Exam 16: Capital Expenditure Decisions

A new machine is expected to produce a MACRS deduction in three years of $50,000.If the company has a 12% after-tax hurdle rate and is subject to a 30% income tax rate,the correct discounted net cash flow to include in an acquisition analysis would be:

Reids Company,which uses net present value to analyze investments,requires a 10% minimum rate of return.A staff assistant recently calculated a $500,000 machine's net present value to be $86,400,excluding the impact of straight-line depreciation.If Reids ignores income taxes and the machine is expected to have a five-year service life,the correct net present value of the machine would be:

Consider the following statements about the payback period: I.As shown in your text,the payback period considers the time value of money. II.The payback period can only be used if net cash inflows are uniform throughout a project's life. III.The payback period ignores cash inflows that occur after the payback period is reached. Which of the above statements is (are)correct?

A new asset is expected to provide service over the next four years.It will cost $500,000,generates annual cash inflows of $150,000,and requires cash operating expenses of $30,000 each year.In addition,a $10,000 overhaul will be needed in year 3.If the company requires a 10% rate of return,the net present value of this machine would be:

The mayor of Statesville is considering the purchase of a new computer system for the city's tax department.The system costs $75,000 and has an expected life of five years.The mayor estimates the following savings will result if the system is purchased: What can be said about the computer system's internal rate of return if the net present value at 12% is positive? Statesville uses a 10% discount rate for capital-budgeting decisions.

Capital-budgeting decisions primarily involve:

Paulsen is considering the acquisition of a $217,750 machine that is expected to produce annual savings in cash operating costs of $50,000 over the next six years.If Paulsen uses the internal rate of return (IRR)to evaluate new investments and the company has a hurdle rate of 12%,which of the following statements is correct?

Mark Industries is currently purchasing part no.76 from an outside supplier for $80 per unit.Because of supplier reliability problems,the company is considering producing the part internally in an idle manufacturing plant.Annual volume over the next six years is expected to total 300,000 units at variable manufacturing costs of $75 per unit. Mark must acquire $80,000 of new equipment if it reopens the plant.The equipment has a six-year service life,a $14,000 salvage value,and will be depreciated by the straight-line method.Repairs and maintenance are expected to average $5,200 per year in years 4-6,and the equipment will be sold at the end of its life. Required: Rounding to the nearest dollar,use the net-present-value method (total-cost approach)and a 12% hurdle rate to determine whether Mark should make or buy part no.76.Ignore income taxes.

The net-present-value method assumes that project funds are reinvested at the:

The rule for project acceptance under the internal rate of return method is that:

Preston Company is considering the use of accelerated depreciation rather than straight-line depreciation for a new asset acquisition.Which of the following choices correctly shows when the majority of depreciation would be taken (early or late in the asset's life),when most of the tax savings occur (early or late in the asset's life),and which depreciation method would have the higher present value?

Julio Company purchased a $200,000 machine that has a four-year life and no salvage value.The company uses straight-line depreciation on all asset acquisitions and is subject to a 30% tax rate.The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be:

A machine costs $25,000;it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years.The required rate of return is 12%.Which of the following statements about the machine's internal rate of return is true?

The loss on disposal would be:

A cash flow measured in nominal dollars is:

The payback period is best defined as:

Crossword Company is studying a capital project that will produce $600,000 of added sales revenue,$400,000 of additional cash operating expenses,and $50,000 of depreciation.Assuming a 30% income tax rate,the company's after-tax cash inflow (outflow)is:

A company used the net-present-value method to analyze an investment and found the investment to be very attractive.If the firm used Modified Accelerated Cost Recovery System (MACRS)and changes to the straight-line depreciation,the investment's net present value will:

Consider the following factors related to an investment: I.The net income from the investment. II.The cash flows from the investment. III.The timing of the cash flows from the investment. Which of the preceding factors would be important considerations in a net-present-value analysis?

Consider the following statements about the accounting for inflation in a capital budgeting analysis: I.An analyst can use nominal dollars in conjunction with a nominal interest rate. II.An analyst can use real dollars in conjunction with a real interest rate. III.An analyst can use nominal dollars in conjunction with a real interest rate. Which of the above statements is (are)correct?