Exam 20: Capital Budgeting: Methods of Investment Analysis

Use the information below to answer the following question(s).Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.If the machine is disposed of now, it may be sold for $30,000.The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project.The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000.The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem. -Use the following information to determine which machines to purchase based on net present value. Cost of capital is 10 percent.

Discounted cash flow methods focus on operating income.

When considering the net cash inflows resulting from a capital budgeting decision, taxes will

In the net present value (NPV)method, after-tax cash flows should be used instead of pre-tax cash flows when taxes are a consideration.

Samuel Manufacturing Inc.is evaluating new machinery in its factory.The machinery would replace existing equipment.The new machinery would cost $430,000, would last 6 years, and would have a salvage value of $36,000.The existing machinery currently has a net book value of $72,000 and could be sold for $65,000.If kept, the old machine would have a salvage value of $5,000 in 6 years time.The new machinery is expected to lower direct labour costs by $22,000 per year.The current variable overhead rate is 120% of direct labour.Other annual cost savings are projected to be $15,000.Due to the reduction in the production cycle time, working capital requirements will decrease by $8,000 during the life of the new machine.Ignore income taxes.Required: a.Compute the net present value of replacing the existing equipment at a 12 percent required rate of return. b.Compute the internal rate of return. c.Comment on the efficacy of the use of internal rate of return versus net present value in making this decision.

The after-tax cash inflow from the terminal disposal value of the investment is usually a significant factor in capital budgeting decision making.

Use the information below to answer the following question(s).Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.If the machine is disposed of now, it may be sold for $30,000.The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project.The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000.The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem. -What is the net present value (rounded to the nearest thousand)of the investment assuming the required rate of return is 10 percent? Would Hawkeye Cleaners want to purchase the new machine?

A new machine will cost $1,800,000.It is in a CCA class pool that uses a declining balance rate of 30%.The company's tax rate is 38% and it requires a 9% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

Capital cost allowance tax deductions result in tax savings that partially offset the cost of acquiring the capital asset.

Jensen Manufacturing Ltd.is considering buying a laser machine which costs $250,000.It requires working capital of $25,000 which will be returned at the end of the project.Annual cash savings are anticipated to be $103,000 for five years.The salvage value at the end of five years is expected to be nil.The company uses straight-line depreciation.Required: Determine the accrual accounting rate of return of the investment.

Wilf Company acquired an additional Class 10 (30% declining balance)asset for $60,000.The UCC at the beginning of the year was $100,000.The maximum CCA in the current year is

Use the information below to answer the following question(s).Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition, Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company uses straight-line depreciation and has a required rate of return of 14%.Ignore income taxes. -What is the net present value for the investment Saturn Ltd.is considering?

The net present value method can on occasion indicate erroneous decisions as it implicitly assumes that project cash flows can be reinvested at the project's rate of return.

A capital proposal is projected to result in annual savings of $25,000.What is the after-tax cash flow if the tax rate is 35%?

Answer the following questions using the information below: Jonesville Hospital has been considering the purchase of a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.If the machine is disposed now, it may be sold for $90,000.The new machine will cost $650,000 and an additional cash investment in working capital of $20,000 will be required.The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital.The investment is expected to net $60,000 in additional cash inflows during the year of acquisition and $230,000 each additional year of use.The new machine has a five-year life, and zero disposal value.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.The working capital investment will not be recovered at the end of the asset's life. -What is the net present value of the investment, assuming the required rate of return is 12%? Would the hospital want to purchase the new machine?

The discount rate, hurdle rate, or (opportunity)cost of capital all refer to the

If the appropriate tax rate is 35%, the after-tax effect of a single CCA deduction of $60,000 is

Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is referred to as

International Financial Reporting Standards (IFRS)require an annual post investment review.

The payback method discounts cash flows prior to the payback date.