Findell Corporation is considering two projects,A and B,and it has gathered the following estimates for the projects: $\begin{array}{|l|l|l|} \hline & \text { Project A } & \text { Project B } \\ \hline \text { Useful life } & 5 \text { years } & 5 \text { years } \\ \hline \text { Present value of cash inflows } & \$ 84,360 & \$ 55,100 \\ \hline \text { Present value of cash outflows } & \$ 77,000 & \$ 49,000 \\ \hline & & \\ \hline \end{array}$ What is the net present value of cash flows for project B?

A) $7,360 B) $6,100 C) $1,260 D) None of these answers is correct. A) $7,360 B) $6,100 C) $1,260 D) None of these answers is correct.

Levin Company is considering two new machines that should produce considerable cost savings in its assembly operations.The cost of each machine is $14,000 and neither is expected to have a salvage value at the end of a 4-year useful life.Levin's required rate of return is 12% and the company prefers that a project return its initial outlay within the first half of the project's life.The annual after-tax cash savings for each machine are provided in the following table: $ \quad \quad \quad \quad \quad \quad\text { Annual After-tax Cash Savings }$ $\begin{array}{|l|r|r|} \hline \text { Year: } & \quad\quad\text { Machine A } & \quad \quad\text { Machine B } \\ \hline1& \$ 5,000 & \$ 8,000 \\ \hline 2&5,000 & 6,000 \\ \hline3&5,000 & 4,000 \\ \hline4& \underline { 5,000} & \underline { 2,000} \\ \hline 5& \underline { \$ 20,000} & \underline { \$ 20,000} \\ \hline \end{array}$ Required: 1)Compute the payback period for each machine using the incremental approach and comment on the results. 2)Compute the unadjusted rate of return based on average investment for each machine.The machines will be depreciated on a straight-line basis. 3)Compute the net present value for each machine. 4)Which machine would you recommend? Explain your reasoning. 5)Use the present value table to compute the approximate internal rate of return for Machine.

Answers will vary 1)Machine A: $14,000 ÷

Columbus Company is considering a project that requires an initial investment of $400,000.Its incremental cash flows are expected to be $150,000 per year for five years.The project would be depreciated on a straight-line basis over 5 years with no expected salvage value.The company has a stated policy that all projects must return their required investment dollars within the first 75% of the project's life.The company is subject to a 40% income tax rate,and its cost of capital is 10%. Required: 1)Compute the project's after-tax net cash flows (NCF)by completing the following table: $\begin{array}{|c|c|c|c|c|c|} \hline & \text { Cash } & & \text { Taxable } & \text { Cash Outflow } & \text { After-tax } \\ \hline \text { Year } & \text { Inflows } & \text { Depreciation } & \text { Income } & \text { for Taxes } & \text { NCF } \\ \hline 1.5 & & & & & \\ \hline \end{array}$ 2)Compute the project's net present value by completing the following table.(Round the present value amounts to the nearest whole number. ) $\begin{array}{|c|c|c|c|} \hline & \text { After-tax } & \text { Present Value } & \text { Total } \\ \hline \text { Year } & \text { NCF } & \text { Factor } & \text { Present Value } \\ \hline 0 & & & \\ \hline 1.5 & & & \\ \hline \end{array}$ 3)Compute the project's payback period. 4)Should the project be accepted? Why or why not?

Answers will vary 1)After-tax net cash f

Mendez Company is considering a capital project that costs $16,000.The project will deliver the following cash flows: $\begin{array}{|l|l|l|l|l|} \hline \underline {\text { Year 1 }} & \underline {\text { Year 2 }} & \underline {\text { Year 3 }} & \underline {\text { Year 4 }} & \underline {\text { Year 5 }} \\ \hline \$ 8,000 &\$ 6 ,000&\$ 5,000&\$ 6 ,000&\$5 ,000\\ \hline \end{array}$ Using the incremental approach,the payback period for the investment is:

A) 5 years. B) 2 years. C) 2.4 years. D) 1.66 years. A) 5 years. B) 2 years. C) 2.4 years. D) 1.66 years.

Exam 10: Planning for Capital Investments

If a company has to pay a given amount of income taxes over the life of a capital investment,managers of the company should seek to pay the taxes as early as possible in the investment's life.

(True/False)

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Question 101

Nguyen Company has an opportunity to purchase an asset that will cost the company $36,000.The asset is expected to add $12,000 per year to the company's net income.Assuming the asset has a five-year useful life and zero salvage value,the unadjusted rate of return based on the average investment will be:

(Multiple Choice)

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Question 102

An annuity is a series of equal payments over equal time intervals that earn a constant rate of return.

(True/False)

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Question 103

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

(Multiple Choice)

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Question 104

Which of the following is not a criteria that is used to determine whether a project is acceptable under the net present value method?

(Multiple Choice)

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Question 105

Cash outflows from a capital investment project include:

(Multiple Choice)

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Question 106

Which of the following statements is incorrect?

(Multiple Choice)

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Question 107

Sources of cash inflows from capital investments include incremental expenses and installation costs.

(True/False)

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Question 108

Findell Corporation is considering two projects,A and B,and it has gathered the following estimates for the projects: Project A Project B Useful life 5 years 5 years Present value of cash inflows \ 84,360 \ 55,100 Present value of cash outflows \ 77,000 \ 49,000 What is the net present value of cash flows for project B?

(Multiple Choice)

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Question 109

Paul Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $12,000 per year for 3 years.Assuming that the required rate of return is 10%,what is the present value of these cash inflows? (Do not round PV factors and intermediate calculations.Round your final answer to the nearest dollar. )

(Multiple Choice)

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Question 110

Because of the expense of applying multiple techniques,managers should use a single capital budgeting technique to analyze potential capital investments.

(True/False)

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Question 111

Levin Company is considering two new machines that should produce considerable cost savings in its assembly operations.The cost of each machine is $14,000 and neither is expected to have a salvage value at the end of a 4-year useful life.Levin's required rate of return is 12% and the company prefers that a project return its initial outlay within the first half of the project's life.The annual after-tax cash savings for each machine are provided in the following table: $\quad \quad \quad \quad \quad \quad\text { Annual After-tax Cash Savings }$ Year: Machine A Machine B 1 \ 5,000 \ 8,000 2 5,000 6,000 3 5,000 4,000 4 5 Required: 1)Compute the payback period for each machine using the incremental approach and comment on the results. 2)Compute the unadjusted rate of return based on average investment for each machine.The machines will be depreciated on a straight-line basis. 3)Compute the net present value for each machine. 4)Which machine would you recommend? Explain your reasoning. 5)Use the present value table to compute the approximate internal rate of return for Machine.

(Essay)

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Question 112

Select the incorrect statement regarding postaudits of capital investment decisions.

(Multiple Choice)

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Question 113

The compensation a company receives for investing in capital assets is referred to as a return on investment.

(True/False)

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Question 114

The present value index indicates the:

(Multiple Choice)

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Question 115

Columbus Company is considering a project that requires an initial investment of $400,000.Its incremental cash flows are expected to be $150,000 per year for five years.The project would be depreciated on a straight-line basis over 5 years with no expected salvage value.The company has a stated policy that all projects must return their required investment dollars within the first 75% of the project's life.The company is subject to a 40% income tax rate,and its cost of capital is 10%. Required: 1)Compute the project's after-tax net cash flows (NCF)by completing the following table: Cash Taxable Cash Outflow After-tax Year Inflows Depreciation Income for Taxes NCF 1.5 2)Compute the project's net present value by completing the following table.(Round the present value amounts to the nearest whole number. ) After-tax Present Value Total Year NCF Factor Present Value 0 1.5 3)Compute the project's payback period. 4)Should the project be accepted? Why or why not?

(Essay)

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Question 116

Which of the following statements concerning payback analysis is

(Multiple Choice)

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Question 117

Mendez Company is considering a capital project that costs $16,000.The project will deliver the following cash flows: \ 8,000 \ 6,000 \ 5,000 \ 6,000 \5 ,000 Using the incremental approach,the payback period for the investment is:

(Multiple Choice)

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Question 118

An investment that costs $40,000 will produce annual cash flows of $12,000 for a period of 4 years.Given a desired rate of return of 10%,what will the investment generate? (Do not round your intermediate calculations.Round your answer to nearest whole dollar. )

(Multiple Choice)

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Question 119

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow.Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

(Multiple Choice)

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Question 120

If a company has to pay a given amount of income taxes over the life of a capital investment,managers of the company should seek to pay the taxes as early as possible in the investment's life.

An annuity is a series of equal payments over equal time intervals that earn a constant rate of return.

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

Which of the following is not a criteria that is used to determine whether a project is acceptable under the net present value method?

Cash outflows from a capital investment project include:

Which of the following statements is incorrect?

Sources of cash inflows from capital investments include incremental expenses and installation costs.

Because of the expense of applying multiple techniques,managers should use a single capital budgeting technique to analyze potential capital investments.

Select the incorrect statement regarding postaudits of capital investment decisions.

The compensation a company receives for investing in capital assets is referred to as a return on investment.

The present value index indicates the:

Which of the following statements concerning payback analysis is

Mendez Company is considering a capital project that costs $16,000.The project will deliver the following cash flows: \ 8,000 \ 6,000 \ 5,000 \ 6,000 \5 ,000 Using the incremental approach,the payback period for the investment is:

An investment that costs $40,000 will produce annual cash flows of $12,000 for a period of 4 years.Given a desired rate of return of 10%,what will the investment generate? (Do not round your intermediate calculations.Round your answer to nearest whole dollar. )

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow.Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

Management Accounting and Corporate Governance

Cost Behavior, Operating Leverage, and Profitability Analysis

Analysis of Cost,Volume,and Pricing to Increase Profitability

Cost Accumulation,Tracing,and Allocation

Cost Management in an Automated Business Environment: ABC, ABM, and TQM

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Product Costing in Service and Manufacturing Entities

Job-Order, Process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

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