Exam 20: Capital Budgeting: Methods of Investment Analysis

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 20%? Would the hospital want to purchase the new machine?

Use the information below to answer the following question(s).Neptune Ltd.wants to expand its operations by manufacturing a new product line.New equipment will cost $225,000.Incremental sales are estimated at $150,000 per year for 6 years.Variable costs of producing the new product line are 52% of sales and incremental annual fixed costs are $25,000.The equipment can be salvaged after 6 years for 16% of its original cost.The company's required rate of return for new projects is 18%.Ignore income taxes. -Net present value is calculated using the

The primary advantage of the internal rate of return method is that the end result of the computation is in dollars instead of percentages.

A rental company replaces its heavy drilling machine every four years (no salvage value).It is contemplating acquiring a larger machine, at a cost of $70,000, which is guaranteed to last for seven years.The current machine can be traded-in for a $3,000 down payment on the new machine, and the company expects annual savings in operating costs of $15,000.What is the AARR for the new machine?

Use the information below to answer the following question(s).Albernie Ltd.purchased a CCA Class 8 (CCA rate of 20%)item of equipment for $90,000.The equipment was the only item in the Class 8 capital cost allowance pool.The equipment is expected to generate savings in the amount of $40,000 per year.The company uses straight-line depreciation, estimates a 3 year useful life with $20,000 salvage value for the new equipment.The tax rate is 35%, and Albernie has a required rate of return of 9.0%. -What is the net present value of the Albernie Ltd.investment in equipment?

Use the information below to answer the following question(s).Wet Water Company drills residential and commercial wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below: Note: Other than the initial investment, cash flows are end of period.The working capital is returned at the end of the investment period. -The net present value method is better than the internal rate of return because

The required rate of return is the minimum acceptable percentage return on an investment and is set by the suppliers of investment funds.

In capital budgeting decisions, revenues and costs are analyzed over the short-run.

The use of an accelerated method of depreciation for tax purposes would usually increase the present value of the investment.

Pluto Medical Ltd.is considering purchasing ultrasound equipment for $110,000.The machine will require additional working capital of $6,000.Its anticipated seven-year life will generate additional revenue of $22,000 annually with operating costs, excluding depreciation, of $1,500.At the end of seven years it will have a salvage value of $15,000 and return $6,000 in working capital.Required: a.If the company has a required rate of return of 9 percent, what is the net present value of the proposed investment? b.What is the internal rate of return?

Both financial and nonfinancial factors associated with proposed capital budgeting opportunities need to be considered as part of the capital budgeting decision process.

Describe the purpose, features and benefits of a post investment audit for a capital budgeting project.

Which of the following is false concerning the payback method of capital budgeting?

"Faster response to market changes" is a benefit of computer-integrated technology.

A company purchased a class 8 asset (there were no disposals).If the asset cost $20,000, had an estimated salvage value of $5,000, using the declining balance method with an allowable rate of 20%, the allowable CCA in the first and second years would be, respectively

In capital budgeting a single discount fits all alternative investment opportunities.