Exam 8: Capital Expenditure Decisions

A not-for-profit company purchased an asset at a cost of $60,000.Annual operating cash flows are expected to be $20,000 each year for 4 years.At the end of the asset life,there will be no residual (salvage)value.Ignore income taxes.What is the net present value if the cost of capital is 10 percent?

Which of the following would not be considered a periodic cash flow?

If the firm must choose one from a set of mutually exclusive alternatives with the same life span,which alternative should be selected?

What would the periodic cash flows associated with an investment project include?

Because the cost of capital includes a premium reflecting inflation expected to occur over the life of the asset,what should decision-makers do?

What would the periodic cash flows associated with an investment project include?

Explain how spreadsheets help the analyst to conduct sensitivity analyses of capital budgeting.

Explain why analysts will need more than cash flow analysis to justify or reject an investment.

Explain the problem of just using cash flow analysis in justifying or rejecting an investment in advanced manufacturing systems.

When using the internal rate of return to evaluate investment alternatives,what rate would an analyst need to specify?

Crown Corporation Crown Corporation has agreed to sell some used computer equipment to Bob Parsons,one of the company's employees,for $5,000. Refer to Crown Corporation.If Crown offers to accept a $1,000 down payment and set up a note receivable for Bob Parsons that calls for four $1,000 payments at the end of each of the next 4 years and Crown uses a 6 percent discount rate,what is the present value of the note?

The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a pure interest rate and a premium for the risk of the investment,but no increase to reflect expected inflation.What is this rate called?

Which of the following can be calculated using built-in functions in spreadsheet programs?

What is the process by which an organization decides on its major programs and the approximate resources to devote to them?

What should a firm do to justify or reject investments in advanced manufacturing systems?

Which interest rate is used by analysts when computing the present value of future cash flows?

An investment that costs $79,100 will reduce operating costs by $14,000 per year for 10 years. Required: Determine the internal rate of return of the investment (ignoring taxes).Should the investment be undertaken if the required rate of return is 18 percent?

The Information Technology Club,Inc.is considering an investment that requires $20,000 and promises to return $28,090 in 3 years.The company's income tax rate is 40 percent.What is the approximate internal rate of return?

Mercken Industries Mercken Industries is contemplating four projects: Project P,Project Q,Project R,and Project S.The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below.Mercken's desired after-tax opportunity cost is 12 percent,and the company has a capital budget for the year of $450,000.Idle funds cannot be reinvested at greater than 12 percent. Refer to Mercken Industries.Which project(s)will the company choose?

Describe the steps of the net present value method for making long-term decisions using discounted cash flows,and explain the effect of income taxes on cash flows.