Exam 11: Capital Budgeting

Which of the following items is NOT a relevant cash inflow or cash outflow when using the net present value method? (Ignore income taxes.)

When using accelerated depreciation methods,most of the depreciation taken on an asset occurs at the end of its life.

Jonathon Company is considering an investment in the project below: Project 1 Cost \ 10,000 Annual cash operating savings (end of year) \ 3,000 Terminal salvage \ 0 Useful life in years 5 Required rate of return 10\% Present value of one for 5 periods at 10\% 0.6209 Present value of ordinary annuity of one for 5 periods at 10\% 3.7908 Ignoring taxes,what is the lowest level of annual cash operating savings that will result in a positive net present value?

Danworth Company is contemplating whether to use MACRS depreciation or straight-line depreciation for a plant asset.The following information is available: MACRS Straight-line Present Value of Depreciation Depreciation One At 12\% Year 1 \ 13,333 \ 10,000 0.8929 Year 2 \ 17,780 \ 10,000 0.7972 Year 3 \ 5,924 \ 10,000 0.7118 Year 4 \ 2,964 \ 10,000 0,6355 Over the four years examined,how much did Danworth Company gain by using MACRS depreciation instead of straight-line depreciation for the plant asset? The tax rate is 40%.(Find the present value.)

Woods Company is considering the purchase of some equipment.The initial investment will be $100,000.The estimated useful life of the equipment will be 5 years,at which point it will have a zero terminal salvage value.The annual savings in cash operating costs at the end of each year,for five years,is $29,000.The company has a minimum desired rate of return of 12%.The company uses straight-line depreciation for financial reporting.Ignore income taxes.The cash operating savings of $29,000 do not include depreciation expense. Given: The present value of ordinary annuity of one at 12% and 5 periods is 3.6048. The present value of one at 12% and 5 periods is 0.5674. Required: Compute: A) Net present value B) Payback period C) Accounting rate of return using the average investment

The net present value method computes the present value of all ________ using a minimum desired rate of return.

Steps used in applying the net present value method to a proposed capital investment do NOT include ________.

The " break-even" cash inflow for an investment project is the point at which ________.

Levine Company will purchase a van for $40,000.It will have a depreciable life of 5 years and a terminal salvage value of $10,000.Assume a tax rate of 30% and a required rate of return of 12%.The company uses the straight-line method of depreciation for tax purposes.The annual cash operating savings at the end of each year,exclusive of depreciation,are $10,000 for five years.The present value of an ordinary annuity factor of one for 5 periods at 12% is 3.6048.The present value of one for 5 periods at 12% is 0.5674.What is the net present value of the van?