Exam 20: Capital Budgeting: Methods of Investment Analysis

Fabian Company is considering the purchase of a piece of materials-handling equipment: Required: a.Calculate the payback period. b.Calculate the accrual accounting rate of return.

Financing opportunities are always investigated prior to the formal analyses of the costs and benefits of various investments.

The time value of money

A company is considering purchasing two different high-speed photocopiers.The regular model costs $4,500 and the deluxe model costs $6,100.The company has projected cash savings of $800 for the first year,and then $850 annually thereafter for both models,but the vendor is claiming that the deluxe model is $400 cheaper per year to operate than the regular model.What are the payback periods for the Regular and Deluxe models respectively assuming that the vendor is correct?

In the net present value (NPV)method,after-tax cash flows should be used instead of pre-tax cash flows when taxes are a consideration.

Shirt Company wants to purchase a new cutting machine for its sewing plant.The investment is expected to generate annual cash inflows of $300,000 recognized at the end of each year.The required rate of return is 12 percent and the new machine is expected to last for 4 years.What is the maximum dollar amount Shirt Company would be willing to spend for the machine?

Upper Darby Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $150,000.The annual cost savings if the new machine is acquired will be $40,000.The machine will have a 5-year life,at which time the terminal disposal value is expected to be $20,000.Upper Darby Park Department is assuming no tax consequences.If Upper Darby Park Department has a required rate of return of 10%,which of the following is closest to the net present value of the project?

In capital budgeting a single discount fits all alternative investment opportunities.

A company purchased a class 8 asset (there were no disposals).If the asset cost $20,000,had an estimated salvage value of $5,000,using the declining balance method with an allowable rate of 20%,the allowable CCA in the first and second years would be,respectively

Explain why the term tax shield is used in conjunction with amortization.

When the net present value method is used,only projects with ________ are ________.

Both financial and nonfinancial factors associated with proposed capital budgeting opportunities need to be considered as part of the capital budgeting decision process.

Initial machine investment costs include cash outflows for installation and transportation.

Which of the following is TRUE,concerning NPV?

Sources of funding for capital projects include the proceeds of debt and equity securities sold in capital markets as well as internally generated cash.

Use the information below to answer the following question(s). Albernie Ltd.purchased a CCA Class 8 (CCA rate of 20%)item of equipment for $90,000.The equipment was the only item in the Class 8 capital cost allowance pool.The equipment is expected to generate savings in the amount of $40,000 per year.The company uses straight-line depreciation,estimates a 3 year useful life with $20,000 salvage value for the new equipment.The tax rate is 35%,and Albernie has a required rate of return of 9.0%. -What is the net present value of the Albernie Ltd.investment in equipment?

The income tax depreciation method referred to as CCA

The payback method discounts cash flows prior to the payback date.

Headwaters Ltd.is considering purchasing a new asset.It has a cost of $1,350,000,an expected 6 year life and a salvage value of $90,000.The equipment would qualify as a class 8 (20% CCA)asset and Headwaters has a required rate of return of 11% and an effective tax rate of 32%. Required: Calculate the tax shields that are generated from the purchase of this asset.Assume the asset will be placed in a pool and the pool will continue upon disposition.For tax purposes the disposition will occur on day 1 of Year 7.What is the net tax effect of the asset acquisition?

When considering the net cash inflows resulting from a capital budgeting decision,taxes will