Exam 18: Capital Budgeting and Cost Analysis

Maremount Tyre Company needs to overhaul its auto lift system or buy a new one.The facts have been gathered,and they are as follows: Current Machine New Machine Purchase Price, New \ 112500 \ 148000 Current book value 33500 Overhaul needed now 27500 Annual cash operating costs 63000 48000 Current salvage value 40000 Salvage value in five years 8000 35000 Required: Which alternative is the most desirable with a current required rate of return of 15%? Show computations,and assume no taxes. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Book & Bible Bookstore desires to buy a new coding machine to help control book inventories.The machine sells for $36 586 and requires working capital of $4000.Its estimated useful life is five years and will have a salvage value of $4000.Recovery of working capital will be $4000 at the end of its useful life.Annual cash savings from the purchase of the machine will be $10 000. Required: a.Compute the net present value at a 14% required rate of return. b.Compute the internal rate of return. c.Determine the discounted payback period of the investment. _____________________________________________________________________________________________ _____________________________________________________________________________________________

For capital budgeting decisions,the use of the accrual accounting rate of return for evaluating performance is often a stumbling block to the implementation of the:

Explain capital budgeting and briefly discuss each of the five stages of a capital budgeting project. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Nullabor Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $144 192.The annual cost savings if the new machine is acquired will be $40 000.The machine will have a five-year life,at which time the terminal disposal value is expected to be zero.What is the internal rate of return for Nullabor Park Department? Ignore taxes.

A post-investment audit of capital budgeting projects provides management with feedback about the performance of a project so management can compare actual results to the costs and benefits expected at the time the project was selected.

Answer the following questions using the information below: Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.The working capital investment will not be recovered at the end of the asset's life. -What is the net present value of the investment,assuming the required rate of return is 20%? Would the hospital want to purchase the new machine?

The net initial investment for a piece of construction equipment is $1 000 000.Annual cash inflows are expected to increase by $200 000 per year.The equipment has an eight-year useful life.The payback period is ______________:

In capital budgeting,a project is accepted only if the internal rate of return equals or:

Explain why a corporation's customer base is considered an intangible asset. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Adelaide Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $83 840 and has predicted cash inflows of $20 000 per year for 10 years.It will have no salvage value. Required: a.Using a required rate of return of 16%,determine the net present value of the investment proposal. b.Determine the proposal's internal rate of return. _____________________________________________________________________________________________ _____________________________________________________________________________________________

It is advantageous to use _______________________in situations where the required rate of return is not constant for each year of the project.

Lake Torrens Minimarket desires to buy a new coding machine to help control inventories.The machine sells for $73 172 and requires working capital of $8000.Its estimated useful life is five years and will have a salvage value of $8000.Recovery of working capital will be $8000 at the end of its useful life.Annual cash savings from the purchase of the machine will be $20 000. Required: a.Compute the net present value at a 14% required rate of return. b.Compute the internal rate of return. c.Determine the discounted payback period of the investment. _____________________________________________________________________________________________ _____________________________________________________________________________________________

The 'collect relevant information' stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects.

Answer the following questions using the information below: Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.The working capital investment will not be recovered at the end of the asset's life. -What is the net present value of the investment,assuming the required rate of return is 12%? Would the hospital want to purchase the new machine?

What is the accounting system that corresponds to the project dimension in capital budgeting called?

The focus in capital budgeting should be on:

The Silver Shades Corporation sells a capital asset with an original cost of $115 000 and accumulated depreciation of $62 500 for a salvage price of $18 000.Silver Shades's tax rate is 30%.Calculate the after-tax cash inflow from the disposal of the capital asset.

What is the minimum annual acceptable rate of return on an investment called?

Managers using discounted cash flow methods to make capital budgeting decisions make the same decisions that they would make if they used the accrual accounting rate-of-return methods.