Exam 8: Long-Term Capital Investment Decisions

C & K Inc. purchased a delivery van costing $65,000. Annual operating cash inflows are expected to be $18,000 each year for six years. At the end of the asset's life, the salvage value is expected to be $5,000. Assuming C & K's cost of capital is 15 percent, what is the asset's net present value? (ignore income taxes)

When using the NPV method for a particular investment decision, if the present value of all cash inflows is greater than the present value of all cash outflows, then:

Mid-Town Plumbers Inc. is considering the purchase of a machine costing approximately $6,000. Using a discount rate of 19%, the present value of future cash inflows are calculated to be $6,700. To yield at least an 19% return, the actual cost of the machine should not exceed the $6,000 estimate by more than:

Chester Manufacturing is considering a project that will require an initial investment of $50,000 and is expected to generate future cash flows of $20,000 for years 1 through 3 and $10,000 for years 4 through 7. The project's payback period is:

If an investment's net present value is positive, then:

Floyd Manufacturing purchased an asset costing $65,000. Annual operating cash inflows are expected to be $12,000 each year for ten years. No salvage value is expected at the end of the asset's life. Assuming Floyd's cost of capital is 11 percent, what is the asset's net present value? (ignore income taxes)

Putter Inc. requires all capital investment projects to have a payback period of 4 years or less. Putter is currently considering an equipment purchase that has an initial cost of $80,000. The equipment is expected to have a six year life and a salvage value of $4,000. Assuming cash flows are equal, what does the annual cash flow generated by the equipment need to be in order to meet the payback period requirements?

Morris Manufacturing is in the 25 percent tax bracket and has a 10 percent rate of return. The after-tax rate of return is:

If the net present value (NPV) of an investment is zero, then the internal rate of return (IRR) is:

Butner Inc. requires all capital investments to generate an internal rate of return of 14%. The company is considering an investment costing $100,000 that is expected to generate equal, annual cash inflows for ten years. The annual cash inflows are expected to be:

Answer the following questions with respect to the payback method:

Grant Inc. would like to replace an outdated piece of equipment with a newer model. Grant has determined that the new equipment needs to generate annual cash inflows of $10,000 for six years and have a salvage value at the end of year six of $4,000. Grant uses a cost of capital equal to 15 percent when making capital investment decisions. Given this information, which of the following statements is true regarding the cost of the new equipment if, using net present value analysis, Grant decides to purchase the new equipment because it has a positive net present value?

A local day spa is considering investing in a machine that costs $60,000. The machine is expected to generate revenues of $25,000 per year for five years. The machine would be depreciated using the straight-line method with no half-year convention over its five year life and have no salvage value. The company considers the impact of income taxes in all of its capital investment decisions. The company has a 35 percent income tax rate and desires an after-tax rate of return of 14 percent on its investment. The net present value of the machine is:

Meredith Products Inc. is considering a new equipment purchase. The estimated cost of the equipment is $80,000. The equipment is expected to generate annual operating cash inflows for the next three years as follows: The equipment is expected to have a salvage value at the end of its useful life of $15,000. The company uses a discount rate of 14%. Required: Compute the net present value of the equipment. (Ignore income taxes)

Grant Manufacturing is considering investing in equipment that costs $70,000. The equipment would be depreciated using the straight-line method with no half-year convention over seven years and have no salvage value. If the company has a 40 percent income tax rate and desires an after-tax rate of return of 14 percent on investments, the total present value of the depreciation tax shield is:

The IRR method assumes that cash inflows associated with a particular capital investment decision are:

Siddon Inc. is considering investing in equipment that costs $24,000. The equipment would be depreciated using the straight-line method with no half-year convention over five years and have no salvage value. If the company has a 35 percent income tax rate and desires an after-tax rate of return of 11 percent on investments, the total present value of the depreciation tax shield is:

Big Al's is considering the purchase of a capital investment costing $33,000. Annual cash savings of $8,000, with a present value at 14 percent of $37,111, are expected for the next eight years. Given this information, which of the following statements is true?

A quantitative analysis of capital investment decisions should consider:

Buchanan Enterprises is considering investing in a machine that costs $400,000. The machine is expected to generate revenues of $175,000 per year for five years. The machine would be depreciated using the straight-line method with no half-year convention over five years and have no salvage value. The company considers the impact of income taxes in all of its capital investment decisions. The company has a 40 percent income tax rate and desires an after-tax rate of return of 10 percent on its investment. The net present value of the machine is: