Shields Company has gathered the following data on a proposed investment project: $\begin{array}{|l|r|} \hline \text { Investment Required in Equipment } & \$ 400,000 \\ \hline \text { Annual Cash Inflows } & \$ 80,000 \\ \hline \text { Salvage Value } & \$-0- \\ \hline \text { Life of the Investment } & 10 \text { years } \\ \hline \text { Discount Rate } & 10 \% \\ \hline \end{array}$ (Ignore income taxes in this problem.) - The internal rate of return on the investment is closest to which of the following?

A) 10%. B) 13%. C) 15%. D) 17%. A) 10%. B) 13%. C) 15%. D) 17%.

The following data pertain to an investment proposal: $\begin{array}{|l|r|} \hline \text { Cost of the investment } & \$ 20,000 \\ \hline \text { Annual cost savings } & \$ 5,000 \\ \hline \text { Estimated Salvage Value } & \$ 1,000 \\ \hline \text { Life of the Project } & 8 \text { years } \\ \hline \end{array}$ \[\begin{array} { | l | l |} \hline \text { Discourt Rate } & 16 \%\\\hline \end{array}\] What is the net present value of the proposed investment? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

A) $1,720. B) $2,023. C) $2,154. D) $6,064. A) $1,720. B) $2,023. C) $2,154. D) $6,064.

UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales minus cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow): $\begin{array}{|l|r|} \hline \text { Year } 1-10 & \$ 90,000 \\ \hline \text { Year } 11 & (\$ 20,000) \\ \hline \text { Year } 12 & \$ 100,000 \\ \hline \end{array}$ In addition to the above net operating cash flows, UR Company would purchase production equipment costing $\$ 200,000$ now to use in the rebuilding of the alternators. The equipment would have a 12 -year life and a $\$ 15,000$ salvage value. The company's discount rate is $10 \%$. (Ignore income taxes in this problem.) - What is the net present value of ALL cash flows associated with this investment,rounded to the nearest dollar? (Do not round your intermediate calculations.)

A) $362,950. B) $377,864. C) $382,644. D) $391,884. A) $362,950. B) $377,864. C) $382,644. D) $391,884.

Boston Company is contemplating the purchase of a new machine on which the following information has been gathered: $\begin{array}{|l|r|} \hline \text { Cost of the Machine } & \$ 38,900 \\ \hline \text { Annual Cash Inflows Expected } & \$ 10,000 \\ \hline \text { Salvage Value } & \$ 5,000 \\ \hline \end{array}$ \[\begin{array} { | l | l | } \hline \text { Life of the Machine } & 6 \text { years } \\ \hline \end{array}\] The company's discount rate is 16%,and the machine will be depreciated using the straight-line method.Given these data,what is the net present value of the machine to the nearest dollar,by not rounding intermediate calculations? (Ignore income taxes in this problem.)

A) ($26,100). B) ($23,900). C) $0. D) $26,100. A) ($26,100). B) ($23,900). C) $0. D) $26,100.

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: $\begin{array}{|l|r|} \hline \text { Cost of the Special equipment needed now } & \$ 300,00 \\ \hline \text { Working capital needed now } & \$ 80,000 \\ \hline \text { Net annual operating cash inflows } & \$ 120,000 \\ \hline \text { Equipment maintenance overhaul at the End of Four Years } & \$ 20,000 \\ \hline \text { Salvage Value of the Equipment in six Years } & \$ 20,000 \\ \hline \end{array}$ The special equipment is in Class 7 with a maximum $15 \% \mathrm { CCA }$ 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 present value of the total after-tax net cash inflows (outflows),excluding any CCA tax shield,in Year 4 is closest to which of the following? (Do not round your intermediate.)

A) ($7,105). B) $23,684. C) $35,525. D) $38,269. A) ($7,105). B) $23,684. C) $35,525. D) $38,269.

The following data pertain to an investment proposal: $\begin{array}{|l|r|} \hline \text { Present Investment Required } & \$ 27,130 \\ \hline \text { Annual Cost Savings } & \$ 5,000 \\ \hline \text { Projected life the investment } & 10 \text { years } \\ \hline \end{array}$ \[\begin{array} { | l | l |} \hline \text { Projected Salvage Value } & \$ - 0 \\ \hline \end{array}\] What would be the internal rate of return? (Ignore income taxes in this problem.)

A) 5.426%. B) 13.0%. C) 54.26%. D) 542.6%. A) 5.426%. B) 13.0%. C) 54.26%. D) 542.6%.

Lambert Manufacturing has $\$ 60,000$ to invest in either Project A or Project B. The following data are available on these projects: $\begin{array}{|l|r|r|} \hline & \text { Project A } & \text { Project B } \\ \hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\ \hline \text { Working capital investment needed now } & & \$ 50,000 \\ \hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\ \hline \text { Salvage value of equipment in six years } & \$ 15,000 & \\ \hline \end{array}$ Both projects have a useful life of six years. At the end of six years, the working capital investment will be released for use elsewhere. Lambert's discount rate is $14 \%$. (Ignore income taxes in this problem.) - The net present value of Project A is closest to which of the following? (Do not round your intermediate calculations.)

A) $67,610. B) $74,450. C) $81,267. D) $141,267. A) $67,610. B) $74,450. C) $81,267. D) $141,267.

How are the following items used in the calculation of the net present value of a proposed project? (Ignore income tax considerations.) \[\begin{array} { | l | l | } \hline \text { Depreciatim Expense } & \text { Salvage Value } \\ \hline \text { A) Include } & \text { Include } \\ \hline \text { B) Include } & \text { Exclude } \\ \hline \text { C) Exclude } & \text { Include } \\ \hline \text { D) Exclude } & \text { Exclude } \\ \hline \end{array}\]

A) Option A B) Option B C) Option C D) Option D A) Option A B) Option B C) Option C D) Option D

Exam 13: Capital Budgeting Decisions

Shields Company has gathered the following data on a proposed investment project: Investment Required in Equipment \ 400,000 Annual Cash Inflows \ 80,000 Salvage Value \- 0- Life of the Investment 10 years Discount Rate 10\% (Ignore income taxes in this problem.) - The internal rate of return on the investment is closest to which of the following?

(Multiple Choice)

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Question 81

Beaver Company had taxable cash sales of $400,000 in Year 1. Tax-deductible cash expenses in Year 1 were $140,000, and capital cost allowance (CCA) deductions were $60,000. The income tax rate was 40%. - What was the after-tax net cash inflow from all sources for Year 1?

(Multiple Choice)

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Question 82

The following data pertain to an investment proposal: Cost of the investment \ 20,000 Annual cost savings \ 5,000 Estimated Salvage Value \ 1,000 Life of the Project 8 years Discourt Rate 16\% What is the net present value of the proposed investment? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

(Multiple Choice)

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Question 83

The present value of a cash flow decreases as it moves further into the future.

(True/False)

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Question 84

UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales minus cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow): Year 1-10 \ 90,000 Year 11 (\ 20,000) Year 12 \ 100,000 In addition to the above net operating cash flows, UR Company would purchase production equipment costing $\$ 200,000$ now to use in the rebuilding of the alternators. The equipment would have a 12 -year life and a $\$ 15,000$ salvage value. The company's discount rate is $10 \%$ . (Ignore income taxes in this problem.) - What is the net present value of ALL cash flows associated with this investment,rounded to the nearest dollar? (Do not round your intermediate calculations.)

(Multiple Choice)

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Question 85

The Higgins Company has just purchased a piece of equipment at a cost of $120,000.This equipment will reduce operating costs by $40,000 each year for the next eight years.This equipment replaces old equipment that was sold for $8,000 cash.What is the new equipment's payback period? (Ignore income taxes in this problem.)

(Multiple Choice)

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Question 86

Kipling Company has invested in a project that has an eight-year life.It is expected that the annual cash inflow from the project will be $20,000.Assuming that the project has an internal rate of return of 12%,how much was the initial investment in the project? (Ignore income taxes in this problem.)(Round your PV factor to 5 decimal places and final answer to nearest whole dollar amount.)

(Multiple Choice)

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Question 87

Which of the following is associated with an increase in the discount rate?

(Multiple Choice)

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Question 88

Boston Company is contemplating the purchase of a new machine on which the following information has been gathered: Cost of the Machine \ 38,900 Annual Cash Inflows Expected \ 10,000 Salvage Value \ 5,000 Life of the Machine 6 years The company's discount rate is 16%,and the machine will be depreciated using the straight-line method.Given these data,what is the net present value of the machine to the nearest dollar,by not rounding intermediate calculations? (Ignore income taxes in this problem.)

(Multiple Choice)

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Question 89

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: Cost of the Special equipment needed now \ 300,00 Working capital needed now \ 80,000 Net annual operating cash inflows \ 120,000 Equipment maintenance overhaul at the End of Four Years \ 20,000 Salvage Value of the Equipment in six Years \ 20,000 The special equipment is in Class 7 with a maximum $15 \% \mathrm { CCA }$ 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 present value of the total after-tax net cash inflows (outflows),excluding any CCA tax shield,in Year 4 is closest to which of the following? (Do not round your intermediate.)

(Multiple Choice)

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Question 90

The following data pertain to an investment proposal: Present Investment Required \ 27,130 Annual Cost Savings \ 5,000 Projected life the investment 10 years Projected Salvage Value \ -0 What would be the internal rate of return? (Ignore income taxes in this problem.)

(Multiple Choice)

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Question 91

Lambert Manufacturing has $\$ 60,000$ to invest in either Project A or Project B. The following data are available on these projects: Project A Project B Cost of equipment needed now \ 120,000 \ 70,000 Working capital investment needed now \ 50,000 Annual net operating cash inflows \ 50,000 \ 45,000 Salvage value of equipment in six years \ 15,000 Both projects have a useful life of six years. At the end of six years, the working capital investment will be released for use elsewhere. Lambert's discount rate is $14 \%$ . (Ignore income taxes in this problem.) - The net present value of Project A is closest to which of the following? (Do not round your intermediate calculations.)

(Multiple Choice)

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Question 92

The preference rule for ranking projects by the profitability index is the following: the higher the profitability index,the more desirable the project.

(True/False)

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Question 93

How are the following items used in the calculation of the net present value of a proposed project? (Ignore income tax considerations.) Depreciatim Expense Salvage Value A) Include Include B) Include Exclude C) Exclude Include D) Exclude Exclude

(Multiple Choice)

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Question 94

The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now, and the useful life of the project is ten years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the ten-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in ten years. Finney's discount rate is 16%. (Ignore income taxes in this problem.) - What would the annual net cash inflows from this project have to be in order to justify investing in remodelling? (Do not round your intermediate calculations and round your final answer to the nearest whole number.)

(Multiple Choice)

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Question 95

In comparing two investment alternatives,the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach.

(True/False)

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Question 96

Why are the net present value and internal rate of return methods of capital budgeting superior to the payback method?

(Multiple Choice)

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Question 97

Suppose that your company has ample taxable income to take advantage of capital cost allowance (CCA)deductions and has the option to use either accelerated or straight-line method to calculate the CCA deductions. Required: Which method would you prefer? Why?

(Essay)

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Question 98

Arthur operates a part-time auto repair service.He estimates that a new diagnostic computer system will result in increased cash inflows of $2,100 in Year 1,$3,200 in Year 2,and $4,000 in Year 3.If Arthur's discount rate is 10%,what would be the maximum amount he should be willing to pay for the new computer system? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

(Multiple Choice)

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Question 99

The capital cost allowance (CCA)tax shield of a Class 7 asset with a maximum 15% CCA rate was $12,000 for Year 2.The income tax rate was 40%.What was the total CCA deduction for the asset for Year 2?

(Multiple Choice)

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Question 100

Showing 81 - 100 of 185

Beaver Company had taxable cash sales of $400,000 in Year 1. Tax-deductible cash expenses in Year 1 were $140,000, and capital cost allowance (CCA) deductions were $60,000. The income tax rate was 40%. - What was the after-tax net cash inflow from all sources for Year 1?

The present value of a cash flow decreases as it moves further into the future.

Which of the following is associated with an increase in the discount rate?

The following data pertain to an investment proposal: Present Investment Required \ 27,130 Annual Cost Savings \ 5,000 Projected life the investment 10 years Projected Salvage Value \ -0 What would be the internal rate of return? (Ignore income taxes in this problem.)

The preference rule for ranking projects by the profitability index is the following: the higher the profitability index,the more desirable the project.

How are the following items used in the calculation of the net present value of a proposed project? (Ignore income tax considerations.) Depreciatim Expense Salvage Value A) Include Include B) Include Exclude C) Exclude Include D) Exclude Exclude

In comparing two investment alternatives,the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach.

Why are the net present value and internal rate of return methods of capital budgeting superior to the payback method?

Suppose that your company has ample taxable income to take advantage of capital cost allowance (CCA)deductions and has the option to use either accelerated or straight-line method to calculate the CCA deductions. Required: Which method would you prefer? Why?

The capital cost allowance (CCA)tax shield of a Class 7 asset with a maximum 15% CCA rate was $12,000 for Year 2.The income tax rate was 40%.What was the total CCA deduction for the asset for Year 2?

Managerial Accounting and the Business Environment

Cost Terms,concepts,and Classifications

Cost Behaviour: Analysis and Use

Cost-Volume-Profit Relationships

Systems Design: Job-Order Costing

Systems Design: Process Costing

Activity-Based Costing: A Tool to Aid Decision Making

Variable Costing: A Tool for Management

Budgeting

Standard Costs and Overhead Analysis

Reporting for Control

Relevant Costs for Decision Making

Financial Statement Analysis

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