Exam 13: Capital Budgeting Decisions

(Appendix 13B)At the Bartholomew Company last year,all sales were for cash and all expenses were paid in cash.The tax rate was 30%.If the after-tax net cash inflow from these operations last year was $10,500,and if the total before-tax and tax-deductible cash expenses were $35,000,what must have been the total before-tax cash sales?

Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.The auto was purchased for $9,000 and will have a six-year useful life and a $3,000 salvage value.Delivering prescriptions (which the pharmacy has never done before)should increase gross revenues by at least $5,000 per year.The cost of these prescriptions to the pharmacy will be about $2,000 per year.The pharmacy depreciates all assets using the straight-line method.What is the payback period for the auto? (Ignore income taxes in this problem. )

What is the capital budgeting method that divides a project's annual incremental net income by the initial investment?

An investment project that requires a present investment of $210,000 will have cash inflows of R dollars each year for the next five years.The project will terminate in five years.Consider the following statements (ignore income tax considerations): I.If R is less than $42,000,the payback period exceeds the life of the project. II.If R is greater than $42,000,the payback period exceeds the life of the project. III.If R equals $42,000,the payback period equals the life of the project. Which statement(s)is(are)true?

A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year.The payback period for this machine in years is closest to which of the following? (Ignore income taxes in this problem. )

(Appendix 13A and 13B)Vernal Company has been offered a seven-year contract to supply a part for the military.After careful study,the company has developed the following estimated data relating to the contract: The equipment above would be in Class 7 with a 15% CCA rate.The company would take the maximum CCA allowable each year.It is not expected that the contract would be extended beyond the initial contract period.The company's after-tax cost of capital is 10%,and the tax rate is 30%. Required: Use net present value analysis to determine whether or not the contract should be accepted.(Round all calculations to the nearest dollar. )

(Appendix 13A)The following information is available on a new piece of equipment: What is approximately the life of the equipment? (Ignore income taxes in this problem. )

(Appendix 13A and 13B)A company anticipates a tax-deductible cash expense of $60,000 in year 2 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 outflow? Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )

(Appendix 13A)The present value of a given sum to be received in five years will be exactly twice as great as the present value of an equal sum to be received in ten years.

Why are the net present value and internal rate of return methods of capital budgeting superior to the payback method?

The preference rule for ranking projects by the profitability index is the following: the higher the profitability index,the more desirable the project.

How is depreciation handled by the following capital budgeting techniques? (Ignore income taxes in this problem. )

(Appendix 13A)The following data pertain to an investment proposal: What would be the internal rate of return? (Ignore income taxes in this problem. )

(Appendix 13B)By what amount does a capital cost allowance (CCA)deduction reduce income taxes?

(Appendix 13A and 13B)If Manti deducts the maximum CCA for tax purposes,what will be the approximate present value (as of January 2,Year 1)of the CCA tax shield for Year 1?(Do not round your intermediate calculations. )

The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero.

(Appendix 13A)The Whitton Company uses a discount rate of 16%.The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years.The machine would have no salvage value.What is the net present value of this machine,rounded to the nearest whole dollar,do not round your intermediate calculations? (Ignore income taxes in this problem. )

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

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

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