modular buildings. The machine sells for $75,000 and requires working capital of $10,000. Its estimated useful life is six years and it will have a salvage value of $17,560. Recovery of working capital will be $10,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $20,000. Required: a.Compute the net present value at a 12% required rate of return. b.Compute the internal rate of return. c.Determine the payback period of the investment.

Assume your goal in life is to retire with 1 million dollars. How much would you need to save at the end of each year if investment rates average 5% and you have a 16-year work life?

A commitment to a new capital project will always result in an increase in net working capital.

In the "make predictions" stage of the capital budgeting process, a company forecasts all potential net income additions those are attributable to the alternative projects.

The NPV method is the preferred method over IRR for selecting projects because ________.

Explain why the term tax shield is used in conjunction with depreciation.

Which of the following best describes the internal rate-of-return (IRR) method?