Exam 13: Capital Budgeting Decisions

A company anticipates a tax-deductible cash expense of $60,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 14%.What is the approximate present value of this future cash outflow? Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

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 net present value on this investment is closest to which of the following? (Do not round your intermediate calculations.)

Which one of the following statements about the payback method of capital budgeting is correct?

Which of the following is a weakness of the internal rate of return method for screening investment projects?

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $450,000 and would have a ten-year useful life.Unfortunately,the new machine would have no salvage value.The new machine would cost $20,000 per year to operate and maintain,but would save $100,000 per year in labour and other costs.The old machine can be sold now for scrap for $50,000.The simple rate of return on the new machine is closest to which of the following? (Ignore income taxes in this problem.)

Jim Bingham is considering starting a small catering business.He would need to purchase a delivery van and equipment costing $125,000 to operate the business and another $60,000 for inventories and other working capital needs.Rent for the building to be used by the business will be $35,000 per year.Jim's marketing studies indicate that the annual cash inflow from the business will amount to $120,000.In addition to the building rent,annual cash outflow for operating costs will amount to $40,000.Jim wants to operate the catering business for only six years.He estimates that the equipment could be sold at that time for 4% of its original cost.Jim uses a 16% discount rate.(Ignore income taxes in this problem.) Required: Would you advise Jim to make this investment? Use Net Present Value and Profitability analysis to support your decision.

The reduction in taxes made possible by a capital cost allowance (CCA)tax shield equals the amount of the CCA deduction multiplied by the tax rate.

The net present value method takes into account which of the following? Cash Flow over Life of Project Time Value of Money A) No Yes B) No No C) Yes No D) Yes Yes

A company had tax-deductible cash expenses of $650,000 last year,and the tax rate was 30%.What was the after-tax net cash outflow for these expenses?

One strength of the simple rate of return method is that it takes into account the time value of money in computing the return on an investment project.

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 be the immediate cash outflow required for this project?

Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision: Cost of the new van now \ 20,000 Annual cash operating costs of the new Van \ 6,000 Useful life of the new van 6 years Salvage value of the van at the End of six years \ 2,000 Original cost of the old van two years ago \ 18,000 Book value of the old van now \ 4,000 Salvage value of the old van now \ 1,000 Salvage value of the old van six year from now \ 200 Annual Cash operating Costs of the old van \ 8,000 The old van is in Class 10 with a maximum CCA rate of $30 \%$ and will last for six more years. The new van is also in Class 10 with a maximum CCA rate of $30 \%$ . The income tax rate is $40 \%$ , and the company's after-tax cost of capital is $10 \%$ . - What is the value of the incremental UCC (the "C" in the PV CCA formula)used in the calculation for the present value of CCA tax savings?

The following data pertain to an investment proposal: Investment in the Project (equipment) \ 14,000 Net Annual Cash Inflows Promised \ 2,800 Working Capital Required \ 5,000 Salvage Value of the Equipment \ 1,000 Life of the Project 10years The working capital would be released for use elsewhere when the project is completed.What is the net present value of the project,using a discount rate of 8%? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

The Whitton Company uses a discount rate of 15%.The company has an opportunity to buy a machine now for $16,000 that will yield cash inflows of $8,000 per year for each of the next three years.The machine would have no salvage value.What is the net present value of this machine,rounded to the nearest whole dollar,do not round your intermediate calculations? (Ignore income taxes in this problem.)

If a company is operating at a profit,all cash inflows associated with an investment project should be multiplied by one minus the tax rate to be placed on an after-tax basis.

When using the internal rate of return method to evaluate investment projects,if the internal rate of return is less than the required rate of return,the project should be accepted.

The Becker Company is interested in buying a piece of equipment. The following data have been assembled concerning this equipment: Cost of Required Equipment \ 250,000 Working capital required \ 100,000 Annual operating cash inflows \ 80,000 Cash repair at End of Four years \ 40,000 Salvage Value at End of Six Years \ 90,000 This equipment is expected to have a useful life of six years. At the end of the sixth year, the working capital would be released for use elsewhere. The company's discount rate is $10 \%$ . (Ignore income taxes in this problem.) - The internal rate of return for this investment is closest to which of the following?

Purvell Company has just acquired a new machine. Data on the machine follow: Purchase Cost \ 50,000 Annual cost savings \ 15,000 Life of the Machine 8 years The company uses straight-line depreciation and a $\$ 5,000$ salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year. (Ignore income taxes in this problem.) -The payback period would be closest to which of the following?

A company anticipates a taxable cash receipt of $20,000 in year 3 of a project.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of this future cash flow? (Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

Alpine Company is analyzing two investment projects: $\mathrm { P }$ and $\mathrm { Q }$ . The following data are available: Project P Project Q Investment in Computer Equipment now \ 140,000 \ 0 Investment in Working Capital Now \ 0 \ 90,000 Net Annual Operating Cash inflows \ 20,000 \ 16,000 Life of Project 8 years 8 years The computer equipment for Project P will have a total salvage value of $8,000 at end of eight years. It will belong to Class 10 with a 30% maximum CCA rate. At the end of eight years, the working capital for Project Q will be released for use elsewhere. The income tax rate is 30% and Alpine's after-tax cost of capital is 10%. - What is the approximate present value of the after-tax net annual operating cash inflows for Project P? (Do not round your intermediate calculations.)