Exam 12: Planning Investments: Capital Budgeting

Which of the following is the correct order of events in the capital budgeting process?

When calculating net present value of an investment,the present value of the expected future cash flows represents:

What are the four reasons a company will make operating investments and how does management know what investments to select?

Use the following to answer questions Union Company is contemplating the acquisition of a new computer that will cost the company $19,500. The computer is expected to last 4 years, after which time it will be discarded. Union's cost of capital is 10%, and use of the computer is expected to reduce the company's annual cash operating costs by the following amounts: -Ignoring income taxes,Union should:

Which of the following is an operational investment?

Ness Corporation purchased a machine with a cost of $100,000 and paid $500 in freight charges and $1,000 to have it installed.Ness failed to take advantage of a $2,000 discount it would have received if it had paid $98,000 cash within ten days of the purchase.How much is the cost of the machine?

Barton Inc had assets of $15,350,000 and owners' equity of $4,975,000 at December 31,2010.Their net income for the year was $750,000 and their interest expense for the year was $830,000.Given the amount of leverage of the firm the stockholders demanded a 17% rate of return.Given this information what is the firm's cost of capital?

Explain why both the timing and quantity of cash flows are significant in determining net present value.

A capital investment generates a satisfactory rate of return when its return is:

The capital budgeting process uses the four processes listed below,identify the sequence in which the processes occur starting with 1 and ending with 4. _____ A.Financing the selected investment. _____ B.Identifying long-term investment opportunities. _____ C.Evaluating the investments. _____ D.Selecting appropriate investment.

The Katrina Corp is considering the purchase of a new machine that produces hurricane proof windows in January 2010.The window machine will cost $300,000 and Katrina's management expects it to last 6 years.At the end of six years the new machine is expected to have a zero book value but could be sold for $25,000.Depreciation each year on the window machine will be $50,000 and Katrina's tax rate is 30%.The Pretax cash flows expected from the machine are as follows: Required: (A.)Calculate the net present of the new machine if the cost of capital is 15%. (B.)Indicate whether or not Katrina should buy the new machine and explain the basis for your decision (do not use positive or negative NPV as an explanation):

A capital investment generates a satisfactory rate of return when its return is:

Capital investments in operating assets are made:

Under the net-present-value method,if the cost of the asset is less than the present value of the future cash flows,the:

The first step in the capital budgeting process is:

If net present value is computed using after-tax cash flows which of following are included in the computation of the net present value?

All of the below are part of the capital budgeting process,which of them is not based on an estimate.

Roadmaster Corporation reported depreciation expense of $345,800 for the year just ended.Assuming a 35% income tax rate,the amount of the tax shield created by the depreciation was:

Explain how performance evaluation based on accrual accounting may lead to investment decisions that are not in the best interests of the firm.

Late in 2010,the Spencer K Corporation has projected the pretax cash flows shown below for a dabblemaster that cost $460,000.If Spencer K Corp's tax rate is 40% and its cost of capital is 14 percent.The projected cash flows and depreciation for the dabblemaster are described below. Required: (A.)Calculate the net present value of the dabblemaster given the pretax cash flows and depreciation described above and indicate whether you would recommend purchasing the assets. (B.)If Spencer K Corp used straight-line depreciation of $94,000 per year for 5 years would your answer be the same?