Exam 20: Capital Budgeting: Methods of Investment Analysis

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 $4,000.Its estimated useful life is five years and will have a salvage value of $4,000.Recovery of working capital will be $4,000 at the end of its useful life.Annual cash savings from the purchase of the machine will be $10,000.Ignore income taxes. Required: a.Compute the net present value at a 14 percent required rate of return. b.Compute the internal rate of return. c.Determine the payback period of the investment.

What are the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method?

Cost systems with an exclusive period-by-period focus are more likely to identify project costs over multiple periods.

The Income Tax Act classifies every amortizable asset into one of several classes.

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance

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 present value of the after-tax savings that Albernie Ltd.expects during the useful life of the equipment?

The discount rate,hurdle rate,or (opportunity)cost of capital all refer to the

An accounting measure of income divided by an accounting measure of investment is called

Use the information below to answer the following question(s). Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition,Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company uses straight-line depreciation and has a required rate of return of 14%.Ignore income taxes. -What is the accrual accounting rate of return for the investment Saturn Ltd.is considering?

Better Products Ltd.had annual net income of $20,000,CCA of $40,000,a 40 percent tax rate,a discount rate of 10 percent and annual cash sales of $200,000.The depreciable assets of Better Products belong in several different classes under the Income Tax Act,have a salvage value of zero at the end of six years,and were all bought new at the beginning of Year 1.What is the tax saving from CCA?

Mercury Ltd.is considering purchasing laser equipment for $72,000.The machine will require additional working capital of $8,000.Its anticipated seven-year life will generate additional revenue of $31,000 annually with operating costs,excluding depreciation,of $14,000.At the end of seven years it will have a salvage value of $9,760 and return $8,000 in working capital. Required: a.If the company has a required rate of return of 12 percent,what is the net present value of the proposed investment? b.What is the internal rate of return?

Supply the missing data for each of the following proposals.

Sam's Structures desires to buy a new crane and accessories to help move and install modular buildings.The machine sells for $75,000 and requires working capital of $10,000.Its estimated useful life is six years and it will have a salvage value of $17,560.Recovery of working capital will be $10,000 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 12% required rate of return. b.Compute the internal rate of return. c.Determine the payback period of the investment.

After-tax savings from an operating cash inflow are calculated by multiplying the cash flow by (1 - t),where t = the tax rate.

Discounted cash flow methods focus on operating income.

Post-investment audits

Projects with shorter paybacks always generate more cash flows.

In situations where the required rate of return is not constant for each year of the project,it is advantageous to use

A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.

A company is considering purchasing new equipment.The equipment will allow the company to expand into a new product line.The equipment will be installed in the company's existing facility.Which of the following cash flows would NOT be relevant to the decision to acquire the new equipment?