Exam 15: Capital Budgeting

Atlantic Princess Corporation Atlantic Princess Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years.At the end of 10 years,the ship will have no value and will be scuttled.Atlantic Princess's cost of capital is 12 percent,and its marginal tax rate is 40 percent. Refer to Atlantic Princess Corporation.If the ship produces equal annual labor cost savings over its 10-year life,how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar. )Present value tables or a financial calculator are required.

McDonald Industries is considering the purchase of a $180,000 machine that is expected to result in a decrease of $20,000 per year in cash expenses.This machine,which has no residual value,has an estimated useful life of 15 years and will be depreciated on a straight-line basis.For this machine,the accounting rate of return would be

Crosson Corporation recently sold a used machine for $40,000.The machine had a book value of $60,000 at the time of the sale.What is the after-tax cash flow from the sale,assuming the company's marginal tax rate is 20 percent?

The payback method typically assumes that all cash inflows are reinvested to yield a return equal to

In computing the accounting rate of return,the ____ level of investment should be used as the denominator.

A project has an initial cost of $125,000 and generates a present value of net cash inflows of $150,000.What is the project's profitability index?

The Awesome Automobile Corporation is contemplating the acquisition of an automatic car wash.The following information is relevant: The cost of the car wash is $\$ 160,000$ The anticipated revenue from the car wash is $\$ 100,000$ per year. The useful life of the car washis 10 years. Anmul operating costs are expected to be: Salaries \ 30,000 Utilities 9,600 Water usage 4,400 Supplies 6,000 Repars/maintenance 10,000 The firm uses straight-line depreciation The salvage value for the car wash is zero. The company's cutuf points are as follows: Payback 3years Accounting rate of return 18\% \ Internal rate of retune 18\% \ Ignore income taxes. Required: a. Compute the annual cash inflow. b. Compute the net present value. c. Compute internal rate of return. d. Compute the payback period. e. Compute the profitability index. f. Should the car wash be purchased?

A project has an initial cost of $100,000 and generates a present value of net cash inflows of $120,000.What is the project's profitability index?

Julie Collins recently invested in a project that promised an internal rate of return of 15 percent.If the project has an expected annual cash inflow of $12,000 for six years,with no salvage value,how much did Julie pay for the project? Present value tables or a financial calculator are required.

Income taxes are levied on

Galveston Excursons Corporation Galveston Excursons Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $600,000 and would be fully depreciated by the straight-line method over 15 years.At the end of 15 years,the ship will have no value and will be scuttled.Galveston Excursons' cost of capital is 14 percent,and its marginal tax rate is 35 percent. Refer to Galveston Excursons Corporation.If the ship produces equal annual labor cost savings over its 10-year life,how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar. )Present value tables or a financial calculator are required.

Duval Corporation The Duval Corporation has recently evaluated a proposal to invest in cost-reducing production technology.According to the evaluation,the project would require an initial investment of $17,166 and would provide equal annual cost savings for five years.Based on a 10 percent discount rate,the project generates a net present value of $1,788.The project is not expected to have any salvage value at the end of its five-year life. Refer to Duval Corporation.What is the project's expected internal rate of return? Present value tables or a financial calculator are required.

In a net present value analysis,how can an analyst explicitly and formally consider the influence of risk on the present value of certain cash flows?

The internal rate of return is the rate at which a project's net present value is zero.

To reflect greater uncertainty (greater risk)about a future cash inflow,an analyst could

The time value of money is explicitly recognized through the process of

The time value of money is considered in long-range investment decisions by

All other things being equal,as the time period for receiving an annuity lengthens,

All other factors equal,a large number is preferred to a smaller number for all capital project evaluation measures except

Smith Corporation Smith Corporation is involved in the evaluation of a new computer-integrated manufacturing system.The system has a projected initial cost of $1,000,000.It has an expected life of six years,with no salvage value,and is expected to generate annual cost savings of $250,000.Based on Smith Corporation's analysis,the project has a net present value of $57,625. Refer to Smith Corporation.What is the project's profitability index?