Exam 13: Capital Budgeting Decisions

Payson Company bought $40,000 worth of office equipment at the beginning of Year 1. This equipment has a useful life of eight years and a salvage value at the end of its useful life of $4,000. This equipment is in Class 7 with capital cost allowance (CCA) rate of 15%. The income tax rate is 40%. -What is the maximum amount of CCA that the company will be able to deduct for tax purposes for Year 2?

Horn Corporation is considering investing in a four-year project.Cash inflows from the project are expected to be as follows: Year 1,$2,000; Year 2,$2,200; Year 3,$2,400; Year 4,$2,600.If using a discount rate of 8%,the project has a positive net present value of $500,what was the amount of the original investment? (Ignore income taxes in this problem.)

How is depreciation handled by the following capital budgeting techniques? (Ignore income taxes in this problem.) Internal Rate of Return Simple Rate of Return A) Excluded Included Excluded B) Included Excluded Included C) Excluded Excluded Included D) Included Included Excluded

Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.The auto was purchased for $9,000 and will have a six-year useful life and a $3,000 salvage value.Delivering prescriptions (which the pharmacy has never done before)should increase gross revenues by at least $5,000 per year.The cost of these prescriptions to the pharmacy will be about $2,000 per year.The pharmacy depreciates all assets using the straight-line method.What is the payback period for the auto? (Ignore income taxes in this problem.)

Capital cost allowance (CCA)deductions shield revenues from taxation and thereby lower the amount of taxes that a company must pay.

The Whitton Company uses a discount rate of 16%.The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years.The machine would have no salvage value.What is the net present value of this machine,rounded to the nearest whole dollar? (Ignore income taxes in this problem.)

Vernon Company has been offered a seven-year contract to supply a part for the military.After careful study,the company has estimated the following data relating to the contract: Cost of Equipment Needed \ 300,000 Working Capital Needed \ 50,000 Annual Cash Receipts from the Delivery of Parts, Less Cash Operating Costs \ 70,000 Salvage Value of Equipment at Termination of the \ 5,000 Contract It is not expected that the contract would be extended beyond the initial contract period. The company's discount rate is 10%. (Ignore income taxes in this problem.) Required: Use the net present value method to determine if the contract should be accepted. Round all computations to the nearest dollar.

Selah Company bought a new computer-assisted design (CAD) software for $10,000,000 at the beginning of Year 1. The software has a useful life of 3 years and will save the company annual cash operating expenses of $4,000,000 in each of those 3 years. The software will have a zero net salvage value at the end of 3 years. It belongs to Class 12 with a capital cost allowance (CCA) rate of 100%. With special permission from the Canada Revenue Agency, the half-year CCA rule has been waived for the company to permit a maximum 100% CCA deduction for Year 1. The company's income tax rate and after-tax cost of capital are 40% and 12%, respectively. Required: a) Calculate the maximum total CCA tax shied available to the company. b) Calculate the present value of the annual cash savings in operating expenses. c) Calculate the net present value (NPV) of the investment. d) Was the internal rate of return (IROR) greater than or less than the company's after-tax cost of capital of 12%? (Note: Do NOT try to calculate the implied actual internal rate or return.) e) By how much must the annual savings in operating expenses be increased or decreased to make the investment just worthwhile, that is, either zero NPV or 12% IROR?

A company anticipates a taxable cash receipt of $20,000 in year 3 of a project.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of this future cash flow?

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 payback period would be closest to which of the following?

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 net present value of this investment is closest to which of the following?

An investment project that requires a present investment of $210,000 will have cash inflows of R dollars each year for the next five years.The project will terminate in five years.Consider the following statements (ignore income tax considerations): I.If R is less than $42,000,the payback period exceeds the life of the project. II)If R is greater than $42,000,the payback period exceeds the life of the project. III)If R equals $42,000,the payback period equals the life of the project. Which statement(s)is(are)true?

UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales minus cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow): In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%. (Ignore income taxes in this problem.) -What is the present value of the net operating cash flows (sales minus cash operating expenses)arising from the rebuilding and sale of the alternators,rounded to the nearest dollar?

Eureka Company is considering replacing an old computer with a new computer. The following data relate to this investment decision: The new computer will belong to Class 10 with a maximum CCA rate of 30%. The income tax rate is also 30%, and the company's after-tax cost of capital is 12% -What is the approximate effective cost now of the working capital component of the investment decision?

White Company's required rate of return on capital budgeting projects is 12%.The company is considering an investment opportunity that would yield a cash flow of $10,000 in five years.What is the most that the company should be willing to invest in this project? (Ignore income taxes in this problem.)

A company anticipates a capital cost allowance (CCA)deduction of $30,000 in year 3 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?

Last year,a firm had taxable cash receipts of $800,000,and the tax rate was 30%.What was the after-tax net cash inflow from these receipts?

Hilltop Company invested $100,000 in a two-year project.The cash flow was $40,000 for the first year.Assuming that the internal rate of return was exactly 12%,what was the cash flow for the second year of the project? (Ignore income taxes in this problem.)

The payback period is the length of time it takes for an investment to recoup its own initial cost out of the cash receipts it generates.

A company needs an increase in working capital of $70,000 in a project that will last three years.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of the working capital to be released at the end of the project?