Exam 21: Capital Budgeting and Cost Analysis

The three common discounted cash flow methods are net present value, internal rate of return, and payback.

Unlike the net present value method and the internal rate-of-return method, the payback method does NOT distinguish between the origins of the cash flows.

Which of the following is NOT an appropriate term for the required rate of return?

The make decisions by choosing among alternatives stage of the capital budgeting process consists of determining which investment yields the greatest benefit and the least cost to the organization.

Terrain Vehicle has received three proposals for its new vehicle-painting machine. Information on each proposal is as follows: Required: Determine each proposal's payback.

Which of the following are NOT included in the formal financial analysis of a capital budgeting program?

The Lancaster Corporation has an annual cash inflow from operations from its investment in a capital asset of $22,000 each year for five years. The corporation's income tax rate is 25%. Calculate the five years total after-tax cash inflow from operations.

The payback method is only useful when the expected cash flows in the later years of the project are highly uncertain.

The stage of the capital-budgeting process in which projects get underway and performance is monitored is the:

ABC Boat Company is interested in replacing a molding machine with a new improved model. The old machine has a salvage value of $10,000 now and a predicted salvage value of $4,000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $20,000. The new machine costs $80,000 and has a predicted salvage value of $12,000 at the end of six years. If purchased, the new machine will allow cash savings of $20,000 for each of the first three years, and $10,000 for each year of its remaining six-year life. Required: What is the net present value of purchasing the new machine if the company has a required rate of return of 14%?

Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $432,576. The annual cost savings if the new machine is acquired will be $120,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be zero. Upper Darby Park Department is assuming no tax consequences. What is the internal rate of return for Upper Darby Park Department?

The approach to capital budgeting which divides an accounting measure of income by an accounting measure of investment is the:

Shirt Company wants to purchase a new cutting machine for its sewing plant. The investment is expected to generate annual cash inflows of $150,000. The required rate of return is 12% and the current machine is expected to last for four years. What is the maximum dollar amount Shirt Company would be willing to spend for the machine, assuming its life is also four years? Income taxes are not considered.

The relevant terminal disposal price of a machine equals the:

Capital investment decisions that are strategic in nature:

Gavin and Alex, baseball consultants, are in need of a microcomputer network for their staff. They have received three proposals, with related facts as follows: The company uses straight-line depreciation for all capital assets. Required: a. Compute the payback period, net present value, and accrual accounting rate of return with initial investment, for each proposal. Use a required rate of return of 14%. b. Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best? Why?

Springtime Flower Company provides flowers and other nursery products for decorative purposes in medium to large sized restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van has a value of $62,755 with a seven-year life. The expected additional cash inflows are $13,750 per year. What is the internal rate of return?

Discuss a range of factors that managers may have to consider when making capital budgeting decisions that are strategic in nature.

Relevant cash flows are expected future cash flows that differ among the alternative uses of investment funds.

Jensen Manufacturing is considering buying an automated machine that costs $500,000. It requires working capital of $50,000. Annual cash savings are anticipated to be $206,000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $20,000. The working capital will be recovered at the end of the machine's life. Required: Compute the accrual accounting rate of return based on the initial investment.