Exam 13: Capital Budgeting Decisions

(Appendix 13A)General Manufacturing Company consists of several divisions,one of which is the Transportation Division.The company has decided to dispose of this division because it no longer fits the company's long-term strategy.An offer of $9,000,000 has been received from a prospective buyer.If General retained the division,the company would operate the division for only nine years,after which the division would no longer be needed and would be sold for $600,000.If the company retains the division,an immediate investment of $500,000 would need to be made to update equipment to current standards.Annual net operating cash flows would be $1,805,000 if the division is retained.The company's discount rate is 12%.(Ignore income taxes in this problem. ) Required: Using the net present value method,determine whether General Manufacturing should accept or reject the offer made by the potential buyer.

(Appendix 13A)Overland Company has gathered the following data on a proposed investment project: The internal rate of return on this investment is closest to which of the following? (Ignore income taxes in this problem. )

(Appendix 13A)What is the present value of the net operating cash flows (sales minus cash operating expenses)arising from the rebuilding and sale of the alternators,rounded to the nearest dollar? (Do not round your intermediate calculations. )

The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the discount rate.

(Appendix 13A)Hilltop Company plans to invest $100,000 in a two-year project.The cash flow will be $40,000 for the first year and $80,000 in year 2.At a required rate of return of 12% what is the Net Present Value of the project? (Ignore income taxes in this problem. )(Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )

(Appendix 13A)Suppose an investment has cash inflows of R dollars at the end of each year for two years.What will be the present value of these cash inflows using a 12% discount rate?

(Appendix 13A and 13B)Selah Company bought a new computer-assisted design (CAD)software for $10,000,000 at the beginning of Year 1.The software has a useful life of 3 years and will save the company annual cash operating expenses of $4,000,000 in each of those 3 years.The software will have a zero net salvage value at the end of 3 years.It belongs to Class 12 with a capital cost allowance (CCA)rate of 100%.With special permission from the Canada Revenue Agency,the half-year CCA rule has been waived for the company to permit a maximum 100% CCA deduction for Year 1.The company's income tax rate and after-tax cost of capital are 40% and 12%,respectively. Required: a)Calculate the maximum total CCA tax shied available to the company. b)Calculate the present value of the annual cash savings in operating expenses. c)Calculate the net present value (NPV)of the investment. d)Was the internal rate of return (IROR)greater than or less than the company's after-tax cost of capital of 12%? (Note: Do NOT try to calculate the implied actual internal rate or return. ) e)By how much must the annual savings in operating expenses be increased or decreased to make the investment just worthwhile,that is,either zero NPV or 12% IROR?

The simple rate of return for the new machine is closest to which of the following?

(Appendix 13A)Sam Weller is thinking of investing $70,000 to start a bookstore.Sam plans to earn $15,000 cash from the business at the end of each year for the next five years.At the end of the fifth year,Sam plans to sell the business for $110,000 cash.At a 12% discount rate,what is the net present value of the investment? (Ignore income taxes in this problem. )(Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )

The payback period for the investment is closest to which of the following?

Which of the following capital budgeting techniques consider(s)cash flow over the entire life of the project?

(Appendix 13A)Which of the following would decrease the net present value of a project?

One strength of the simple rate of return method is that it takes into account the time value of money in computing the return on an investment project.

(Appendix 13B)The reduction in taxes made possible by a capital cost allowance (CCA)tax shield equals the amount of the CCA deduction multiplied by the tax rate.

(Appendix 13A)Which of the following is associated with an increase in the discount rate?

Projects with shorter payback periods are always more profitable than projects with longer payback periods.

The payback period is the length of time it takes for an investment to recoup its own initial cost out of the cash receipts it generates.

(Appendix 13A)The following data pertain to an investment proposal: The working capital would be released for use elsewhere when the project is completed.What is the net present value of the project,using a discount rate of 8%? (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 effective cost to Morgan of the need for working capital on the contract is closest to which of the following? (Do not round your intermediate calculations and round your final answer to the nearest whole number. )

Depreciation expenses taken on financial reports are relevant for capital budgeting decisions because it affects the company's net income.