Exam 21: Capital Budgeting and Cost Analysis

The Golden Shades Corporation disposes a capital asset with an original cost of $320,000 and accumulated depreciation of $140,000 for a salvage price of $42,000. Golden Shades's tax rate is 35%. Calculate the after-tax cash inflow from the disposal of the capital asset.

Accrual accounting rate of return is calculated by dividing an increase in expected average annual after-tax operating income by the net initial or average investment.

Locil Corporation recently purchased a new machine for $307,890 with a eight-year life. The old equipment has a remaining life of eight years and no disposal value at the time of replacement. Net cash flows will be $90,000 per year. What is the internal rate of return?

Relevant cash flows are expected future cash flows that differ among the alternative uses of investment funds.

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 $100,000. The new machine will cost $430,000 and an additional cash investment in working capital of $100,000 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 $140,000 in additional cash inflows during the first year of acquisition and $270,000 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 company want to purchase the new machine?

Tax deductions for depreciation result in tax savings that partially offset the cost of acquiring the capital asset.

Managers prefer projects with higher IRRs to projects with lower IRRs, if all other things are equal.

In the "obtain information" stage of capital budgeting, a company gathers information from all parts of the value chain to evaluate alternative projects.

Gibson Manufacturing is considering buying an automated machine that costs $600,000. It requires working capital of $60,000. Annual cash savings are anticipated to be $280,200 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $24,000. The working capital will be recovered at the end of the machine's life. Required: Compute the accrual accounting rate of return based on the initial investment.

Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis.

The discount rate used to calculate the NPV should be the interest rate that the company could borrow at to finance the proposed capital project.

Which of the following is a stage of the capital budgeting process that indicates potential capital investments that agree with an organization's strategy?

Diamond Manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of eight years and the new equipment will cost $141,969 with a eight-year life. The expected additional cash inflows are $37,000 per year. What is the internal rate of return?

A weaknesses of the payback method is that it does not consider a project's cash flows after the payback period.

Depreciation is usually NOT considered an operating cash flow in capital budgeting because ________.

Investment A requires a net investment of $604,021 The required rate of return is 12% for the three-year annuity. What are the annual cash inflows if the net present value equals 0? (rounded)

A company is looking to purchase and replace a fixed asset for $245,000. It will sell the asset that will be replaced for $46,000 but will incur a $20,000 gain upon that sale. It must also commit $30,000 of working-capital to the investment. The firm's tax rate is 35%. What is the amount of the relevant initial investment?

Net initial investment in the project includes the acquisition of assets and any associated additions to working capital, minus the after-tax cash flow from the disposal of existing assets.

Which of the following statements is true of accrual accounting rate of return (AARR) method and internal rate of return (IRR) method?

Net present value is calculated using which of the following?