Exam 14: Capital Budgeting and Strategic Investment Decisions

Green Ltd has invested in a project with a cost of $36,504, annual net cash flows of $12,000, a terminal value of $4,000, and a 5-year useful life. The firm uses a 16% discount rate. Compute the internal rate of return to the nearest tenth of a percent. Ignore income taxes.

Bern & Sons invested in a project that cost $100,000. It had a net present value of $15,975 and a useful life of 8 years. The firm uses a 14% discount rate, and the project has an internal rate of return of 16%. What are the annual cost savings provided by the project?

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 for year 4 is

Phoxco is considering automating its production line. It will cost $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 per year for 14 years. The firm requires a 20% return. Ignoring income taxes, what is the payback period?

The first step in addressing capital budgeting decisions is to identify relevant cash flows.

Which of the following capital budgeting methods ignores the time value of money?

Incremental operating cash flows can be associated with changes in capacity or product quality in capital budgeting decisions.

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. What is the internal rate of return on this investment?

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: What is the relevant after-tax cash flow associated with disposing of the new equipment at its salvage value in 8 years?

The incremental cash tax flow for a capital budgeting project is calculated using which of the following formulas?

The time value of money is important in completing a net present value analysis.

Managers should consider qualitative information in making capital budgeting decisions.

The real and nominal methods are most closely associated with

Which of the following NPV analysis methods requires adjustment of a project's terminal value for inflation?

In completing a sensitivity analysis for a capital budgeting project, which of the following would typically be varied?

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. Bailey's 2007 depreciation tax shield for the old machine is

The tax savings cash flows are treated differently under the nominal and real methods. Which of the following reflects this treatment?

The process that managers use when they evaluate multi-year investments is called

If nominal cash flow is calculated as real cash flow × (1 + i)^t in an NPV analysis, i denotes the

Black Ltd is contemplating the purchase of a piece of equipment with the following cash flow data: Ignoring income taxes, what is the payback period?