Exam 21: Capital Budgeting and Cost Analysis

Gavin and Alex,baseball consultants,are in need of a microcomputer network for their staff.They have received three proposals,with related facts as follows: Proposal A Proposal B Proposal C Initial investment in equipment \ 90,000 \ 90,000 \ 90,000 Annual cash increase in operations: Year 1 80,000 45,000 90,000 Year 2 10,000 45,000 0 Year 3 45,000 45,000 0 Salvage value 0 0 0 Estimated life 3 3 1 The company uses straight-line depreciation for all capital assets. Required: a.Compute the payback period,net present value,and accrual accounting rate of return with initial investment,for each proposal.Use a required rate of return of 14%. b.Rank each proposal 1,2,and 3 using each method separately.Which proposal is best? Why?

Which of the following is also called required rate of return?

In capital budgeting,a project is accepted only if the internal rate of return equals or ________.

Which of the following projects is rejected on the basis of net present value method?

Concose Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $330,000.The annual cost savings if the new machine is acquired will be $85,000.The machine will have a 5-year life,at which time the terminal disposal value is expected to be $32,000.Concose Park Department is assuming no tax consequences.If Concose Park Department has a required rate of return of 11%,which of the following is closest to the present value of the project?

Cast Iron Stove Company wants to buy a molding machine that can be integrated into its computerized manufacturing process.It has received three bids for the machine and related manufacturer's specifications.The bids range from $3,500,000 to $3,550,000.The estimated annual savings of the machines range from $260,000 to $270,000.The payback periods are almost identical and the net present values are all within $8,000 of each other.The president just doesn't know what to do about which vendor to choose since all of the selection criteria are so close together. Required: What suggestions do you have for the president?

Which of the following is the numerator in the mathematical expression for accrual accounting rate-of-return (AARR)?

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 20%? Would the company want to purchase the new machine?

Which capital budgeting technique measures all expected future cash inflows and outflows as if they occurred at a single point in time?

The capital budgeting method which calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return is the ________.

Malive Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $119,000.The annual cost savings if the new machine is acquired will be $35,000.The machine will have a 5-year life,at which time the terminal disposal value is expected to be zero.Malive Park is assuming no tax consequences.Malive Park has a 12% required rate of return.What is the payback period for the investment?

Pearl 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 five years and the new equipment has a value of $239,400 with a five-year life.The expected additional cash inflows are $63,000 per year.What is the payback period for this investment?

The three common discounted cash flow methods are net present value,internal rate of return,and payback.

The focus in capital budgeting should be on ________.

What are the relevant cash inflows and outflows for capital budgeting decisions?

An annuity is ________.

In the "Identify projects" stage of capital budgeting,companies gather information from all parts of the value chain to evaluate alternative projects.

Capital budgeting is the process of making long-run planning decisions for investments in projects.

The income taxes saved as a result of depreciation deductions are irrelevant because they decrease cash outflows.

Bock Construction Company is considering four proposals for the construction of new loading facilities that will include the latest in ship loading/unloading equipment.After careful analysis,the company's accountant has developed the following information about the four proposals: Proposal 1 Proposal 2 Proposal 3 Proposal 4 Payback period 4 years 4.5 years 6 years 7 years Net present value \ 80,000 \ 178,000 \ 166,000 \ 308,000 Internal rate of return 12\% 14\% 11\% 13\% Accrual accounting rate of return 8\% 6\% 4\% 7\% Required: How can this information be used in the decision-making process for the new loading facilities? Does it cause any confusion?