Exam 6: Capital Investment Decisions

Which of the following methods consider the time value of money?

Figure 1 A project requires an investment of £90,000 in equipment. Annual cash inflows of £15,000 are expected to occur for the next ten years. No salvage value is expected. -Refer to Figure 1. Using the initial capital investment, the accounting rate of return for the project would be

A firm is considering a project with annual cash flows of £40,000. The project would have a 10-year life, and the company uses a discount rate of 8 percent. What is the maximum amount the company could invest in the project and the project still be acceptable?

A firm has £2,000,000 of long-term bonds paying 8 percent interest and £8,000,000 of common stock. The firm is considered to be of average risk with the return to the stockholders estimated to be 14 percent. If the company's tax rate is 40 percent, what is the firm's weighted average cost of capital?

Figure 3 Glady, Inc., is considering the purchase of production equipment that costs £800,000. The equipment is expected to generate annual cash inflows of £250,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 14 percent. -Refer to Figure 3. The approximate internal rate of return of Glady's project is

A firm is considering a project requiring an investment of £100,000. The project would generate annual cash inflows of £26,380 per year for the next five years. The approximate internal rate of return for the project is

Figure 1 A project requires an investment of £90,000 in equipment. Annual cash inflows of £15,000 are expected to occur for the next ten years. No salvage value is expected. -Refer to Figure 1. If the annual cash inflows occur throughout the year, payback for the project would be

Houston Corporation is considering an investment in equipment for £45,000. Data related to the investment are as follows: Cost of capital is 18 percent. Houston claims capital allowances (WDV's) using the straight-line method of depreciation . In addition, their tax rate is 40 percent, and the life of the equipment is five years with no salvage value. What is the net present value of the investment?

Redding Industries is considering the acquisition of a new machine that would reduce operating costs by £100,000 per year throughout its life. The machine has a cost of £300,000 and has an expected salvage value of £25,000 at the end of 4 years. The tax shield (i.e. tax savings) from capital allowances is £34,000; £45,344; £15,111; and £7,555 for Years 1-4, respectively. The company is at the 34 percent tax rate. The present value factors at the company's required rate of return are as follows: Required: (Round all calculations to the nearest dollar.) a. Compute the after-tax operating cost savings per year. b. Determine the tax cost or tax savings related to the sale of the machine at the end of its useful life. c. Prepare a schedule computing the net present value of Redding Industries' investment in the machine.

A firm is considering a project with annual cash flows of £120,000. The project would have an 8-year life, and the company uses a discount rate of 12 percent. What is the maximum amount the company could invest in the project and the project still be acceptable?

The present value of £8,000 to be received each year for ten years and earning a 16 percent return is

Van Dyke Company is evaluating a capital expenditure proposal that has the following predicted cash flows: Required: Determine the following values: a. Net present value of the investment b. Proposal's internal rate of return c. Payback period

Five mutually exclusive projects had the following information: Which project is preferred?

Figure 2 -Refer to Figure 2. The present value of the salvage value is

Refer to Figure 5. The present value of the salvage value is

A firm has £1,000,000 of long-term bonds paying 8 percent interest and £3,000,000 of common stock. The firm is considered to be of average risk with the return to the stockholders estimated to be 12 percent. If the company's tax rate is 35 percent, what is the firm's weighted average cost of capital?

A firm is considering a project with an annual cash flow of £240,000. The project would have an 8-year life, and the company uses a discount rate of 12 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

The problem with the accounting rate of return is that it fails to consider the:

Springer Company is considering the purchase of a new machine for £80,000. The machine would generate an annual cash flow before depreciation and taxes of £28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company claims capital allowances based on straight-line depreciation and has a 40 percent tax rate. What is the net present value for the machine?

If the annual cash flows are not an annuity (equal each period), payback is calculated by