Exam 11: Capital Budgeting

In net present value analysis,a reduction in a future cash outflow is treated as ________.

A five year recovery period for a long-term asset means ________.

Investments of large amounts of cash in plant assets are called ________.

Generally,the most difficult part of capital budgeting decisions is predicting accurately the relevant cash flows.

Which of the following statements about the payback model is FALSE?

The first step in using the differential approach to investment analysis is to ________.

The phases of capital budgeting do NOT include ________.

Tomlin Company spends $12,000 for a forklift with an estimated useful life of four years.The company expects annual savings of $4,000 per year for four years,and a salvage value of $5,000 at the end of 4 years.What is the payback period?

________ is the decline in the general purchasing power of the monetary unit.

Pennsylvania Company is considering two investments.The relevant data follows: Project A Project B Cost \ 205,010 \ 259,770 Annual cash savings (end of year) \ 50,000 \ 60,000 Terminal salvage value \ 0 \ 0 Estimated useful life in years 5 5 Minimum desired rate of return 10\% 10\% Method of depreciation Straight-line Straight-line Present Value Present Value Of \ 1 of Ordinary for 5 periods Annuity of \1 for 5 periods 5\% 0.7835 4.3295 6\% 0.7473 4.2124 7\% 0.713 4.1002 8\% 0.6806 3.9927 10\% 0.6209 3.7908 12\% 0.5674 3.6048 14\% 0.5194 3.4331 Ignoring taxes,the internal rate of return for Project A is approximately ________.

The real rate of interest equals the risk-free rate plus the business-risk rate.

A plant asset of $270,000 is expected to generate $180,000 in operating cash savings (excluding depreciation expense)annually for three years.Assume straight-line depreciation is used.The useful life is three years.The asset has no expected residual value.Ignore income taxes.The accounting rate of return based on the average investment is ________.

U.S.corporations are required to use the same method of calculating depreciation on both their income tax return and their annual financial statements.

Valesano Company is considering a project with the following information: Project 1 Cost \ 4,000 Annual cash operating savings(end of year) \ 2,000 Terminal salvage \ 0 Useful life in years 3 Required rate of return 10\% Present value of one for 3 periods at 10\% 0.7513 Present value of ordinary annuity of one for 3 periods at 10\% 2.4869 Ignoring taxes,what is the lowest level of annual cash operating savings that will result in a positive net present value?

Ruth Company has a tax rate of 40% and a required rate of return of 12%.The company has new equipment that saves $200,000 per year in labor costs.What is the annual after-tax cash flow from the labor cost savings?

What is the after-tax amount of annual cash operating savings associated with a proposed machine?

The best way to reconcile any conflict between capital budgeting models and performance evaluation is to use the ________ for both capital budgeting decisions and performance evaluation.

When using the Net Present Value model,which of the following assumptions is/are used?

Marvel Company is considering the acquisition of two machines. Machine A Machine B Initial investment \ 200,000 \ 200,000 Annual operating revenues (end of year) \ 100,000 \ 160,000 Annual expenses (end of year) \ 25,000 \ 85,000 Terminal salvage value \ 10,000 \ 20,000 Estimated useful life 5 years 5 years Minimum desired rate of return 14\% 14\% Assume straight-line depreciation.Ignore income taxes.The present value of an ordinary annuity of one at 14% and 5 periods is 3.4331.The present value of one at 14% and 5 periods is 0.5194. Required: A) Calculate the net present value for both machines. B) Assume there are enough funds to purchase both machines. Should both machines be purchased? C) Assume there are funds to purchase only one machine. Which machine should be purchased?

The marginal income tax rate is the tax rate paid on additional amounts of pretax income.