Exam 21: Capital Budgeting and Cost Analysis

The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.

The Comil Corporation recently purchased a new machine for its factory operations at a cost of $390,875.The investment is expected to generate $125,000 in annual cash flows for a period of five years.The required rate of return is 12%.The old machine has a remaining life of five years.The new machine is expected to have zero value at the end of the five-year period.The disposal value of the old machine at the time of replacement is zero.What is the internal rate of return?

Accrual accounting rate of return is calculated by dividing an increase in expected average annual after-tax operating income by the net initial or average investment.

In using the net present value method,only projects with a zero or positive net present value are acceptable because ________.

The use of an accelerated method of depreciation for tax purposes would usually decrease the present value of the investment.

Which of the following is an advantage of internal rate of return method?

The net present value method accurately assumes that project cash flows can only be reinvested at the company's required rate of return.

ABC Boat Company is interested in replacing a molding machine with a new improved model.The old machine has a salvage value of $10,000 now and a predicted salvage value of $4,000 in six years,if rebuilt.If the old machine is kept,it must be rebuilt in one year at a predicted cost of $20,000. The new machine costs $80,000 and has a predicted salvage value of $12,000 at the end of six years.If purchased,the new machine will allow cash savings of $20,000 for each of the first three years,and $10,000 for each year of its remaining six-year life. Required: What is the net present value of purchasing the new machine if the company has a required rate of return of 14%?

Sam's Structures desires to buy a new crane and accessories to help move and install modular buildings.The machine sells for $75,000 and requires working capital of $10,000.Its estimated useful life is six years and it will have a salvage value of $17,560.Recovery of working capital will be $10,000 at the end of its useful life.Annual cash savings from the purchase of the machine will be $20,000. Required: a.Compute the net present value at a 12% required rate of return. b.Compute the internal rate of return. c.Determine the payback period of the investment.

In situations where the required rate of return is not constant for each year of the project,it is advantageous to use ________.

The Enor Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $99,360 and has predicted cash inflows of $20,000 per year for 8 years.It will have no salvage value. Required: a.Using a required rate of return of 10%,determine the net present value of the investment proposal. b.Determine the proposal's internal rate of return.

What is the difference between nominal approach and real approach to incorporating inflation into the net present value method?

If the net present value for a project is positive,________.

Answer the following questions using the information below: Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $80,000. The new machine will cost $600,000 and an additional cash investment in working capital of $25,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $200,000 each additional year of use. The new machine has a five-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 11%? Would the hospital want to purchase the new machine?

While calculating terminal recovery of working capital there are no tax consequences as there is no gain or loss on working capital.

In determining whether to keep a machine or replace it,the original cost of the machine is a sunk cost and is NOT a relevant factor.

What are the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method?

Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.

Which of the following capital budgeting methods uses discounted cash flows?

Assume your goal in life is to retire with $2,500,000.How much would you need to save at the end of each year if interest rates average 7% and you have a 20-year work life?