Exam 21: Capital Budgeting and Cost Analysis

The most significant manager evaluation and goal congruence issues arise because of inconsistencies between the following methods of choosing among alternatives for capital budgeting purposes:

The minimum annual acceptable rate of return on an investment is the:

In determining whether to keep a machine or replace it, the original cost of the machine is a sunk cost and is NOT a relevant factor.

The stage of the capital budgeting process that chooses projects for implementation is the:

The net present value method can be used in situations where the required rate of return varies over the life of the project.

A capital budget spans only a one-year period.

The net initial investment for a piece of construction equipment is $2,000,000. Annual cash inflows are expected to increase by $400,000 per year. The equipment has an 8-year useful life. What is the payback period?

Crystal Manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of five years and the new equipment has a value of $117,320 with a five-year life. The expected additional cash inflows are $35,000 per year. What is the internal rate of return?

It is possible to use the net present value in an analysis of customer profitability.

The accrual accounting rate-of-return method is similar to the internal rate-of-return method because both methods calculate a rate-of-return percentage.

For capital budgeting decisions, the use of the accrual accounting rate of return for evaluating performance is often a stumbling block to the implementation of the:

The definition of an annuity is:

Managers using discounted cash flow methods to make capital budgeting decisions make the same decisions that they would make in using the accrual accounting rate-of-return methods.

Assume your goal in life is to retire with 2 million dollars. How much would you need to save at the end of each year if investment rates average 9% and you have a 15-year work life?

EIF Manufacturing Company needs to overhaul its drill press or buy a new one. The facts have been gathered, and they are as follows: Required: Which alternative is the most desirable with a current required rate of return of 20%? Show computations, and assume no taxes.

The final activity in the capital budgeting process is to obtain funding and make the investments identified in the make decisions by choosing among alternatives stage of the process.

Crystal Manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of five years and the new equipment has a value of $231,000 with a five-year life. The expected additional cash inflows are $70,000 per year. What is the payback period on this investment?

How is inflation related to capital budgeting? Discuss.

Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The machine sells for $36,586 and requires working capital of $4,000. Its estimated useful life is five years and will have a salvage value of $4,000. Recovery of working capital will be $4,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $10,000. Required: a. Compute the net present value at a 14% required rate of return. b. Compute the internal rate of return. c. Determine the payback period of the investment.

Brown Corporation recently purchased a new machine for $339,013.20 with a ten-year life. The old equipment has a remaining life of ten years and no disposal value at the time of replacement. Net cash flows will be $60,000 per year. What is the internal rate of return?