Exam 6: Capital Investment Decisions

Clemens Company is considering the purchase of a new machine for £160,000. The machine would generate an annual cash flow before depreciation and taxes of £62,588 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company claims capital allowances using straight-line depreciation and has a 40 percent tax rate. What is the net present value for the machine?

The present value of £10,000 to be received five years from now and earning a 12 percent return is

The time required for a project to return its investment is the

Figure 2 -Refer to Figure 2. The present value of the annual net cash inflows from operations is

Refer to Figure 5. The present value of the annual net cash inflows from operations is

Why would a company use the accounting rate of return?

Bert Corporation is considering an investment in equipment for £150,000. Data related to the investment are as follows: Cost of capital is 10 percent. Bert claims capital allowancews using the straight-line method of depreciation with midyear convention (i.e. half a year's depreciation in the first and final year) for tax purposes. In addition, its tax rate is 40 percent and the depreciable life of the equipment is four years with no salvage value. The equipment is sold at the end of the fifth year. Required: Determine the following amounts using after-tax cash flows: a. Payback period b. Accounting rate of return on original investments for each year c. Net present value

What are the steps normally undertaken in an effective capital budgeting process?

The internal rate of return model assumes that all net cash inflows are reinvested at the:

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