Exam 6: Capital Investment Decisions

Jolly Corporation is considering an investment in equipment for £25,000. Data related to the investment are as follows: Jolly claims capital allowances using the straight-line method of depreciation . In addition, its tax rate is 40 percent, and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent. What is the net present value of the investment?

Lake Kariba Company is considering buying a new boat that would cost £120,000. The accountant determined that the boat promises an internal rate of return of 10 percent and has a life of four years. The accountant resigned and the president wanted to check her calculations. What were the approximate annual net cash inflows from the project?

The internal rate of return is the

Matusadona Company plans to invest £450,000 in a new factory. With a discount rate of 14 percent, the present value from the factory is £483,000. To yield a 14 percent internal rate of return, the actual investment cost cannot exceed the £450,000 estimate by more than

Which of the following methods uses income instead of cash flows?

Mitchell, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of £80,000, while Project 2 requires an investment of £90,000. 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 £10,000 and Project 2 would have a salvage value of £5,000. Required: a. Determine the net present value of EACH project using an 8 percent discount rate. b. Prepare a memorandum for management stating your recommendation. Include supporting calculations in good form.

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 cash inflows occur at the end of each year, the net present value of the project using a 12 percent discount rate would be

Explain what a capital investment decision is. In your answer, distinguish between independent and mutually exclusive capital investment decisions.

The Bradshaw Company is considering purchasing equipment for £78,000. This equipment will save the company £22,000 in operating costs annually. The payback period for this equipment is

A firm is considering a project requiring an investment of £14,150. The project would generate annual cash inflows of £3,300 per year for the next seven years. The approximate internal rate of return for the project is

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. If depreciation is £190,000 per year, Glady's accounting rate of return based on the average investment would be

Kaylin Company purchased a piece of equipment for £100,000 that had a useful life of 5 years. The equipment had no salvage value. It saves the company £40,000 a year and costs the company £5,000 a year to operate. What is the accounting rate of return on the equipment?

Ducky Pizza Restaurant purchases a van to deliver pizzas to their customers. The van costs £28,000 and is projected to increase revenues by £10,000 a year and to increase costs by £4,500. The payback period for this van is

Which of the following is a capital investment criterion, but NOT captured in any of the basic capital budgeting models examined in the text?

A capital investment project requires an investment of £145,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Required: a. Compute payback assuming that the cash flows occur evenly throughout the year. b. Compute the net present value of the project using an 8 percent discount rate.

If the tax rate is 35 percent, a tax depreciation deduction (WDA)of £75,000 would result in a tax savings of

A firm is considering a project with annual cash flows of £75,000. The project would have a 7-year life, and the company uses a discount rate of 10 percent. What is the maximum amount the company could invest in the project and the project still be acceptable?

If a project has a net present value of £0 when a discount rate of 10 percent is used, what can be concluded about the rate of return of the project?

If the tax rate is 40 percent and a company has pre-tax cash inflows from operations of £600,000, the company's after-tax net cash inflow from operations would be

In computing the net present value of a project, a manager uses a cost of capital number that is too low. This error causes the manager to compute a net present value that: