Exam 20: Capital Budgeting: Methods of Investment Analysis

Toys and Junk Company is evaluating a capital expenditure proposal that requires an initial investment of $16,004 and has predicted cash inflows of $4,000 per year for 15 years.It will have no salvage value.Required: a.Using a required rate of return rate of 14 percent, determine the net present value of the investment proposal. b.Determine the proposals internal rate of return.

Jefferson Ltd.is considering the acquisition of new production equipment.If purchased, the new equipment would cost $1,850,000.Installation and testing costs would be $35,000 and $25,000 respectively.Once operational, the equipment will cause an increase in working capital of $120,000.The new equipment is expected to generate increased annual sales of $720,000.Variable costs to operate the machine are estimated at 42% of sales and annual fixed costs would be lowered by $75,000.The equipment has an estimate 6 year life and a salvage value of $90,000.The company requires an 11% return on its investments.Ignore income taxes.Required: a.Compute the net present value. b.Compute the internal rate of return. c.Determine the payback period of the investment.

Merkel Manufacturing company needs to overhaul its sheet metal cutting machine or buy a new one.The facts have been gathered, and are as follows: Required: Based on present value analysis, which alternative is the most desirable with a current required rate of return of 10 percent? Show cash flows, ignore tax effect.

Terrain Vehicle has received three proposals for its new vehicle painting machine.Information on each proposal is as follows: Annual cash saved by operations: Salvage value end of year: Required: Determine each proposals payback period.

Central Trailer Supply has received three proposals for its new trailer assembly line.Information on each proposal is as follows: Required: Determine each proposals payback.

Use the information below to answer the following question(s).Jupiter Ltd.wants to automate one of its production processes.The new equipment will cost $90,000.In addition, Jupiter will incur installation and testing costs of $5,000 and $4,500 respectively.The expected life of the equipment is 5 years and the salvage value of the equipment is estimated at $12,000.The annual cash savings are estimated at $29,000.The company uses straight-line depreciation and has a required rate of return of 9%.Ignore income taxes. -What is the accrual accounting rate of return for the investment Jupiter Ltd.is considering?

Discounted cash flow measures the cash inflows and outflows of a project as if they occurred at a single point in time in order to facilitate a proper comparison.

Biermann Equipment is a publicly held corporation required to pay income taxes.For the current year it had revenues of $5,000,000 and cash expenses of $3,000,000, and claimed CCA of $200,000.The company has a 30 percent tax rate.What would be the net cash flow for the current year if all revenues and expenses were in cash?

An accounting measure of income divided by an accounting measure of investment is called

Retail Outlet is looking for a new location near a shopping mall.It is considering purchasing a building rather than leasing, as it has done in the past.Three retail buildings near a new mall are available but each has its own advantages and disadvantages.The owner of the company has completed an analysis of each location which includes considerations for the time value of money.The information is as follows: The owner does not understand how the location with the highest percentage return has the lowest net present value.Required: Explain to the owner the probable cause(s)of the comparable differences.

Lion Enterprises Inc.is evaluating 3 investment alternatives.Each alternative requires a cash outflow of $102,000.The cash inflows are summarized below (ignore taxes): The company has a required rate of return of 9%.Required: Evaluate and rank each alternative using net present value (NPV).

Better Products Ltd.had annual net income of $20,000, CCA of $40,000, a 40 percent tax rate, a discount rate of 10 percent and annual cash sales of $200,000.The depreciable assets of Better Products belong in several different classes under the Income Tax Act, have a salvage value of zero at the end of six years, and were all bought new at the beginning of Year 1.What is the tax saving from CCA?

After-tax savings from an operating cash inflow are calculated by multiplying the cash flow by (1 - t), where t = the tax rate.

Explain why the term tax shield is used in conjunction with amortization.

Hiroshi Inc.is evaluating 3 investment alternatives.Each alternative requires an initial investment cash outflow of $176,000 and is to be depreciated on a straight-line basis ($6,000 salvage value).Ignore income taxes.Cash flows for the various investments are summarized below: The company has a required rate of return of 11.2% Required: a.rank each alternative based on NPV b.rank each alternative based on IRR c.rank each alternative based on accrual accounting rate of return using average annual cash flows d.evaluate each project based on the payback periods

Depreciation charges

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. -Upper Darby Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $150,000.The annual cost savings if the new machine is acquired will be $40,000.The machine will have a 5-year life, at which time the terminal disposal value is expected to be $20,000.Upper Darby Park Department is assuming no tax consequences.If Upper Darby Park Department has a required rate of return of 10%, which of the following is closest to the net present value of the project?

Explain capital budgeting, and list each of the five steps of the capital budgeting decision process model.Include both phases for step five.

The accrual accounting rate of return is an accounting measure of income divided by an accounting measure of investment.

Supply the missing data for each of the following proposals.