Exam 20: Capital Budgeting: Methods of Investment Analysis

Anderson Equipment Manufacturing produces equipment for the natural gas industry.The company management is considering purchasing new controllers for the fabricating machines.The new controllers are expected to increase efficiency and product quality.The engineering staff estimate that annual net cash savings from increased efficiency will be $35,000 per year for four years.The existing controllers can be sold for $8,000.The new controllers have a purchase price of $75,000 and will require installation costs in the amount of $4,500.The annual software contract for the new controllers is $1,700;the controllers will be depreciated using the straight-line method.The salvage value of the new controllers at the end of four years is estimated to be $10,000.The company has a required rate of return of 15%. Required: a.Determine the net present value of the investment in the new controllers. b.Calculate the internal rate of return of the investment in the new controllers.

When the present value of expected cash inflows from a project equals the present value of expected cash outflows of a project,the discount rate is the

Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is referred to as

A Canadian corporation can deduct a full year's worth of CCA on any asset acquired in the year.

Hiroshi Inc.is evaluating 3 investment alternatives.Each alternative requires an initial investment cash outflow of $176,000 and is to be depreciated on a straight-line basis ($6,000 salvage value).Ignore income taxes.Cash flows for the various investments are summarized below: The company has a required rate of return of 11.2% Required: a.rank each alternative based on NPV b.rank each alternative based on IRR c.rank each alternative based on accrual accounting rate of return using average annual cash flows d.evaluate each project based on the payback periods

The time value of money refers to the concept that

Opportunity cost is a cost of capital for which of the following sources of funds?

The acquisition cost of the assets in a class,minus the CCA claimed to date for that class,is referred to as the UCC of a particular class.

Central Trailer Supply has received three proposals for its new trailer assembly line.Information on each proposal is as follows: Required: Determine each proposals payback.

A project's net present value is increased if

A decrease in the tax rate will decrease the net present value (NPV)for a given capital budgeting project.

Net present value can be used to examine the effects of alternative ways of increasing customer loyalty.

Weston Ltd.is considering investing in a new piece of equipment for its factory.It estimates that the machine will generate an additional $120,000 per year in revenues.The contribution margin on these incremental revenues is estimated at 40%.Incremental annual fixed costs are estimated to be $8,200.The equipment would have a salvage value of $14,000 at the end of 6 years.The company's required rate of return is 13%.What is the net present value of this investment if the equipment costs $250,000? (Ignore income taxes. )

Life cycle costing is the accounting system that corresponds to

Capital Cost Allowance (CCA)is a cash flow.

Brown Corporation recently purchased a new machine for $339,013.20.The new equipment has a useful life of 10 years.Net cash flows will be $60,000 per year,end of year payments. What is the internal rate of return?

In NPV analysis,if the IRR exceeds the RRR

Which of the following is NOT a major category of cash flows in capital budgeting?

EIF Manufacturing company needs to overhaul its drill press or buy a new one.The facts have been gathered,and are as follows: Required: Based on present value analysis,which alternative is the most desirable with a current required rate of return of 20 percent? Show computations,ignore tax effect.

What is the net present value for the Wet Water Company's new drill?