Exam 11: Capital Budgeting

Mammoth Company is considering the acquisition of two machines. Assume straight-line depreciation.Ignore income taxes.The present value of an ordinary annuity at 14% and 5 periods is 3.4331.The present value of one at 14% and 5 periods is 0.5194. Required: A)Calculate the net present value for both machines. B)Which is the best alternative?

A company is considering two investment projects.If they use the total project approach and the differential approach,both approaches produce ________.

In the capital budgeting process,accountants are NOT involved in ________.

The accounting rate of return model does not ignore the time value of money.

A manager is considering the following investment: Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

Samsonite Company will purchase a van for $40,000.It will have a depreciable life of 5 years and no terminal salvage value.Assume a tax rate of 30% and a required rate of return of 12%.The company uses the straight-line method of depreciation for tax purposes.What is the present value of the total after-tax savings from the depreciation over the life of the van? (The present value of an ordinary annuity factor for 5 periods at 12% is 3.6048.The present value of a single sum for 5 periods at 12% is 0.5674.)

Woods Company is considering the purchase of some equipment.The initial investment will be $100,000.The estimated useful life of the equipment will be 5 years,at which point it will have a zero terminal salvage value.The annual savings in cash operating costs are $29,000.The company has a minimum desired rate of return of 12%.The company uses straight-line depreciation.Ignore income taxes. Given: The present value of ordinary annuity at 12% and 5 periods is 3.6048. The present value of one at 12% and 5 periods is 0.5674. Required: Compute: A)Net present value B)Payback period C)Accounting rate of return using the average investment

Discounted-cash-flow models are not based on the theory of compound interest.

The phases of capital budgeting do NOT include ________.

Slowly Company has obtained the following information about a proposed project: Present value of ordinary annuity Required: A)What is the net after-tax income per year? B)What is the annual after-tax cash flow from depreciation expense? C)What is the NPV of the project?

The minimum desired rate of return on an investment is sometimes referred to as ________.

________ is a capital budgeting model that ignores the time value of money and focuses on the profitability of an investment project.

An asset with a book value of $40,000 is sold for $20,000.The applicable tax rate is 20%.The net after-tax cash effect of this transaction is a ________.

A company is considering the acquisition of new equipment to replace old equipment.When using the net present value method,which item is NOT relevant?

A company is evaluating two different pieces of equipment for investment.Fixed overhead costs will be the same under each investment alternative.Fixed overhead costs are a(n)________ cost in the net present value method.

The time it will take to recoup in the form of cash inflows the initial dollars invested in an investment project is called the ________.

An asset with a book value of $160,000 is sold for $120,000.The applicable tax rate is 20%.What is the net after-tax cash inflow resulting from this transaction?

Accepting a project with a ________ NPV makes the firm worse off financially because the cost of the investment exceeds the ________.

In the net present value method,the disposal value of a long-term asset at the end of its useful life is considered to be a ________.

Which item below does NOT require an explicit adjustment for inflation?