Exam 21: Capital Budgeting and Cost Analysis

Explain why a corporation's customer base is considered an intangible asset.

Post-investment audits:

The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $475,000. The investment is expected to generate $175,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $25,000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered.

The net present value (NPV)method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time using the required rate of return.

The two factors capital budgeting emphasizes are:

The obtain information stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects.

Wet and Wild Water Company drills small commercial water wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below. What is the net present value of the investment? Assume there is no recovery of working capital.

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the:

The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.

The accrual accounting rate of return method divides the average annual income of a project by a measure of the investment in it.

The four typical categories of cash flow for an investment project are: (1)net initial investment, (2)net income, (3)after tax cash flow from operations, and (4)after tax cash flow from terminal disposal of an asset.

Network Service Center is considering purchasing a new computer network for $82,000. It will require additional working capital of $13,000. Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs, excluding depreciation, of $15,000. At the end of eight years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not considered. Required: a. If the company has a required rate of return of 14%, what is the net present value of the proposed investment? b. What is the internal rate of return?

A increase in the tax rate will increase the net present value (NPV)for a given capital budgeting project.

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 $123,750 with a seven-year life. The expected additional cash inflows are $27,500 per year. What is the payback period on this investment?

The Alpha Beta Corporation disposes a capital asset with an original cost of $170,000 and accumulated depreciation of $109,000 for $50,000. Alpha betas tax rate is 40%. Calculate the after-tax cash inflow from the disposal of the capital asset.

Discounted cash flow methods for capital budgeting focus on:

The Required Rate of Return (RRR)is set externally by creditors as the interest rate on long term liabilities.

Supply the missing data for each of the following proposals:

Cash received from the disposal of old equipment is NOT relevant to a decision to buy a replacement.

Answer the following questions using the information below: Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $120,000. The new machine will cost $400,000 and an additional cash investment in working capital of $120,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $100,000 in additional cash inflows during the year of acquisition and $300,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. -What is the net present value of the investment, assuming the required rate of return is 24%? Would the company want to purchase the new machine?