Exam 10: Capital Budgeting Decisions

Cedric Inc. is considering two mutually exclusive projects. Project 1 requires an investment of $100,000 while project 2 requires an investment o $110,000. Revenues and costs for each project are shown below. The company estimates that at the end of the fourth year Project 1 would have a salvage value of $20,000 and Project 2 would have a salvage value of $10,000. Determine the net present value of each project using a 14% discount rate.

The payback model measures profitability as well as how quickly investment dollars may be recouped.

Below are two potential investment alternatives: -Assume straight-line amortization in all computations, and ignore income taxes. The net present value in case A is

The owner of a construction company is contemplating possible purchase of new equipment. The equipment would cost $40,000, have an expected life of 8 years and a zero terminal salvage value. The equipment is Class 8 (20% declining balance). The equipment would generate $125,000 of additional annual revenue, but yearly expenses for additional labour and material would also increase by $115,000. Assume the appropriate tax rate is 20 percent. The required after-tax rate of return is 14 percent. The following data are for an interest rate of 14 percent and 8 periods. Required: Compute the net present value of the investment. Should the equipment be purchased?

DOCA Corp. is considering the following two capital projects: Which project has the higher present value?

Below are two potential investment alternatives: Assume straight-line amortization in all computations, and ignore income taxes. -The accounting rate of return based on INITIAL investment in case A is

Below are two potential investment alternatives: -Assume straight-line amortization in all computations, and ignore income taxes. The internal rate of return in case A is approximately

Beta Company has the following information: -What is (a)?

Below are two potential investment alternatives: -Assume straight-line amortization in all computations, and ignore income taxes. The net present value in case X is

The discount rate is

The process of determining which long-term capital assets to acquire.

The "inflation element" refers to the

When no revenue is involved, organizations try to choose projects with the least cost for any given set of objectives.

Below are two potential investment alternatives: Assume straight-line amortization in all computations, and ignore income taxes. -The payback period in case B is

A follow-up evaluation of capital-budgeting decisions is called a postaudit.

Below are two potential investment alternatives: Assume straight-line amortization in all computations, and ignore income taxes. -The accounting rate of return based on INITIAL investment in case X is

Use the following information to answer the next question(s). Sunny Flowers is considering the purchase of a small business that costs $500,000. Sunny plans to sell stock valued at $250,000. The stock would pay dividends of $20,000 per year. Sunny would borrow the remaining $250,000 from a local bank at 12 percent interest. The business is expected to generate annual cash inflows of $80,000. Duane plans to operate the business for 15 years and then turn it over to his son. -The amount of the capital cost allowance for the second year for Mike Manufacturing would be

Below are two potential investment alternatives: Assume straight-line amortization in all computations, and ignore income taxes. -The payback period in case X is

Projects that, if accepted or rejected, will not affect the cash flows of another project.

A company with pretax income of $60,000 is required to pay taxes of 20 percent on all income up to $20,000 and 32 percent on any income in excess of $20,000. The company's average tax rate is