Exam 14: Capital Budgeting and Strategic Investment Decisions

Sebastian is presenting a capital budgeting project to Tamara, his division manager. Which one of the following is likely to have the least amount of bias when evaluating this project?

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 net cash flow associated with selling the old machine in January 2008 (i.e., the value of the sale and any tax consequences) would be

Which of the following statements regarding NPV analysis is true?

In a capital budgeting analysis, nominal cash flow is generally calculated as

A negative net present value means that the

Which of the following factors are subject to uncertainty in an NPV analysis?

DBR is considering the purchase and implementation of an enterprise-wide information system. Which of the following would be the least biased source of qualitative information about the project?

Which of the following is the best example of a capital budgeting decision?

Uniform cash flows from a capital project are necessary for which of the following calculations?

Which of the following is not a step in the process for addressing capital budgeting 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 terminal cash flows is

Rams Ltd has invested in a machine with a cost of $37,164 and annual cost savings of $6,000. The discount rate is 8%, and the machine's internal rate of return is 12%. Ignore income taxes. The estimated life of the machine is

Phoxco would like to automate its calligraphy operation. The equipment will cost $150,000 plus freight, installation, and testing costs of $5,500. The expected life of the project is 8 years, with annual cost savings of $20,000. The minimum rate of return is 12% and estimated terminal value is $3,000. Ignore income taxes. The profitability index of the project is