Exam 6: Capital Investment Decisions

What is a weakness of the payback method?

Future cash flows expressed in present value terms are

A firm is evaluating a project that has a net present value of £0 when a discount rate of 8 percent is used. A discount rate of 10 percent will result in

Figure 4 A capital investment project requires an investment of £60,000 and has an expected life of four years. Annual cash flows, which occur evenly throughout the year, are expected to be as follows: -Refer to Figure 4. The net present value of the project using a 6 percent discount rate is

Firms may select projects with short paybacks because

Brooks Company invested in a project that is expected to have an annual cash flow of £10,000. The project's life is five years and has an IRR of 14 percent. How much was the initial investment in the project?

Dale Davis Company is evaluating a proposal to purchase a new machine that would cost £100,000 and have a salvage value of £10,000 in four years. It would provide annual operating cash savings of £10,000, as follows: If the new machine is purchased, the old machine will be sold for its current salvage value of £20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of £2,000. The old machine's present book value is £40,000. If kept, in one year the old machine will require repairs predicted to cost £35,000. Dale Davis's cost of capital is 14 percent. Required: Should the new machine be purchased? Why or why not?

Maxim, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of £40,000, while Project 2 requires an investment of £30,000. Cash revenues and cash costs for each project are shown below. The company estimates that at the end of the fourth year Project 1 would have a salvage value of £3,000 and Project 2 would have a salvage value of £1,000. Required: a. Determine the net present value of EACH project using a 16 percent discount rate. b. Prepare a memorandum for management stating your recommendation. Include supporting calculations in good form.

(Memorandum required) KT Enterprises is considering the purchase of a flexible manufacturing system. The savings associated with the system are estimated to be as follows: The system will cost £250,000 and will last seven years. The system would have a salvage value of £30,000 at the end of seven years. The company's cost of capital is 8 percent. Required: Prepare a memorandum to management with your recommendation regarding whether KT Enterprises should purchase the flexible manufacturing system. Include a discussion of qualitative factors that might influence management's decision. Include your supporting calculations (including NPV analysis).

A capital investment project requires an investment of £1,000,000. It has an expected life of five years with annual cash flows of £240,000 received at the end of each year. Required: a. Compute payback for the project. b. Compute the internal rate of return for the project. c. Compute the net present value of the project using a 12 percent discount rate. Ignore income taxes. d. Would you recommend this project be accepted? Why or why not?

Explain what a capital investment decision is and distinguish between independent and mutually exclusive capital investment decisions.

The depreciation tax shield is:

_____ are capital budgeting models that identify criteria for accepting or rejecting projects without considering the time value of money.

Figure 4 A capital investment project requires an investment of £60,000 and has an expected life of four years. Annual cash flows, which occur evenly throughout the year, are expected to be as follows: -Refer to Figure 5. The net present value of the project is

Figure 6 JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 percent. -Refer to Figure 6. Based on quantitative factors, should JD accept, reject, or wait on the project?

A firm is considering two projects with the following cash flows: Each project requires an investment of £120,000. Which project will have the higher net present value?

A firm is considering a project with an annual cash flow of £200,000. The project would have a 7-year life, and the company uses a discount rate of 10 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable?

If NPV and IRR produce different rankings, which method should be used in choosing investment projects?

If the tax rate is 40 percent and a company has £400,000 of income, a tax allowable depreciation deduction (WDA) of £80,000 would result in a tax savings of

If an asset is sold for less than its tax written down value,