Exam 13: Capital Budgeting Decisions

The Sawyer Company has $80,000 to invest and is considering two different projects: X and Y. The following data are available on the projects: Both projects will have a useful life of five years; at the end of five years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. (Ignore income taxes in this problem.) -What is the net present value of project X?

The release of working capital at the end of an investment project is a taxable cash inflow.

Treads Corporation is considering the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to replace the old machine, Picco Company has offered to purchase the old machine for $60,000. The old machine would have no salvage value in five years. The new machine would be acquired from Hillcrest Industries for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated. Treads Corporation uses a discount rate of 12%. (Ignore income taxes in this problem.) -The internal rate of return of the project is closest to which of the following?

The net present value method takes into account which of the following? Cash Flow over Life of Project Time Value of Money A) No Yes B) No No C) Yes No D) Yes Yes

A company anticipates a capital cost allowance (CCA)deduction of $70,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 14%.What is the approximate present value of the CCA tax shield resulting from this deduction?

The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the discount rate.

The reduction in taxes made possible by a capital cost allowance (CCA)tax shield equals the amount of the CCA deduction multiplied by the tax rate.

Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes in this problem.) -The simple rate of return on the investment is closest to which of the following?

Beaver Company had taxable cash sales of $400,000 in Year 1. Tax-deductible cash expenses in Year 1 were $140,000, and capital cost allowance (CCA) deductions were $60,000. The income tax rate was 40%. -What were the tax savings from the CCA tax shield for Year 1?

Which of the following would decrease the net present value of a project?

A company anticipates a taxable cash receipt of $50,000 in year 4 of a project.The company's tax rate is 30%,and its discount rate is 12%.What is the approximate present value of this future cash flow?

Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision: The old van is in Class 10 with a maximum CCA rate of 30% and will last for six more years. The new van is also in Class 10 with a maximum CCA rate of 30%. The income tax rate is 40%, and the company's after-tax cost of capital is 10%. -What is the incremental cash outlay now for the purchase of the new van?

The following data pertain to an investment proposal: Cost of the Investment \ 20,000 Annual Cost Savings \ 5,000 Estimated Salvage Value \ 1,000 Life of the Project 8 years Discount Rate 16\% What is the net present value of the proposed investment? (Ignore income taxes in this problem.)

In comparing two investment alternatives,the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach.

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 for the building to be 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. Mark uses a discount rate of 16%. (Ignore income taxes in this problem.) Required: Would you advise Mark to make this investment? Use the net present value method.

Not all cash inflows are taxable.

Given the following data: Present Investment Required \ 12,000 Net Present Value \ 430 Annual Cost Savings \ ? Discount Rate 12\% Life of the Project 10 years Based on the data given,what would be the annual cost savings? (Ignore income taxes in this problem.)

The Jason Company is considering the purchase of a machine that will increase revenues by $32,000 each year.Cash outflows for operating this machine will be $6,000 each year.The cost of the machine is $65,000.It is expected to have a useful life of five years with no salvage value.For this machine,what is the simple rate of return? (Ignore income taxes in this problem.)

The Morgan Company has been awarded a six-year contract to provide repair service to a commercial bus line. Morgan Company has gathered the following data associated with the items needed for this contract: The special equipment is in Class 7 with a maximum 15% CCA rate. The income tax rate is 40%, and Morgan's after-tax cost of capital is 14%. At the end of six years, the working capital will be released for use elsewhere. -The present value of the after-tax cash from the sale of the equipment at the end of six years is closest to which of the following?

Oriental Company has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.) -What would be the net present value of this investment?