Eureka Company is considering replacing an old computer with a new computer. The following data relate to this investment decision: $\begin{array}{|l|r|} \hline \text { Cost of the new computer } & \$ 40,000 \\ \hline \text { Annual cash operating costs of the new computer } & \$ 10,000 \\ \hline \text { Working capital needed now for the new computer } & \$ 2,000 \\ \hline \text { Useful life of the new computer } & 6 \text { Years } \\ \hline \text { Salvage value of the new computer at the End of six years } & \$ 3,000 \\ \hline \text { Original cost of the old van two years ago } & \$ 18,000 \\ \hline \text { Salvage value of the old computer now } & \$ 4,000 \\ \hline \text { Salvage value of the old computer six years from now } & \$ 0 \\ \hline \end{array}$ The new computer will belong to Class 10 with a maximum CCA rate of $30 \%$. The income tax rate is also $30 \%$, and the company's after-tax cost of capital is $12 \%$. - What is the approximate present value of the after-tax non-operating cash inflows that will occur in Year 6? (Do not round your intermediate calculations and round your final answer to the nearest whole number.)

A) $1,064. B) $1,773. C) $2,077. D) $2,533. A) $1,064. B) $1,773. C) $2,077. D) $2,533.

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 simple rate of return on the investment is closest to which of the following?

A) 5%. B) 10%. C) 15%. D) 20%. A) 5%. B) 10%. C) 15%. D) 20%.

The following data pertain to an investment in equipment: $\begin{array}{|l|r|} \hline \text { Investment in the Project } & \$ 10,000 \\ \hline \text { Net Annual Cash Inflows } & \$ 2,400 \\ \hline \text { Working Capital Required } & \$ 5,000 \\ \hline \text { Salvage Value of the Equipment } & \$ 600 \\ \hline \end{array}$ \[\begin{array} { |l | l |} \hline \text { Life of the Project } & 7 \text { years } \\ \hline \end{array}\] At the completion of the project,the working capital will be released for use elsewhere.What is the net present value of the project,using a discount rate of 9%? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

A) $142. B) $126. C) ($1,729). D) ($517). A) $142. B) $126. C) ($1,729). D) ($517).

Fast Food, Inc. has purchased a new donut maker. It cost $\$ 16,000$ and has an estimated life of ten years. The following annual donut sales and expenses are projected: $\begin{array}{l|r|r|} \hline \text { Sales } & & \$ 22,000 \\ \hline \text { Expenses: } & & \\ \hline \text { Flour, etc. (required in making donuts) } & \$ 10,000 & \\ \hline \text { Salaries } & \$ 6,000 & \\ \hline \text { Depreciation } & \$ 1,600 & \$ 17,600 \\ \hline \text { Operating Income } & & \$ 4,400 \\ \hline \end{array}$ (Ignore income taxes in this problem.) -The simple rate of return for the new machine is closest to which of the following?

A) 20.0%. B) 27.5%. C) 37.5%. D) 80.0%. A) 20.0%. B) 27.5%. C) 37.5%. D) 80.0%.

The Baker Company purchased a piece of equipment with the following expected results: $\begin{array}{|l|r|} \hline \text { Useful Life } & 7 \text { years } \\ \hline \text { Yearly Net Cash Inflow } & \$ 50,000 \\ \hline \text { Salvage Value } & -0 \\ \hline \text { Internal Rate of Return } & 20 \% \\ \hline \end{array}$ \[\begin{array} { | l | l |} \hline \text { Discourt Rate } & 16 \%\\\hline \end{array}\] What was the initial cost of the equipment? (Ignore income taxes in this problem.)(Round your PV factor to 5 decimal places and final answer to nearest whole dollar amount.)

A) $180,230. B) $190,630. C) $350,000. D) Cannot be determined from the information given. A) $180,230. B) $190,630. C) $350,000. D) Cannot be determined from the information given.

How is depreciation handled by the following capital budgeting techniques? (Ignore income taxes in this problem.) $\begin{array}{|l|l|l|} \hline \text { Internal Rate of Return } & \text { Simple Rate of Return } & \text { Payback } \\ \hline \text { A) Excluded } & \text { Included } & \text { Excluded } \\ \hline \text { B) Included } & \text { Excluded } & \text { Included } \\ \hline \text { C) Excluded } & \text { Excluded } & \text { Included } \\ \hline \end{array}$ $\begin{array}{|l|l|l|} \hline \text {D) Included }&\text { Included}&\text {Excluded }\\ \hline \end{array}$

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

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 after-tax cash from the sale of the equipment at the end of six years is closest to which of the following? (Do not round your intermediate calculations.)

A) $0. B) $3,645. C) $5,467. D) $9,112. A) $0. B) $3,645. C) $5,467. D) $9,112.

Fast Food, Inc. has purchased a new donut maker. It cost $\$ 16,000$ and has an estimated life of ten years. The following annual donut sales and expenses are projected: $\begin{array}{l|r|r|} \hline \text { Sales } & & \$ 22,000 \\ \hline \text { Expenses: } & & \\ \hline \text { Flour, etc. (required in making donuts) } & \$ 10,000 & \\ \hline \text { Salaries } & \$ 6,000 & \\ \hline \text { Depreciation } & \$ 1,600 & \$ 17,600 \\ \hline \text { Operating Income } & & \$ 4,400 \\ \hline \end{array}$ (Ignore income taxes in this problem.) -The payback period on the new machine is closest to which of the following?

A) 1.4 years. B) 2.7 years. C) 3.6 years. D) 5.0 years. A) 1.4 years. B) 2.7 years. C) 3.6 years. D) 5.0 years.

Exam 13: Capital Budgeting Decisions

Eureka Company is considering replacing an old computer with a new computer. The following data relate to this investment decision: Cost of the new computer \ 40,000 Annual cash operating costs of the new computer \ 10,000 Working capital needed now for the new computer \ 2,000 Useful life of the new computer 6 Years Salvage value of the new computer at the End of six years \ 3,000 Original cost of the old van two years ago \ 18,000 Salvage value of the old computer now \ 4,000 Salvage value of the old computer six years from now \ 0 The new computer will belong to Class 10 with a maximum CCA rate of $30 \%$ . The income tax rate is also $30 \%$ , and the company's after-tax cost of capital is $12 \%$ . - What is the approximate present value of the after-tax non-operating cash inflows that will occur in Year 6? (Do not round your intermediate calculations and round your final answer to the nearest whole number.)

(Multiple Choice)

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Question 141

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 simple rate of return on the investment is closest to which of the following?

(Multiple Choice)

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Question 142

The following data pertain to an investment in equipment: Investment in the Project \ 10,000 Net Annual Cash Inflows \ 2,400 Working Capital Required \ 5,000 Salvage Value of the Equipment \ 600 Life of the Project 7 years At the completion of the project,the working capital will be released for use elsewhere.What is the net present value of the project,using a discount rate of 9%? (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 143

Which of the following statements about the evaluation of an investment having uneven cash flows using the payback method is correct?

(Multiple Choice)

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Question 144

Fast Food, Inc. has purchased a new donut maker. It cost $\$ 16,000$ and has an estimated life of ten years. The following annual donut sales and expenses are projected: Sales \ 22,000 Expenses: Flour, etc. (required in making donuts) \ 10,000 Salaries \ 6,000 Depreciation \ 1,600 \ 17,600 Operating Income \ 4,400 (Ignore income taxes in this problem.) -The simple rate of return for the new machine is closest to which of the following?

(Multiple Choice)

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Question 145

The Baker Company purchased a piece of equipment with the following expected results: Useful Life 7 years Yearly Net Cash Inflow \ 50,000 Salvage Value -0 Internal Rate of Return 20\% Discourt Rate 16\% What was the initial cost of the equipment? (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 146

Consider a machine that costs $115,000 now and has a useful life of seven years.This machine will require a major overhaul at the end of the fourth year that will cost X dollars.If the tax rate is 40%,and if the after-tax cash outflow for this overhaul is $3,600,what is the amount of X in dollars?

(Multiple Choice)

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Question 147

The working capital required at the start of an investment is a tax deductible cash outflow.

(True/False)

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Question 148

Last year,the sales at Jersey Company were $200,000 and were all cash sales.The tax-deductible expenses at Jersey were $125,000 and were all cash expenses.The tax rate was 30%.What was the after-tax net cash inflow at Jersey last year from these operations?

(Multiple Choice)

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Question 149

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 present value of the net operating cash flows (sales minus cash operating expenses)arising from the rebuilding and sale of the alternators,rounded to the nearest dollar? (Do not round your intermediate calculations.)

(Multiple Choice)

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Question 150

Which of the following would decrease the net present value of a project?

(Multiple Choice)

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Question 151

Benz Company is considering the purchase of a machine that costs $100,000 and has a useful life of 18 years.The company's required discount rate is 12%.If the machine's net present value is $5,850,what must be the annual cash inflows associated with the machine,rounded to the nearest whole dollar,do not round your intermediate calculations? (Ignore income taxes in this problem.)

(Multiple Choice)

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Question 152

If a firm acquires a depreciable asset on September 1,it can add only one-third of the capital cost of the asset to the undepreciated capital cost (UCC)in the calculation of the capital cost allowance (CCA)for the year.

(True/False)

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Question 153

How is depreciation handled by the following capital budgeting techniques? (Ignore income taxes in this problem.) Internal Rate of Return Simple Rate of Return Payback A) Excluded Included Excluded B) Included Excluded Included C) Excluded Excluded Included D) Included Included Excluded

(Multiple Choice)

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Question 154

An investment project that requires a present investment of $210,000 will have cash inflows of R dollars each year for the next five years.The project will terminate in five years.Consider the following statements (ignore income tax considerations): I.If R is less than $42,000,the payback period exceeds the life of the project. II.If R is greater than $42,000,the payback period exceeds the life of the project. III.If R equals $42,000,the payback period equals the life of the project. Which statement(s)is(are)true?

(Multiple Choice)

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Question 155

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 after-tax cash from the sale of the equipment at the end of six years is closest to which of the following? (Do not round your intermediate calculations.)

(Multiple Choice)

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Question 156

Fast Food, Inc. has purchased a new donut maker. It cost $\$ 16,000$ and has an estimated life of ten years. The following annual donut sales and expenses are projected: Sales \ 22,000 Expenses: Flour, etc. (required in making donuts) \ 10,000 Salaries \ 6,000 Depreciation \ 1,600 \ 17,600 Operating Income \ 4,400 (Ignore income taxes in this problem.) -The payback period on the new machine is closest to which of the following?

(Multiple Choice)

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Question 157

Superstrut is considering replacing an old press that cost $80,000 six years ago with a new one that would cost $245,000.The old press has a net book value of $15,000 and could be sold for $5,000.The increased production of the new press would require an investment in additional working capital of $6,000.The company's tax rate is 40%.What would be Superstrut's net investment now in the project?

(Multiple Choice)

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Question 158

A company needs an increase in working capital of $70,000 in a project that will last three years.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of the working capital to be released at the end of the project? (Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

(Multiple Choice)

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Question 159

Sue Falls is the president of Sports,Inc.She is considering buying a new machine that would cost $14,125.Sue has determined that the new machine promises an internal rate of return of 12%,but Sue has misplaced the paper that gives the annual cost savings promised by the new machine.She does remember that the machine has a projected life of ten years.Based on these data,what are the annual cost savings? (Ignore income taxes in this problem.)

(Multiple Choice)

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Question 160

Which of the following statements about the evaluation of an investment having uneven cash flows using the payback method is correct?

Consider a machine that costs $115,000 now and has a useful life of seven years.This machine will require a major overhaul at the end of the fourth year that will cost X dollars.If the tax rate is 40%,and if the after-tax cash outflow for this overhaul is $3,600,what is the amount of X in dollars?

The working capital required at the start of an investment is a tax deductible cash outflow.

Last year,the sales at Jersey Company were $200,000 and were all cash sales.The tax-deductible expenses at Jersey were $125,000 and were all cash expenses.The tax rate was 30%.What was the after-tax net cash inflow at Jersey last year from these operations?

Which of the following would decrease the net present value of a project?

If a firm acquires a depreciable asset on September 1,it can add only one-third of the capital cost of the asset to the undepreciated capital cost (UCC)in the calculation of the capital cost allowance (CCA)for the year.

How is depreciation handled by the following capital budgeting techniques? (Ignore income taxes in this problem.) Internal Rate of Return Simple Rate of Return Payback A) Excluded Included Excluded B) Included Excluded Included C) Excluded Excluded Included D) Included Included Excluded

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Variable Costing: A Tool for Management

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