Exam 14: Capital Budgeting and Strategic Investment Decisions

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 maintenance cost in year 4 is

Which of the following is not a quantitative technique commonly used in capital budgeting decisions?

In general, the initial project investment does not require discounting in a net present value analysis.

The accrual accounting rate of return method does not consider the time value of money.

The cost of disposing of an old asset is considered irrelevant in capital budgeting decisions.

Which of the following is the best example of a tax shield for an asset?

You are currently entering university and you want to buy your uncle's Mercedes when you graduate. He has promised to sell it to you for $18,000. How much will you have to deposit now, in an account earning 8%, to have enough money buy the car in 4 years?

Phoxco is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. The net present value for this investment is

In January, Wilson Ltd purchased a new machine for $80,000 that has a useful life of 10 years and a terminal value of $5,000. Annual cash operating savings from the machine are $20,000. The income tax rate is 40%. What is the after-tax payback period?

A company is currently buying a part at a cost of $12 each. It is considering buying a machine that will produce the part at a variable cost of $8. Each unit of input produces the part plus a by-product, which is sold for $1. The machine will cost $40,000 and will have a useful life of 5 years. The company requires an 8% return. What annual volume is necessary to justify making the investment? Ignore income taxes.

Brisbane Hospital is considering the purchase of new medical equipment for $25,000. The old equipment has zero salvage value. The costs associated with operating the equipment are: If the new machine is purchased and ignoring income taxes, the payback period is

The net present value method is

Disquotek is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: The after-tax cash flows from selling the old equipment are

Bell Pty Ltd is considering a project that would provide a single cash inflow eight years from now of $80,000. What is the most that Bell would be willing to spend on this project if the discount rate is 16%?

Benjamin Ltd invested in a 3-year project and expects a 15% rate of return. Annual cash inflows from the project are: year 1 $8,000; year 2 $8,500; and year 3 $9,500. The net present value is $4,000. What was the amount of the original investment? Ignore income taxes.

For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true?

What is the net present value of a capital project to buy new equipment for replacing old equipment, given the following data and a minimum return of 12%? Ignore income taxes.

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 total savings (excluding the maintenance in year 4) in annual cash operating costs is

Elkins Ltd is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is

Cash flows for a capital budgeting analysis are affected by inflation, but not by deflation.