Exam 19: Capital Investment

Clementine Company is considering the purchase of a new machine for $160,000. The machine would generate an annual cash flow before depreciation and taxes of $62,588 for four years. At the end of four 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 annual net after-tax cash flow per year?

The present value of $20,000 to be received five years from now and earning a 6 percent return (rounded) is

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 NPV for the computerized manufacturing system?

Spiritlight Ventures is considering the following investment: Ignore income taxes. The present value of the annual cash flow (rounded) is

A project requires an investment of $40,000 in equipment. Annual cash flows of $8,000 are expected to occur for the next eight years. No salvage value is expected. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The accounting rate of return on the original investment for the project is

The present value of $10,000 to be received ten years from now and earning a 12 percent return (rounded) is

Local Construction Company is considering the purchase of a bulldozer for $280,000. The expected life is four years. The company is comparing the depreciation tax shield using MACRS versus the straight-line method. If MACRS is used, the MACRS life is three years with a depreciation rate of 200 percent annually. Regardless of the method of depreciation used, the mid-year convention will be observed. The company's tax rate is 40 percent. The straight-line method assumes mid-year convention, and the cost of capital is 14 percent. Required: (Round all calculations to the nearest dollar.)

Callendula 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 internal rate of return for the machine rounded to the nearest percent?

The difference between the present value of future cash flows and the initial investment outlay is called the __________ value.

The following information pertains to an investment: Ignoring income taxes, the present value of the salvage value (rounded) is

The payback period is the time required for a company to recover its initial investment.

The present value of $4,000 to be received three years from now and earning a 12 percent return (rounded) is

Fill in the lettered blanks in the following table:

NPV reveals the wealth-maximization of a project more consistently than IRR.

Under the current tax law, an asset that is classified as 5-year property and has a cost of $200,000 would result in a depreciation deduction in Year 2 of

NPV is preferred to IRR because it assumes that each cash inflow is not reinvested at the required rate of return.

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

Information about a project Wunderbar Company is considering is as follows: The property is considered 5-year property for tax purposes. The company plans to use MACRS and dispose of the property at the end of the sixth year; no salvage value is expected. Assume all cash flows occur at the end of the year. Round amounts to dollars. The tax savings from depreciation in Year 2 would be

Vendome Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: Vendome plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.) The MACRS deduction in Year 2 would be

What are the differences that affect capital investment decisions regarding advanced technology and environmental considerations?