Exam 10: Capital Budgeting Decisions

Allowable depreciation under the income tax act and its regulations.

Future cash flows expressed in present value terms.

The net present value model expresses all amounts in today's monetary units at time zero.

A company is considering the purchase of some equipment that in the second year of operation should cause an increase in sales of $200,000, an increase in cash expenses of $120,000, and a depreciation deduction of $60,000. If the appropriate tax rate is 40 percent, what will be the after-tax effect of this equipment on cash flows in year two?

Which of the following methods determines the interest rate which equates the present value of the future cash flows with the investment outlay?

The rate of return that equates the present value of a project's cash inflows with the present value of its cash outflows (the NPV equals zero).

The Quast Company is considering a capital investment project that requires an investment of $37,910. The project is expected to have annual cash inflows of $10,000 occurring at the end of each of the next five years. a. Determine the internal rate of return for the project. b. Determine the net present value of the project using discount rates of: 8%, 10%, and 12%. c. From your answers to part [B] above, what are your observations about the effect the discount rate has upon the project's net present value?

The Serena Company is evaluating two mutually exclusive projects with three-year lives. Each project requires an investment of $10,000. The projects have the following cash inflows received at the end of each year. a. Determine the net present value of each project using an 8% discount rate. b. What can you conclude about the effect the timing of the cash flows has upon a project's net present value?

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

Which of the following is not true about CCA expense?

Fagen Grocery Store is considering the purchase of a new $45,000 delivery truck. The truck will have a useful life of 5 years, no terminal salvage value, and tax amortization will be calculated using the straight-line method. If the truck is purchased, the company will be able to increase annual revenues by $90,000 per year for the life of the truck, but out-of-pocket expenses will also increase by $67,500 per year. Assume a tax rate of 30 percent and a required after-tax rate of return equal to 10 percent. Time value factors are given below for 5 years and an interest rate of 10 percent. -What is the total net present value of the investment?

Fagen Grocery Store is considering the purchase of a new $45,000 delivery truck. The truck will have a useful life of 5 years, no terminal salvage value, and tax amortization will be calculated using the straight-line method. If the truck is purchased, the company will be able to increase annual revenues by $90,000 per year for the life of the truck, but out-of-pocket expenses will also increase by $67,500 per year. Assume a tax rate of 30 percent and a required after-tax rate of return equal to 10 percent. Time value factors are given below for 5 years and an interest rate of 10 percent. -What is the net present value of the tax savings from depreciation?

One purpose of a postaudit is to evaluate the continuation of the project.

Inflation is

Boric Company is considering the purchase of a new acid-producing machine. It will cost $360,000, and it will last for 12 years with a zero terminal salvage value at the end of that time. The equipment is expected to increase revenues by $40,000 per year, but additional cash outlays to operate the equipment will equal $24,000 per year. Required: Calculate the total annual net after-tax cash flow generated by using the machine. Use straight-line amortization and a tax rate of 25 percent.

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