Exam 20: Capital Budgeting: Methods of Investment Analysis

Which of the following is TRUE concerning capital budgeting analysis?

Clock Manufacturing Company purchased a new piece of equipment at a cost of $60,000 at the beginning of the year.For tax purposes the machine is a Class 8 asset (20% declining balance).The company has a 34 percent income tax rate.Assume that the company has no other Class 8 assets during the period. Required: a.Compute the amount of tax savings from CCA for the first three years. b.Compute the amount of tax savings from CCA for the first three years using a required rate of return of 12 percent.

Computer integrated technology may increase workers' knowledge of automation and facilitate future installations.

Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.

Answer the following questions using the information below: Jonesville Hospital has been considering the purchase of a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.If the machine is disposed now,it may be sold for $90,000.The new machine will cost $650,000 and an additional cash investment in working capital of $20,000 will be required.The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital.The investment is expected to net $60,000 in additional cash inflows during the year of acquisition and $230,000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.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?

Samuel Manufacturing Inc.is evaluating new machinery in its factory.The machinery would replace existing equipment.The new machinery would cost $430,000,would last 6 years,and would have a salvage value of $36,000.The existing machinery currently has a net book value of $72,000 and could be sold for $65,000.If kept,the old machine would have a salvage value of $5,000 in 6 years time.The new machinery is expected to lower direct labour costs by $22,000 per year.The current variable overhead rate is 120% of direct labour.Other annual cost savings are projected to be $15,000.Due to the reduction in the production cycle time,working capital requirements will decrease by $8,000 during the life of the new machine.Ignore income taxes. Required: a.Compute the net present value of replacing the existing equipment at a 12 percent required rate of return. b.Compute the internal rate of return. c.Comment on the efficacy of the use of internal rate of return versus net present value in making this decision.

If the appropriate tax rate is 35%,the after-tax effect of a single CCA deduction of $60,000 is

Soda Manufacturing Company provides vending machines for soft drink manufacturers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of 1 year and no sales value.The new equipment has a value of $52,650 with a three-year life.The expected additional cash inflows are $25,000 per year,end of year payments. What is the internal rate of return?

The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000.The investment is expected to generate $350,000 in annual cash flows for a period of four years.The required rate of return is 14%.The old machine can be sold for $50,000.The machine is expected to have zero value at the end of the four-year period.Income taxes are not considered.What is the net present value of the investment?

Answer the following questions using the information below: Jonesville Hospital has been considering the purchase of a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.If the machine is disposed now,it may be sold for $90,000.The new machine will cost $650,000 and an additional cash investment in working capital of $20,000 will be required.The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital.The investment is expected to net $60,000 in additional cash inflows during the year of acquisition and $230,000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.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?

The accrual accounting rate of return is an accounting measure of income divided by an accounting measure of investment.

Which of the following is NOT a part of the capital budgeting decision process model?

The Zero Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $20,960 and has predicted cash inflows of $5,000 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 proposals internal rate of return.

A new machine will cost $720,000.It is in a CCA class pool that uses a declining balance rate of 20%.The company's tax rate is 42% and it requires a 12% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

ABC Boat Company is interested in replacing a moulding machine with a new improved model.The old machine has a salvage value of $20,000 now and a predicted salvage value of $4,000 in six years,if rebuilt.If the old machine is kept,it must be rebuilt in one year at a predicted cost of $40,000.The new machine costs $160,000 and has a predicted salvage value of $28,000 at the end of six years.The new machine will generate cash savings of $40,000 for each of the first three years and $20,000 for each year of its remaining six-year life.Ignore income taxes. Required: What is the net present value of replacing the old machine if the company has a required rate of return of 14 percent?

The after-tax cash inflow from the terminal disposal value of the investment is usually a significant factor in capital budgeting decision making.

In determining whether to keep a machine or replace it,the net book value of the machine is irrelevant.

Project ABC is under consideration.Annual cash flows equal $50,000 per year for 5 years.During the first three years the required rate of return is 2 percent.The required rate of return for cash flows in the final two years is 10 percent.What is the present value of cash inflows?

The required rate of return is the minimum acceptable percentage return on an investment and is set by the suppliers of investment funds.

Terrain Vehicle has received three proposals for its new vehicle painting machine.Information on each proposal is as follows: Required: Determine each proposals payback period.