Exam 13: Capital Budgeting Decisions

Overland Company has gathered the following data on a proposed investment project: Investment in Depreciable Equipment \ 150,000 Annual Cash Flows \ 40,000 Life of the Equipment 10 years Salvage Value -0- Discount Rate 10\% The internal rate of return on this investment is closest to which of the following? (Ignore income taxes in this problem.)

The following data pertain to an investment in equipment: Investment in the Project \ 10,000 Net Annual Cash Inflows \ 2,400 Working Capital Required \ 5,000 Salvage Value of the Equipment \ 1,000 Life of the Project 8 years At the completion of the project,the working capital will be released for use elsewhere.What is the net present value of the project,using a discount rate of 10%? (Ignore income taxes in this problem.)

Jim Bingham is considering starting a small catering business. He would need to purchase a delivery van and equipment costing $125,000 to operate the business and another $60,000 for inventories and other working capital needs. Rent for the building to be used by the business will be $35,000 per year. Jim's marketing studies indicate that the annual cash inflow from the business will amount to $120,000. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. Jim wants to operate the catering business for only six years. He estimates that the equipment could be sold at that time for 4% of its original cost. Jim uses a 16% discount rate. (Ignore income taxes in this problem.) Required: Would you advise Jim to make this investment? Use Net Present Value and Profitability analysis to support your decision.

A piece of equipment has a cost of $20,000.The equipment will provide cost savings of $3,500 each year for ten years,after which time it will have a salvage value of $2,500.If the company's discount rate is 12%,what is the equipment's net present value? (Ignore income taxes in this problem.)

A piece of equipment, acquired in Year 1, belongs to Class 7 with a maximum CCA rate of 15%. The income tax rate is 40%. The tax savings (before discounting) from the CCA tax shield were $2,830.50 for Year 3. The after-tax cost of capital is 10%. -What is the approximate undepreciated capital cost (UCC)balance for the equipment at the beginning of Year 3?

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $450,000 and would have a ten-year useful life.Unfortunately,the new machine would have no salvage value.The new machine would cost $20,000 per year to operate and maintain,but would save $100,000 per year in labour and other costs.The old machine can be sold now for scrap for $50,000.The simple rate of return on the new machine is closest to which of the following? (Ignore income taxes in this problem.)

A company anticipates a tax-deductible cash expense of $40,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 10%.What is the approximate present value of this future cash outflow?

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 present value of the after-tax non-operating cash inflows that will occur in Year 6?

If a company operates at a profit,the after-tax cost of a tax-deductible cash expense is determined by multiplying the cash expense by one minus the tax rate.

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 effective cost to Morgan of the need for working capital on the contract is closest to which of the following?

When using the internal rate of return method to evaluate investment projects,if the internal rate of return is less than the required rate of return,the project should be accepted.

A piece of equipment is in Class 7 with a maximum CCA rate of 15%.The income tax rate is 40%.The tax savings from the CCA tax shield on this equipment for the first year was $1,500.What must have been the original capital cost of the equipment?

A company needs an increase in working capital of $20,000 in a project that will last four years.The company's tax rate is 30%,and its discount rate is 10%.What is the approximate present value of the working capital to be released at the end of the project?

Manti Company purchased a new machine on January 2, Year 1. Cost and other data relating to the machine follow: The machine is in Class 7 with a maximum 15% CCA rate. Manti uses an after-tax discount rate of 12% for capital budgeting decisions. The income tax rate is 40%. -If Manti deducts the maximum CCA for tax purposes,what will be the approximate present value (as of January 2,Year 1)of the CCA tax shield for Year 1?

Which one of the following statements about the payback method of capital budgeting is correct?

A company anticipates a tax-deductible cash expense of $60,000 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 this future cash outflow?

The following data pertain to an investment proposal: Present Investment Required \ 14,000 Annual Cost Savings \ 2,500 Projected Life of the Investment 8 years Projected Salvage Value \ -0- Required Rate of Return 6\% The internal rate of return on this investment proposal is closest to which of the following? (Ignore income taxes in this problem.)

Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment that has no salvage value.The project would provide net income each year as follows for the life of the project: Sales Less cash variable expenses Contribution margin Less fixed expenses: Fixed cash expenses Depreciation expenses Net income \ 500,000 200,000 300,000 \ 150,000 \ 105,000 The company's required rate of return is 12%.What is the payback period for this project? (Ignore income taxes in this problem.)

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 payback period on the new machine is closest to which of the following?

Projects with shorter payback periods are always more profitable than projects with longer payback periods.