Exam 10: Decentralization

For what reason are the net present value and internal rate of return methods of capital budgeting superior to the payback method?

Equipment purchased on the last day of a company's fiscal year for a total cost of $10,000 is in a capital asset class that has a 10% per annual depreciation rate allowed for tax purposes.In the year of acquisition of this asset,the allowable tax deduction will be:

The present value of the net cash flows (all cash inflows less all cash outflows)occurring during year 4 is:

The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero.

Trimaine and Marjorie Manufacturing is considering the replacement of some old machinery with new machinery due to technology advancement that should save them $16,000 in net cash operating costs.The estimated life of the new equipment is 8 years and it will cost $50,000.What is the payback period?

Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment that has no salvage value.The project would provide net income each year as follows for the life of the project: The company's required rate of return is 12%.What is the payback period for this project?

Jimbob Co.wishes to incorporate the consideration of the impact of inflation in its capital budgeting.The following estimates pertain to a project:

The preference rule for ranking projects by the profitability index is: the higher the profitability index,the more desirable the project.

Sam Weller is thinking of investing $70,000 to start a bookstore.Sam plans to withdraw $15,000 from the business at the end of each year for the next five years.At the end of the fifth year,Sam plans to sell the business for $110,000 cash.At a 12% discount rate,what is the net present value of the investment?

Stratford Company purchased a machine with an estimated useful life of seven years.The machine will generate cash inflows of $90,000 each year over the next seven years.If the machine has no salvage value at the end of seven years,and assuming the company's discount rate is 10%,what is the purchase price of the machine if the net present value of the investment is $170,000?

The net present value is closest to:

The payback period for the investment is closest to:

Mark Stevens is considering opening a hobby and craft store.He would need $100,000 to equip the business and another $40,000 for inventories and other working capital needs.Rent on the building used by the business will be $24,000 per year.Mark estimates that the annual cash inflow from the business will amount to $90,000.In addition to building rent,annual cash outflow for operating costs will amount to $30,000.Mark plans to operate the business for only six years.He estimates that the equipment and furnishings could be sold at that time for 10% of their original cost.The working capital will be fully released for other purposes at the end of the six years.Mark uses a discount rate of 16%. Required: Would you advise Mark to make this investment? Use the net present value method.