Exam 7: Business Decisions, Capital Budgeting and Depreciation

A machine costing $42,246 is expected to last 10 years with a scrap value of $4000.The machine is depreciated using the constant percentage method with d = 21%.After 5 years,the depreciation method is changed to the straight-line method for the final 5 years.What is the book value after 7 years?

A company is considering buying a certain machine.There are there options: • Machine 1 costs $6000 and will last 15 years with a scrap value of $800 and maintenance costs of $500 a year • The capitalized cost for Machine 2 is $23,457 • The capitalized cost for Machine 3 is $25,500 It is known that machine 1 produces 30% less output than machine 2 and machine 3 produces 10% more output than machine 2.If j₁ = 7%,which of the following list is the rank of preference of machine to be purchased (ranked from best to worst machine)?

Which of the following statements is (are)true? (I)If an investment project has an internal rate of return (IRR)equal to the cost of capital,the net present value (NPV)for that project must be positive. (II)If the cumulative cash flows,∑ F_t,change signs more than once during the term of an investment,there may be more than one IRR.

A company $100,000.They can invest this money in bonds with annual coupons yielding j₁ = 6%.There are two other investments available which each cost $100,000: I.A perpetuity paying $6300 per year. II.An investment paying $13,000 per year for the next 10 years. The company can only choose one of the three investment options.Assuming the cost of capital is 6%.Which of the following is the correct answer? (Both the decision and explanation must be correct).

A company buys a machine costing $75,000.The machine has no scrap value at the end of its estimated lifetime of 15 years.It has annual maintenance expenses of $1000,and is expected to produce 2000 units per year.The capitalized cost of the machine at j₁ = 7% is $131,922.72.The company wishes to increase the machine's productivity by 10% per year.If this is done,the cost,estimated lifetime and scrap value remain unchanged,but maintenance costs will increase by $X per year.What is the value of X?

You are deciding where to invest $100,000 and you have narrowed your choices to two options,I and II.Using the net present value method with a cost of capital of 10%,you have determined that NPV_I > NPV_II.Which of the following statements is true?

An asset with an initial value of $15,000 has a salvage value of $2000 after 10 years.What is the absolute value of the difference between the depreciation expenses entered in the books in the seventh year under the straight-line method and under the declining-balance method?

A company has an asset that cost $20,000.It is estimated to last 8 years.It is to be depreciated 32% every year using the constant percentage method.What is the scrap value of the asset?

A piece of equipment is depreciated over 5-years.It costs $5000 and has a scrap value of $500.For the first 2-years,the straight line method is used.For the last 3-years,the constant percentage method is used with a depreciation rate of d.What value of d is needed?

An investment of $724 will produce estimated cash flows of $250 at the end of each of the next four years.Which of the following would be reported as the internal rate of return,IRR? (Answer to the nearest 0.5%)

An office machine costing $2000 is being depreciated over 10 years using the constant-percentage method.The book value after 4-years is $480.20.What is the scrap (salvage)value of the machine?

A mine $2,000,000 and is said to contain 80,000 tons of ore.When all the ore has been mined,the land can be sold for $100,000.If the book value of the mine after 3 years is $1,080,000,how many tons of ore have been mined up to that point?

You are looking to invest $200,000.You have 3 possible investment options: (I)A lump sum of $640,000 payable in 10 years (II)An annuity paying $30,000 at the end of every years for 15 years (III)A perpetuity paying $25,000 at the end of every year Using the net present value method of business decision making,which option should be chosen,if any,if the cost of capital is j₁ = 12%?

A machines costing $10,000 is estimated to have a useful lifetime of n years and a scrap value of $500.It is expected to run for 25,000 hours over n years.The actual hours the machine runs are: 2000 hours in year 1,1500 hours in year 2 and 800 in year 3.What is the book value of the machine at the end of 3-years?

Machine 1 has a capitalized cost of $74,000.Machine 2 has a cost of $C,a scrap value estimated at $5000,an estimated lifetime of 10 years and annual maintenance costs of $2000.Machine 2 produces 20% more output per year than Machine 1.If j₁ = 8%,what is the value of C so that machine 1 and 2 are economically equivalent? (Answer to the nearest dollar)

A gravel pit is purchased for $200,000 and has expected usable gravel equal to 40,000 truck loads,with yearly production as follows (in truck loads): year 1 -10,500 ;year 2 - 9,600 ;year 3 - 8,300 ;year 4 - 6,700 ;year 5 - 4,900.When all the usable gravel has been extracted,the land can be sold for $30,000.What is the book value of the land after 3 years?

A computer is depreciated over 3 years.It costs $2300 and has an estimated scrap value of $200.The straight-line method is used for the first year.For the last two years,the constant percentage method is used,with depreciation rate d.In order to depreciate the computer from $2300 to $200 by the end of 3 years,what value of d is needed?

Equipment costing $40,000 is to be depreciated over 15 years,at which time it will be sold for scrap for $4,000.Let R_s = depreciation expense for the 6^th year under the straight line method and R_c = depreciation expense for the 6^th year under the constant percentage method with rate of depreciation d = 20%.What is | R_s -R_c |?

A company needs to buy a machine to produce widgets.They have narrowed their choices to the following 4 machines: Machine W - capitalized cost = $75,800 Machine X - capitalized cost = $87,500;produces 15% more widgets a year than machine W Machine Y - capitalized cost = $67,500;produces 10% fewer widgets a year than machine W Machine Z - capitalized cost = $60,500;produces 20% fewer widgets a year than machine W From a financial point of view,which machine should the company buy?

Which of the following statements is true? (I)If an investment project has an internal rate of return (IRR)equal to the cost of capital,the Net Present Value (NPV)for that project must be greater than 0 (II)If [CF₁ + CF₂ + … + CF_k] > CF₀,then the IRR will always be greater than 0.(CF_k = net cash flow at end of year k)