Exam 21: Capital Budgeting and Cost Analysis

Network Service Center is considering purchasing a new computer network for $82,000.It will require additional working capital of $13,000.Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs,excluding depreciation,of $15,000.At the end of eight years,it will have a salvage value of $9,500 and return $5,000 in working capital.Taxes are not considered. Required: a.If the company has a required rate of return of 14%,what is the net present value of the proposed investment? b.What is the internal rate of return?

Griffith Vehicle has received three proposals for its new vehicle-painting machine.Information on each proposal is as follows: Proposal X Proposal Y Proposal Z Initial investment in equipment \ 240,000 \ 150,000 \ 190,000 Working capital needed 0 0 10,000 Annual cash saved by operations: Year 1 80,000 50,000 80,000 Year 2 80,000 42,000 80,000 Year 3 80,000 46,000 80,000 Year 4 80,000 24,000 80,000 Salvage value end of year: Year 1 100,000 80,000 60,000 Year 2 80,000 60,000 50,000 Year 3 40,000 40,000 30,000 Year 4 10,000 20,000 15,000 Working capital returned 0 0 10,000 Required: Determine each proposal's payback.

Post-investment audits ________.

Assume your goal in life is to retire with 3 million dollars.How much would you need to save at the end of each year if investment rates average 8% and you have a 14-year work life?

The internal rate-of-return (IRR)method calculates ________.

AARR indicates the average rate at which ________.

The Fortive Corporation disposes a capital asset with an original cost of $180,000 and accumulated depreciation of $111,000 for $56,000.Alpha betas tax rate is 40%.Calculate the after-tax cash inflow from the disposal of the capital asset.

Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is referred to as ________.

Locil Corporation recently purchased a new machine for $415,275 with a nine-year life.The old equipment has a remaining life of nine years and no disposal value at the time of replacement.Net cash flows will be $75,000 per year.What is the internal rate of return?

Which of the following statements is true of accrual accounting rate of return (AARR)method and internal rate of return (IRR)method?

The internal rate of return method assumes that project cash flows can be reinvested at the project's ________.

As a discounted cash flow method does not report good operating income results in the project's early years,managers are tempted to not use discounted cash flow methods even though the decisions based on them would be in the best interests of the company as a whole over the long run.

A increase in the tax rate will increase the net present value (NPV)for a given capital budgeting project.

Retail Outlet is looking for a new location near a shopping mall.It is considering purchasing a building rather than leasing,as it has done in the past.Three retail buildings near a new mall are available but each has its own advantages and disadvantages.The owner of the company has completed an analysis of each location that includes considerations for the time value of money.The information is as follows: Location A Location B Location C Internal rate of return 13\% 17\% 20\% Net present value \ 25,000 \ 40,000 \ 20,000 The owner does not understand how the location with the highest percentage return has the lowest net present value. Required: Explain to the owner what is (are)the probable cause(s)of the comparable differences.

The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does NOT track cash flows and it ignores the time value of money.

Supply the missing data for each of the following proposals: Proposal A Proposal B Proposal C Initial investment (a) \ 62,900 \ 226,000 Annual net cash inflow \ 60,000 () () Life, in years 10 6 10 Salvage value \ 0 \ 10,000 \ 0 Payback period in years (b) () 5.65 Internal rate of return 12\% 24\% ()

Explain capital budgeting and then briefly discuss each of the five stages of a capital budgeting project?

Soda Manufacturing Company provides vending machines for soft-drink manufacturers.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 $91,110 with a four-year life.The expected additional cash inflows are $30,000 per year.What is the internal rate of return?

Which of the following statements is true of a post-investment audit?

If there are uniform cash flows,payback period is calculated by dividing net initial investment by uniform increase in annual future cash flows.