Exam 16: Capital Expenditure Decisions

Consider the five items that follow,which are related to independent investment opportunities. Purchase price of a new machine: $850,000 Annual straight-line depreciation: $75,000 Annual savings in cash operating costs: $120,000 Advertising expenses related to a new marketing campaign in year 2: $35,000 Sale of an asset in year 6: Loss on sale,$60,000;proceeds received by seller,$23,000 Required: Complete the following table,inserting the (pre-discounted)cash flow amounts that would be used in a net-present-value analysis.Column A should be completed based on the assumption of no income taxes;in contrast,Column B should be completed assuming the relevant company is subject to a 30% income tax rate.Be sure to note cash outflows in parentheses.

The decision process that has managers select from among several acceptable investment proposals to make the best use of limited funds is known as:

Mad's Hatters Corporation will evaluate a potential investment in an advanced manufacturing system by use of the net-present-value (NPV)method.Which of the following system benefits is least likely to be omitted from the NPV analysis?

The accounting rate of return focuses on the:

San Remo has a $4,000,000 asset investment and is subject to a 30% income tax rate.Cash inflows are expected to average $600,000 before tax over the next few years;in contrast,average income before tax is anticipated to be $500,000.The company's after-tax accounting rate of return is:

Wrangler Company is considering a five-year project that requires a typical investment in working capital,in this case,$100,000.Consider the following statements about this situation: I.Wrangler should include a $100,000 outflow that occurs at time 0 in a discounted-cash-flow analysis. II.Wrangler should include separate $100,000 outflows in each year of the project's five-year life. III.Wrangler should include a $100,000 recovery of its working-capital investment in year 5 of a discounted-cash-flow analysis. Which of the above statements is (are)correct?

Harrison Township is studying a 700-acre site for a new landfill.The new site will save $70,000 in annual operating costs for 10 years,as Harrison currently uses the landfill of a neighboring municipality.Other data are: Purchase price per acre: $550 Site preparation costs: $110,000 Hurdle rate: 6% Ignore income taxes. Required: A. Yes,the landfill should be acquired because it has a positive net present value. A.Use the net-present-value method and determine whether the landfill should be acquired. B.Determine the landfill's approximate internal rate of return. B.Let X = present value factor $70,000X = ($385,000 + $110,000) X = 7.071 A review of annuity factors for 10 years finds an internal rate of return that falls between 6% (7.360)and 8% (6.710).

Dahlia Corporation,which is subject to a 30% income tax rate,is considering a $420,000 asset that will result in the following over its six-year life: Average revenue: $920,000 Average operating expenses (excluding depreciation): $770,000 Average depreciation: $70,000 The after-tax accounting rate of return on the initial investment is:

St.Andrews School ranks investments by using the profitability index (PI).The following data relate to Project X and Project Y: Which project would be more attractive as judged by its ranking,and why?

Which of the following choices correctly states how funds are assumed to be reinvested under the net-present-value method and the internal-rate-of-return method?

Both net present value (NPV)and the internal rate of return (IRR)have a reinvestment assumption. Required: A.In the NPV method,cash flows are assumed to be reinvested at the hurdle rate.With the IRR,cash flows are assumed to be reinvested at the same rate as the project's return. A.State the assumption for each method. B.In the NPV method,a higher hurdle rate can be used,either for the entire analysis or for the estimated cash inflows (savings)that occur late in the project's life. B.One of the advantages of the NPV method is that users can adjust for risk considerations.Explain how this is done.

When making investment decisions that involve advanced manufacturing systems,the use of net present value:

Puck Company received $18,000 cash from the sale of a machine that had a $13,000 book value.If the company is subject to a 30% income tax rate,the net cash flow to use in a discounted-cash-flow analysis would be:

Which of the following choices correctly depicts whether discounted cash flows are used by the method noted when evaluating long-term investments?

The internal rate of return on an asset can be calculated:

Jenkins plans to generate $650,000 of sales revenue if a capital project is implemented.Assuming a 30% tax rate,the sales revenue should be reflected in the analysis by a:

Of the five expenses that follow,which one is most likely treated differently than the others when income taxes are considered in a discounted-cash-flow analysis?

A piece of equipment costs $30,000,and is expected to generate $8,500 of annual cash revenues and $1,500 of annual cash expenses.The disposal value at the end of the estimated 10-year life is $3,000.Ignoring income taxes,the payback period is:

A company's cash flows for income taxes are normally affected by:

If a company desires to be in compliance with current income tax law and write off the cost of its assets rapidly,the firm would use: