Exam 14: Capital Budgeting and Strategic Investment Decisions

Some of the steps in the process for addressing capital budgeting decisions are listed below. Which lettered choice puts the steps in the proper order? 1 Identify relevant cash flows. 2 Perform sensitivity analysis. 3 Apply quantitative techniques.

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 relevant annual pretax cash operating cost associated with Bailey's decision will be

Allen Ltd has the following equity structure: The weighted average cost of capital is

A firm's required rate of return is the rate which makes the

Income taxes have a major effect on capital budgeting decisions.

Cash flows to be considered in capital budgeting decisions generally fall into three major groups: initial investment, incremental operating cash flows, and terminal cash flows.

Sensitivity analysis is usually performed after applying quantitative analysis techniques in a capital budgeting decision.

Capital budgeting is a process managers use when choosing investments with multi-year cash flows.

Allen Ltd invested in a machine that has a 3-year useful life. The company's discount rate is 12%, and the net present value of the investment is $(573). Annual cost savings are: year 1 $3,000; year 2 $4,000; and year 3 $5,000. Determine the original cost of the machine. Ignore income taxes.

The rate of return that results in a zero net present value for a project is called the

A capital investment's expected useful life is inversely correlated with the uncertainty of its cash flows.

The nominal method of NPV analysis adjusts future cash flows for the impact of inflation.

In capital budgeting decisions, depreciation shields part of operating profit from the effect of income taxes.

The internal rate of return method assumes that future cash flows can be reinvested to earn the same return generated by a capital investment project.

George Shaw & Co invested in a project that was to last for 2 years. The project has an internal rate of return of 12%. The project is expected to produce cash inflows of $70,000 in the first year and $80,000 in the second year. The project cost 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: What is the relevant after-tax annual cash operating cost associated with this decision?

Apex Ltd has $100,000 available for long-term investment. Which projects should be selected from the list below?

An organisation that provides housing for abused women has limited housing, so it pays rent for several families. The director is considering expanding the housing facilities by purchasing a duplex that has a useful life of 10 years. The estimated cost is $100,000. Using a discount rate of 15%, the present value of the future savings on rent is $120,000. To yield an internal rate of return that is at least 15%, the actual cost cannot exceed the estimated cost of $100,000 by more than

The effect of a strategic investment decision on a company's reputation is often difficult to quantify.

Last semester a class gave a teacher $810 to fly to Bali. However, he decided not to go until he had enough money to fly back, an additional $690. If he invests the $810 at 8%, when can he make the trip, assuming no change in ticket prices?