Exam 13: Capital Budgeting Decisions

Bugle's Bagel Bakery is investigating the purchase of a new bagel-making machine. This machine would provide an annual operating cost savings of $3,650 for each of the next four years. In addition, this new machine would allow the production of one new type of bagel that would result in selling 1,500 dozen more bagels each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450, and it will have a four-year useful life. Bugle's discount rate is 14%. (Ignore income taxes in this problem.) -The internal rate of return for this investment is closest to which of the following?

Hanley Company has purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. (Ignore income taxes in this problem.) -What is the simple rate of return on the initial investment?

Fast Food, Inc. has purchased a new donut maker. It cost $16,000 and has an estimated life of ten years. The following annual donut sales and expenses are projected: (Ignore income taxes in this problem.) -The simple rate of return for the new machine is closest to which of the following?

Purvell Company has just acquired a new machine. Data on the machine follow: The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year. (Ignore income taxes in this problem.) -The simple rate of return would be closest to which of the following?

A company anticipates a capital cost allowance (CCA)deduction of $20,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 12%.What is the approximate present value of the CCA tax shield resulting from this deduction?

Information on four investment proposals is given below: Proposal Investment Net Present Value 1 \ 50.000 \ 30.000 2 \ 60.000 \ 24.000 3 \ 30.000 \ 15,000 4 \ 45.000 \ 9.000 What are preference rankings of the four proposals according to the profitability index?

The following data pertain to an investment proposal: Investment in the Project (equipment) \ 14,000 Net Annual Cash Inflows Promised \ 2,800 Working Capital Required \ 5,000 Salvage Value of the Equipment \ 1,000 Life of the Project 10 years The working capital would be released for use elsewhere when the project is completed.What is the net present value of the project,using a discount rate of 8%? (Ignore income taxes in this problem.)

Suppose a machine that costs $80,000 has a useful life of ten years.Also suppose that capital cost allowance (CCA)deduction on the machine is $8,000 in year 4.The tax rate is 40%.What would be the tax savings from the CCA tax shield in year 4?

A company anticipates a taxable cash receipt of $50,000 in year 3 of a project.The company's tax rate is 30%,and its discount rate is 14%.What is the approximate present value of this future cash flow?

The present value of a given sum to be received in five years will be exactly twice as great as the present value of an equal sum to be received in ten years.

Which of the following is associated with an increase in the discount rate?

An increase in the discount rate will result in an increase in the present value of a given cash flow.

If new equipment is replacing old equipment,any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment.

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? (Ignore income taxes in this problem.)

Lambert Manufacturing has $60,000 to invest in either Project A or Project B. The following data are available on these projects: Both projects have a useful life of six years. At the end of six years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. (Ignore income taxes in this problem.) -The net present value of Project A is closest to which of the following?

Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: Westland College uses a 10% discount rate and the total - cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. (Ignore income taxes in this problem.) -What is the net present value of the alternative of purchasing the new system?

Monson Company is considering three investment opportunities with cash flows as described below: (Ignore income taxes in this problem.)

Which of the following capital budgeting techniques consider(s)cash flow over the entire life of the project? Internal Rate of Return Payback A) Yes Yes B) Yes No C) No Yes D) No No

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 value of the incremental UCC (the "C" in the PV CCA formula)used in the calculation for the present value of CCA tax savings?

One strength of the simple rate of return method is that it takes into account the time value of money in computing the return on an investment project.