Exam 20: Capital Budgeting: Methods of Investment Analysis

A capital investment project typically has three categories of cash flows: (1)net initial investment; (2)cash flow from operations;and (3)terminal disposal and recovery of investment(s) Required: Complete the following list of components for each category: Net initial investment 1.cost of asset acquisition 2.________ 3.________ Cash flow from operations 1.________ 2.________ Terminal disposal and recovery of investment(s) 1.________ 2.________

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 salvage value that Albernie Ltd.is expecting from the equipment?

Alberta Ltd.is considering the purchase of new machinery which costs $147,800.The machine is expected to save $42,300 in operating costs annually for the next 7 years.By how much can the annual cost savings fall (to the nearest hundred dollars)and still provide a 16% return? Ignore income taxes.

Discounted cash flow measures the cash inflows and outflows of a project as if they occurred at a single point in time in order to facilitate a proper comparison.

The consequences of capital expenditures are

After-tax cash operating flows are equal to

The tax effects are significant in capital budgeting decisions.

Depreciation charges

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 tax shield that Albernie Ltd.can expect from the equipment?

The initial investment in working capital is usually recovered

Wagner Ltd.is considering investing in a new piece of equipment for its factory.It estimates that annual cash flows would be $17,000 and the equipment would last for 8 years.The company's required rate of return is 12%.What is the most that the company should be willing to invest in this equipment? (Ignore income taxes. )

Jensen Manufacturing Ltd.is considering buying a laser machine which costs $250,000.It requires working capital of $25,000 which will be returned at the end of the project.Annual cash savings are anticipated to be $103,000 for five years.The salvage value at the end of five years is expected to be nil.The company uses straight-line depreciation. Required: Determine the accrual accounting rate of return of the investment.

Use the information below to answer the following question(s). Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.If the machine is disposed of now,it may be sold for $30,000.The new machine will cost $200,000,an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project.The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000.The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use.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. -What is the net present value (rounded to the nearest thousand)of the investment assuming the required rate of return is 10 percent? Would Hawkeye Cleaners want to purchase the new machine?

Which of the following is false concerning the payback method of capital budgeting?

Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.

Use the information below to answer the following question(s). Wet Water Company drills residential and commercial wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below: Note: Other than the initial investment,cash flows are end of period.The working capital is returned at the end of the investment period. -In what range is the internal rate of return for the Wet Water Company's new drill?

Toys and Junk Company is evaluating a capital expenditure proposal that requires an initial investment of $16,004 and has predicted cash inflows of $4,000 per year for 15 years.It will have no salvage value. Required: a.Using a required rate of return rate of 14 percent,determine the net present value of the investment proposal. b.Determine the proposals internal rate of return.

Xanadu Manufacturing Ltd.(XML)has two main customers in its' Eastern Canada division.The current year is 2016 and the company is evaluating its' customers current and projected profitability taking the time value of money into consideration.XML has a required rate of return of 12%. The customer gross margins projected for the five year period ending 2020 are as follows: XML has identified the following customer related activities and their rates: The company has the following information for 2016 regarding the three customers: The ratio of activity costs to gross margin is expected to be the same for the years after 2016. Required: a.Determine the profitability of each customer for 2016 using activity-based costing. b.Present a table showing the contribution to profit of each customer for each year assuming that the 2016 ratio of activity costs to gross margin is maintained.Include a column for the five year total. c.Use the present value method to discount each customer's contribution to profit.Assume end of period payments. d.Provide two qualitative measures that can be effective in evaluating customers.

Defensive strategies can be difficult to quantify because opportunity costs are difficult to predict.

A Company wants to buy a moulding machine that can be integrated into its computerized manufacturing process.It has received three bids for the machine and related manufacturer's specifications.The bids range from $3,500,000 to $3,550,000.The estimated annual savings of the machines range from $260,000 to $270,000.The payback periods are almost identical and the net present values are all within $8,000 of each other.The president just doesn't know what to do about which vendor to choose;all the selection criteria are so close together. Required: What suggestions do you have for the president?