Exam 12: Planning Investments: Capital Budgeting

If income taxes are not considered,which of the following is true when computing net present value? INCLUDE EXCLUDE

Use the following to answer questions Forecaster Industries is considering the purchase of a new machine that will cost the company $65,750. The machine is estimated to have a 5 year life and no salvage value. The machine is expected to generate $23,000 of cash inflows each year over the life of the asset. Forecaster's cost of capital is 12%. -Ignoring income taxes,the maximum price Forecaster should pay for this machine is:

Gfeller Brothers had earnings before interest of $1,650,000 for its most recent year-end.Total debt amounted to $10,600,000 and total assets were $19,800,000.The debt carried an interest rate of 9%,while stockholders were demanding an 18% rate of return.Ignoring income taxes,determine the firm's cost of capital.

Calculating Net Present Value requires the four steps listed below,identify the sequence in which the steps occur starting with 1 and ending with 4. _____ A.Calculate the present value of expected future cash flow using the cost of capital _____ B.Estimate the amount an timing of future cash flows associated with the potential investment. _____ C.Decide on whether or not to make the investment _____ D.Calculate the Net Present Value

The Psychic Cookie Company is considering the purchase of a new machine to produce fortune cookies in January 2010.The fortune cookie machine will cost $270,000 and Psychic's management expects it to last 6 years.If it purchases the new machine it will sell its old machine with a book value of $20,000 for $25,000 cash.At the end of six years the new machine is expected to have no salvage value.Depreciation each year on the fortune cookie machine will be $45,000 and Psychic's tax rate is 30%.The Pretax cash flows expected from the machine at the end of the following year are: Required: (A.)Calculate the net present of the new machine if the cost of capital is 15%. (B.)Indicate whether or not Psychic should buy the new machine and explain the basis for your decision (do not use positive or negative NPV as an explanation):

The weighted average cost of a firm's debt and equity financing is referred to as the firm's:

In which of the following steps in the capital budgeting process would sensitivity analysis be used?

After computing a net present value that indicated that the return would be in excess of the cost of capital,you presented an investment proposal to the CFO of your company.The CFO notices that you assumed that the cost of the asset would be written off evenly over its economic life.She comments that the firm often uses accelerated depreciation (a method under which more depreciation is recorded in the early years of an asset's life and less later).How will this change in depreciation methods affect the net present value? Explain.

Parker Pacific,Inc.has $2,000,000 in debt and $3,000,000 in stockholders' equity.If the debt carries an interest rate of 14%,and the stockholders are demanding a 15% rate of return,Parker's cost of capital is:

Kaw Inc.had sales of $500,000 and cash operating expenses of $320,000 and depreciation expense of $50,000 for the year just ended.If Kaw's income tax rate is 40%,its net after-tax cash flows amounted to:

Capital budgeting is:

Donnelly Company is considering investing in a sizable piece of equipment and their analysis yielded a positive NPV of $23,500.Which of the following statements is not True?

Pro Care,Inc.sold equipment with a cost of $62,700 and accumulated depreciation of $39,500 for $24,800 cash.If Pro Care's income tax rate is 30%,the after-tax cash inflow from the sale of the equipment was:

Paderno Inc.had cash sales of $1,300,000 and operating expenses of $825,000 for the year just ended.Included in the operating expenses was $220,000 of depreciation expense with the rest being cash expenses.If Paderno's income tax rate is 35%,its net after-tax cash flows amounted to:

After arriving at a positive net present value,you recently presented an investment proposal to the investment committee at your company.The committee directs you to recompute the net present value after adjusting the required rate of return for the higher-than-normal riskiness of the proposal.How would you change the rate of return?

Depreciation expense taken on plant assets does not directly decrease cash.However,depreciation does provide a "tax shield".Explain the concept of a "tax shield" as it relates to depreciation expense.

Northstar,Inc.had sales of $650,000 and operating expenses of $480,000 for the year just ended.Included in the operating expenses was $35,000 of depreciation expense.If Northstar's income tax rate is 40%,its net after-tax cash flows amounted to:

Why should qualitative factors be considered in the capital budgeting process?

Standard Corporation is considering the purchase of a new truck that will cost the company $48,780.The truck is estimated to have a 5 year life and no salvage value.The truck is expected to save the company $13,532 of operating costs per year over its useful life.Standard's cost of capital is 12%.Ignoring income taxes,determine the net present value of the truck.Should Standard purchase the truck?