Exam 19: Capital Investment

Springer 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 net present value for the machine?

Reece Manufacturing Company is considering the following investment proposal: The firm uses the straight-line method of depreciation with no mid-year convention. What is the net present value for the investment, assuming no taxes are paid?

A firm is evaluating a project that has a net present value of $0 when a discount rate of 8 percent is used.A discount rate of 6 percent will result in a

The present value of $10,000 to be received each year for ten years and earning a 14 percent return (rounded) is

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

Holloway Company is considering the purchase of a new machine for $40,000.The machine would generate an annual cash flow before depreciation and taxes of $15,647 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 accounting rate of return on the original investment in the machine approximated to two decimal points?

Information about a project Darcy 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

If the tax rate is 40 percent and a company has $800,000 of income, a depreciation deduction of $160,000 would result in a tax savings of

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

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

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

Brown Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: Brown 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

NPV differs from IRR:

Blanshan Company is considering the purchase of a computer-aided 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 computer-aided manufacturing system?

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

Clemens 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?

Dale Davis 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. Dale Davis's cost of capital is 14 percent. Required: Should the new machine be purchased? Why or why not?

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

Oakland Shop is considering the purchase of a used printing press costing $9,600.The printing press would generate a net cash inflow of $4,000 per year for three years.At the end of three years, the press 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?