Exam 21: Capital Budgeting and Cost Analysis

The net initial investment for a piece of construction equipment is $3,000,000.Annual cash inflows are expected to increase by $500,000 per year.The equipment has an 8-year useful life.What is the payback period?

Post-investment audits prevent managers from overstating the expected cash inflows from projects and accepting projects they should reject.

Diamond Manufacturing Company provides glassware machines for major department store retailers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of four years and the new equipment has a value of $87,776 with a four-year life.The expected additional cash inflows are $32,000 per year.What is the internal rate of return?

The Golden Shades Corporation disposes a capital asset with an original cost of $280,000 and accumulated depreciation of $160,000 for a salvage price of $50,000.Silver Shades's tax rate is 40%.Calculate the after-tax cash inflow from the disposal of the capital asset.

The net present value method assumes that project cash flows can be reinvested at the company's ________.

The nominal rate of return is made up of a risk-free element when there is no expected inflation,a business-risk element,and an inflation element.

Forge Company wants to purchase a new cutting machine for its sewing plant.The investment is expected to generate annual cash inflows of $120,000.The required rate of return is 10% and the current machine is expected to last for four years.What is the maximum dollar amount the company would be willing to spend for the machine,assuming its life is also four years? Income taxes are not considered.

The Venoid Corporation has an annual cash inflow from operations from its investment in a capital asset of $16,000 each year for six years.The corporation's income tax rate is 30%.Calculate the total after-tax cash inflow from operations for six years.

Gibson Manufacturing is considering buying an automated machine that costs $600,000.It requires working capital of $60,000.Annual cash savings are anticipated to be $280,200 for five years.The company uses straight-line depreciation.The salvage value at the end of five years is expected to be $24,000.The working capital will be recovered at the end of the machine's life. Required: Compute the accrual accounting rate of return based on the initial investment.

Explain why the term tax shield is used in conjunction with depreciation.

Unlike the net present value method and the internal rate-of-return method,the payback method does NOT distinguish between the origins of the cash flows.

The nominal approach to incorporating inflation into the net present value method predicts ________.

Answer the following questions using the information below: Difend 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 now, it may be sold for $100,000. The new machine will cost $350,000 and an additional cash investment in working capital of $100,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $110,000 in additional cash inflows during the first year of acquisition and $250,000 each additional year of use. The new machine has a three-year life, and zero disposal value. 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. The working capital investment will not be recovered at the end of the asset's life. -What is the net present value of the investment,assuming the required rate of return is 10%? Would the company want to purchase the new machine?

Which of the following methods of capital budgeting divides the average annual accrual accounting income of a project by a measure of the investment in it?

The accrual accounting rate-of-return method is similar to the internal rate-of-return method because both methods calculate a rate-of-return percentage.

Net initial investment in the project includes the acquisition of assets and any associated additions to working capital,minus the after-tax cash flow from the disposal of existing assets.

Investment A requires a net investment of $1,400,000.The required rate of return is 10% for the five-year annuity.What are the annual cash inflows if the net present value equals 0? (rounded)

Match each one of the examples below with one of the stages of the capital budgeting decision model. Stages: 1. Identify Projects 2. Obtain Information 3. Make Predictions 4. Make Decisions by Choosing Among Alternatives 5. Implement the Decision, Evaluate Performance, and Learn ___a. Issuing corporate stock for the funds to purchase new equipment ___b. Learning how to effectively operate Machine \#8 only takes 15 minutes ___c. The need to reduce the costs to process the vegetables used in producing goulash ___d. Monitoring the costs to operate a new machine ___e. Percentage of defective merchandise considered too high ___f. Will introducing the new product substantially upgrade our image as a producer of quality products? ___g. Estimating yearly cash flows and setting investment bud gets accordingly using a 12-year planuning horizon. ___h. Use of the internal rate of return for eachalternative ___i. Tracking realized cash flows and comparing against estimated numbers.

A capital budget spans only a one-year period.

A "what-if" technique that examines how a result will change if the original predicted data are NOT achieved or if an underlying assumption changes is called ________.