Exam 19: Capital Investment

Colorform Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: Colorform Company plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.) Tax savings from depreciation in Year 3 would be

Alberto Company is considering the purchase of a new machine for $110,000. The machine generates annual revenues of $68,750 and annual expenses of $41,250, which includes $8,250 of depreciation. What is the payback period in years on the machine approximated to one decimal point?

If the net present value is greater than zero, the investment is profitable and acceptable.

Vociferous Company is considering the purchase of production equipment that costs $800,000. The equipment is expected to generate an annual cash flow of $250,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 12 percent. The straight-line method with no mid-year convention is used. Ignoring income taxes, the net present value of the project is

Joyous Corporation is considering an investment in equipment for $25,000. Data related to the investment are as follows: Joyous uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent. What is the payback period in years approximated to two decimal points?

Bellamy Company is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: The system will cost $9,000,000 and will last ten years. The company's cost of capital is 12 percent. What is the payback period for the computerized manufacturing system?

The __________ rate of return uses income instead of cash flows.

A firm is considering a project with an annual cash flow of $240,000. The project would have an 8-year life, and the company uses a discount rate of 12 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

Los Gatos Shop is considering the purchase of a used wide-format printer costing $9,600. The wide-format printer would generate a net cash inflow of $4,000 per year for three years. At the end of three years, the printer would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid?

Sansariff Company invests in a new piece of equipment costing $40,000. The equipment is expected to yield the following amounts per year for the equipment's four-year useful life: What is the net present value of this investment in equipment, assuming no taxes are paid?

Computation of cash flows is the most critical step in the capital investment process.

Edmundo Services is considering an investment of $25,000. Data related to the investment are as follows: Cost of capital is 14 percent. What is the net present value of the investment, assuming no taxes are paid?

A firm is considering a project with an annual cash flow of $80,000. The project would have a 10-year life, and the company uses a discount rate of 8 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

When comparing the payback method and the accounting rate of return methods, which of the following is true?

Five mutually exclusive projects had the following information: Which project is preferred?

Mutually exclusive projects are those which preclude the acceptance of all other competing projects.

Spaniel Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the accounting rate of return on the original investment in the machine approximated to two decimal points?

A firm is considering two mutually exclusive projects with the following cash flows: Each project requires an investment of $100,000. The cost of capital is 10 percent. Which project will have the higher net present value?

Milagros Company is considering an investment in equipment for $60,000. Milagros uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent and the life of the equipment is five years with no salvage value. The expected income before depreciation and taxes is projected to be $30,000 per year. What is the payback period in years approximated to two decimal points?

Bellamy Company is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: The system will cost $9,000,000 and will last ten years. The company's cost of capital is 12 percent. Which of the following best describes the IRR for this project?