Exam 13: Capital Budgeting Decisions

(Appendix 13A)AB Company is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its six-year useful life.The machine will cost $83,150 and has no salvage value.The machine has a 20% internal rate of return.(Ignore income taxes in this problem. ) Required: What is the annual cost savings promised by the machine?

(Appendix 13B)What is the maximum amount of CCA that the company can deduct for tax purposes for Year 1?

Given the following data: Based on the data given,what would be the profitability index? (Ignore income taxes in this problem. )

(Appendix 13A)A piece of equipment has a cost of $20,000.The equipment will provide cost savings of $3,500 each year for ten years,after which time it will have a salvage value of $2,500.If the company's discount rate is 12%,what is the equipment's net present value? (Ignore income taxes in this problem. )(Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )

(Appendix 13A)The internal rate of return for this investment is closest to which of the following?

(Appendix 13A and 13B)A company anticipates a taxable cash receipt of $50,000 in year 3 of a project.The company's tax rate is 30%,and its discount rate is 14%.What is the approximate present value of this future cash flow? Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )

Which of the following is a weakness of the internal rate of return method for screening investment projects?

(Appendix 13B)What is the approximate undepreciated capital cost (UCC)balance for the equipment at the beginning of Year 3?

(Appendix 13A and 13B)What is the approximate present value of the after-tax net savings in cash operating costs for all the years? (Do not round your intermediate calculations. )

What would be the payback period for the investment?

(Appendix 13A and 13B)What is the approximate present value of the after-tax net annual cash operating inflows for all years?

What is the present value of the before-tax proceeds that will be received on the sale of the old computer?

(Appendix 13A and 13B)What is the approximate present value of the after-tax non-operating cash inflows that will occur in Year 6? (Do not round your intermediate calculations and round your final answer to the nearest whole number. )

(Appendix 13B)Superstrut is considering replacing an old press that cost $80,000 six years ago with a new one that would cost $245,000.The old press has a net book value of $15,000 and could be sold for $5,000.The increased production of the new press would require an investment in additional working capital of $6,000.The company's tax rate is 40%.What would be Superstrut's net investment now in the project?

(Appendix 13A)Jim Bingham is considering starting a small catering business.He would need to purchase a delivery van and equipment costing $125,000 to operate the business and another $60,000 for inventories and other working capital needs.Rent for the building to be used by the business will be $35,000 per year.Jim's marketing studies indicate that the annual cash inflow from the business will amount to $120,000.In addition to the building rent,annual cash outflow for operating costs will amount to $40,000.Jim wants to operate the catering business for only six years.He estimates that the equipment could be sold at that time for 4% of its original cost.Jim uses a 16% discount rate.(Ignore income taxes in this problem. ) Required: Would you advise Jim to make this investment? Use Net Present Value and Profitability analysis to support your decision.

(Appendix 13B)Which of the following items is NOT included in the formula for calculating the present value of the capital cost allowance (CCA)tax shield?

(Appendix 13B)Kane Company is in the process of purchasing a new machine for its production line.It is near the end of the year,and the machine is being offered at a special discount if purchased before the end of the year.Kane has determined that the capital cost allowance (CCA)deduction on the new machine for the year of purchase would be $13,000.The tax rate is 30%.If Kane purchases the machine and reports a positive net income for the year,what would be the tax savings from the CCA tax shield related to this machine for the year of purchase?

(Appendix 13A)The following information concerns a proposed investment: What is the internal rate of return? (Ignore income taxes in this problem. )

(Appendix 13A)Ursus,Inc.is considering a project that would have a ten-year life and would require a $2,000,000 investment in equipment.At the end of ten years,the project would terminate and the equipment would have no salvage value.The project would provide net income each year as follows: All of the above items,except for depreciation of $200,000 a year,represent cash flows.The depreciation is included in the fixed expenses.The company's required rate of return is 12%.(Ignore income taxes in this problem. ) Required: a)What is the project's net present value? b)What is the project's internal rate of return? c)What is the project's payback period? d)What is the project's simple rate of return?

(Appendix 13A)Parks Company is considering an investment proposal in which a working capital investment of $10,000 would be required.The investment would provide cash inflows of $2,000 per year for six years.The working capital would be released for use elsewhere when the project is completed.If the company's discount rate is 10%,what is the investment's net present value? (Ignore income taxes in this problem. )(Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )