Exam 19: Capital Investment

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 net present value for the press, assuming no taxes are paid?

Azimuth Company was considering the purchase of equipment. Details on the equipment are as follows: What is the payback period in years, assuming no taxes are paid?

Missoula Office Services is considering the purchase of a new server to replace the one in operation. Data on the new server are as follows: If the existing server is kept and used, it would require the purchase of additional hardware a year from now costing $2,000. After the use of the server for five years, the salvage value would be $300. Additional information on the existing system is as follows: The company uses the straight-line method of depreciation with no mid-year convention. Required: Should the new server be purchased? Why or why not?

Explain what a capital investment decision is. In your answer, distinguish between independent and mutually exclusive capital investment decisions.

Capital investment decisions are concerned with planning, setting goals, arranging financing, and the selection of long-term assets.

Mutually exclusive projects do not affect the __________ of other projects.

Capital investment decisions are concerned with planning, setting goals, arranging financing, and the selection of __________ assets. or

The present value of $4,000 to be received each year for three years and earning a 10 percent return (rounded) is

NPV differs from IRR:

Marion Dexter Company is evaluating a proposal to purchase a new machine that would cost $100,000 and have a salvage value of $10,000 in four years. It would provide annual operating cash savings of $10,000, as follows: If the new machine is purchased, the old machine will be sold for its current salvage value of $20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in one year the old machine will require repairs predicted to cost $35,000. Marion Dexter's cost of capital is 14 percent. Required: Should the new machine be purchased? Why or why not?

A firm is evaluating a project that has a net present value of $0 when a discount rate of 9 percent is used. A discount rate of 7 percent will result in a

Bertram Corporation is considering an investment in equipment for $150,000. Data related to the investment are as follows: Cost of capital is 10 percent. Bertram uses the straight-line method of depreciation with mid-year convention for tax purposes. In addition, its tax rate is 40 percent and the depreciable life of the equipment is four years with no salvage value. The equipment is sold at the end of the fifth year. Required: Determine the following amounts using after-tax cash flows:

Avionics Corp. is considering the purchase of a new machine for $76,000. The machine would generate an annual cash flow of $23,214 per year 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. What is the net present value for the machine, assuming no taxes are paid?

A firm is considering a project with an annual cash flow of $200,000. The project would have a 7-year life, and the company uses a discount rate of 10 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable?

Canyon Company is considering an investment of $45,000. Data related to the investment are as follows: Cost of capital is 18 percent. What is the net present value of the investment, assuming no taxes are paid?

If the tax rate is 40 percent and a company has $800,000 of income, a depreciation deduction of $100,000 would result in a tax savings of

Decisions concerned with the process of planning, setting goals and priorities, arranging financing, and using certain criteria to select long-term assets are called:

Which of the following capital investment models would be preferred when choosing among mutually exclusive alternatives?

Under the current tax law, an asset that is classified as 7-year property and has a cost of $400,000 would result in a depreciation deduction in Year 3 of

Jacuzzi Corporation is considering an investment in equipment for $25,000. Data related to the investment are as follows: Jacuzzi 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 net present value of the investment?