Exam 20: Capital Budgeting: Methods of Investment Analysis

The method that measures the time it will take to recoup, in the form of cash inflows, the total dollars invested in a project is called the

Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.

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 present value of the after-tax savings that Albernie Ltd.expects during the useful life of the equipment?

Headwaters Ltd.is considering purchasing a new asset.It has a cost of $1,350,000, an expected 6 year life and a salvage value of $90,000.The equipment would qualify as a class 8 (20% CCA)asset and Headwaters has a required rate of return of 11% and an effective tax rate of 32%.Required: Calculate the tax shields that are generated from the purchase of this asset.Assume the asset will be placed in a pool and the pool will continue upon disposition.For tax purposes the disposition will occur on day 1 of Year 7.What is the net tax effect of the asset acquisition?

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. -In NPV analysis, if the IRR exceeds the RRR

A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.

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. -A "what-if" technique that examines how a result will change if the original predicted data are not achieved, or if an underlying assumption changes, is called

Xanadu Manufacturing Ltd.(XML)has two main customers in its' Eastern Canada division.The current year is 2019 and the company is evaluating its' customers current and projected profitability taking the time value of money into consideration.XML has a required rate of return of 12%.The customer gross margins projected for the five year period ending 2020 are as follows: XML has identified the following customer related activities and their rates: The company has the following information for 2016 regarding the three customers: The ratio of activity costs to gross margin is expected to be the same for the years after 2016.Required: a.Determine the profitability of each customer for 2016 using activity-based costing. b.Present a table showing the contribution to profit of each customer for each year assuming that the 2016 ratio of activity costs to gross margin is maintained.Include a column for the five year total. c.Use the present value method to discount each customer's contribution to profit.Assume end of period payments. d.Provide two qualitative measures that can be effective in evaluating customers.

What are the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method?

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. -Shirt Company wants to purchase a new cutting machine for its sewing plant.The investment is expected to generate annual cash inflows of $300,000 recognized at the end of each year.The required rate of return is 12 percent and the new machine is expected to last for 4 years.What is the maximum dollar amount Shirt Company would be willing to spend for the machine?

A company is considering purchasing new equipment.The equipment will allow the company to expand into a new product line.The equipment will be installed in the company's existing facility.Which of the following cash flows would NOT be relevant to the decision to acquire the new 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. -Alberta Ltd.is considering the purchase of new machinery which costs $147,800.The machine is expected to save $42,300 in operating costs annually for the next 7 years.By how much can the annual cost savings fall (to the nearest hundred dollars)and still provide a 16% return? Ignore income taxes.

Crofton Inc.is evaluating new machinery in its foundry.The machinery would replace existing equipment.The new machinery would cost $230,000, would last 5 years, and would have a salvage value of $28,000.The existing machinery currently has a net book value of $52,000 and could be sold for $38,000.If kept, the old machine would have a salvage value of $6,000 in 5 years' time.The new machinery is expected to lower direct labour costs by $18,000 per year.The current variable overhead rate is 120% of direct labour.Other annual cost savings are projected to be $30,000.Due to the reduction in the production cycle time, working capital requirements will decrease by $25,000 during the life of the new machine.Ignore income taxes.Required: a.Compute the net present value of replacing the existing equipment at a 9 percent required rate of return. b.Compute the internal rate of return.

A Canadian corporation can deduct a full year's worth of CCA on any asset acquired in the year.

Post-investment audits

The payback method measures the time required to recoup the total dollars invested in the project through cash inflows.

Mercury Ltd.is considering purchasing laser equipment for $72,000.The machine will require additional working capital of $8,000.Its anticipated seven-year life will generate additional revenue of $31,000 annually with operating costs, excluding depreciation, of $14,000.At the end of seven years it will have a salvage value of $9,760 and return $8,000 in working capital.Required: a.If the company has a required rate of return of 12 percent, what is the net present value of the proposed investment? b.What is the internal rate of return?

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance

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 present value of the salvage value that Albernie Ltd.is expecting from the equipment?

Defensive strategies can be difficult to quantify because opportunity costs are difficult to predict.