Exam 14: Capital Budgeting and Strategic Investment Decisions

Walter borrows $10,000 from his mother. He will repay her $2,000 at the end of each of the next four years and the balance at the end of the fifth year. If the interest rate is 12%, what is the amount to be paid at the end of the fifth year?

Arnold is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: Cost of new machine$100000Annual cost savings in cash expenses45000Terminal value8000Maintenance required in the 4th year5000Book value of the old machine20000The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention). The present value of the total tax savings from the depreciation tax shield is

Inflation refers to the

Martin Ltd has the following equity structure: Martin's weighted average cost of capital is

Arnold is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention). The present value of the cash flows from the sale of the old machine is

Conroy wants to purchase a machine for a new product line that costs $138,750. The company's engineering department estimates the machine will last 10 years and provide an annual contribution margin of $25,000. Ignore income taxes. The internal rate of return to the nearest tenth of a percent is

The local school board is considering the purchase of a new computer system. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.

A depreciable asset's taxable basis is calculated as its

Qualitative factors often influence strategic investment decisions. Which of the following is the best example of such a factor?

Because of its complex calculation, few managers rely on the payback period as a capital budgeting analysis tool.

Bailey Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 2008, $5,700 in 2009, $3,800 in 2010, and $1,900 in 2011. Assume Bailey would purchase the new machine in December 2007 and dispose of the old machine in January 2008. The tax effect of selling the new machine in 2011 would be

Allan Ltd is considering the purchase of a new truck which costs $14,340. The truck is expected to save $3,600 in operating costs annually for the next 7 years. How low can the annual cost savings be and still provide a 15% return? Ignore income taxes.

Capital budgeting decisions typically fall into which of the following major categories?

Under the general quantitative rule, a project with a net present value less than zero should not be accepted.

Early Ltd has chosen four potential investment projects. Listed below are some relevant data on these projects: Use the profitability index to rank these investments in terms of preference.

The payback period is deficient as a decision criterion for capital projects because it

Uncertainty is very often a factor when estimating a project's terminal value for an NPV analysis.

Managers responsible for proposing a project are likely to be favorably biased in their estimates of future project cash flows.

The time value of money means

If the internal rate of return exceeds the discount rate, the net present value is