Exam 11: Long-Term Capital Investmentdecisions

Answer the following questions with respect to the payback method: A. What is the payback method used to determine? B. List one advantage and one disadvantage of this method.

Why do capital investment decisions require consideration of the time value of money?

Big Al's is considering the purchase of a capital investment costing $15 000.Annual cash savings of $5000,with a present value at 15 per cent of $18 923,are expected for the next six years.Given this information,which of the following statements is true?

Which of the following statements regarding the profitability index is true?

Mac Products Inc.is considering the purchase of a new machine.The estimated cost of the machine is $30 000.The machine is expected to generate annual cash inflows over the next three years as follows: Year Annual cash flow 1 \2 5000 2 \2 0000 3 \1 5000 The machine will be depreciated over its three-year life using the straight-line method and is not expected to have a residual value at the end of its useful life.The company considers income tax effects in all of its capital investment decisions.If the company's income tax rate is 35 per cent and they desire an after-tax return of 14 per cent on investments,the net present value of the new machine is:

Floyd Manufacturing purchased an asset costing $50 000.Annual operating cash inflows are expected to be $11 000 each year for eight years.No salvage value is expected at the end of the asset's life.Assuming Floyd's cost of capital is 12 per cent,what is the asset's net present value? (ignore income taxes)

If the net present value (NPV)of an investment is zero,then the internal rate of return (IRR)is:

Oakwood Inc.requires all capital investments to generate an internal rate of return of 16 per cent.Oakwood is currently considering an investment that is expected to generate annual cash inflows of $15 000 for 7 years.The cost of the investment should not exceed:

Fill in the blank with one of the phrases greater than,less than,or equal to. A. If a project's net present value is positive, the actual internal rate of return is than the discount rate. B. If a project's net present value is zero, the actual internal rate of return is than the discount rate. C. If a project's net present value is negative, the actual internal rate of return is than the discount rate.

Grant Manufacturing is considering investing in equipment that costs $70 000.The equipment would be depreciated using the straight-line method with no half-year convention over seven years and have no salvage value.If the company has a 40 per cent income tax rate and desires an after-tax rate of return of 14 per cent on investments,the total present value of the depreciation tax shield is:

Which of the following statements is false regarding the impact of taxes on net present value computations?

The calculation of the profitability index (PI)is most helpful for which type of decisions?

O'Malley Inc.purchased an asset costing $90 000.Annual operating cash inflows are expected to be $20 000 each year for six years.No salvage value is expected at the end of the asset's life.Assuming O'Malley's cost of capital is 16 per cent,what is the asset's net present value? (ignore income taxes)

The IRR method assumes that cash inflows associated with a particular investment occur:

How is net present value (NPV)computed and interpreted?

Morris Manufacturing is in the 40 per cent tax bracket and has a 9 per cent rate of return.The after-tax rate of return is:

Woody Manufacturing Inc.is considering the purchase of a new machine.They have narrowed their choices down to two machines,Machine #1 and Machine #2,each having a cost of $40 000.The following information is available regarding the expected cash inflows from each machine: Year Machine \#1 Machine \#2 1 \ 20000 \ 60000 2 20000 0 3 20000 0 3 20000 0 When using net present value analysis,Woody uses the same cost of capital for both machines and both machines have a positive net present value. Based on the above information,which of the following statements is true?