Exam 21: Information for Capital Expenditure Decisions

A piece of equipment has an estimated five-year life, an internal rate of return of 12 per cent and estimated annual savings of $15 000. What was the cost of the equipment?

Conflict between discounted cash flow (DCF) analysis and accrual accounting A capital investment project was approved based on a well-done DCF analysis. After the initial investment, the expected cash flows of the project were negative for the first two years, small but positive for the next two years and then very large for the last four years. The cash flows were in the form of saving of costs, not additional revenues.

Chelonia Mydas purchased a machine for $500 000 three years ago. The machine can be fully depreciated for tax purposes over 5 years. The tax rate is 30 per cent. Assume that Chelnoia decides to sell the machine for $150 000. What is the tax effect of the disposal?

You estimate that it will take five years to complete your university education. Your parents want to invest enough money today at 12 per cent to enable you to withdraw $5000 at the end of each year for the next five years with nothing left at the end of the five-year period. How much money do they need today?

The payback method and accounting rate of return methods consider the effect of the time value of money.

Investment project E has equal annual cash flows over its lifetime. The present value of the cash inflows from project E:

Determine the payback period from the following. Investment equipment with an eight-year useful life costs $1 000 000. Annual cash flows increase by $200 000 each year. The payback period is:

The manager of Malan Pty Ltd wants to buy a new machine to replace the one currently being used. The new machine will cost $100 000 with no disposal value at the end of a five-year useful life. The manager estimates that the machine will reduce annual operating costs by $30 000. Depreciation will be $20 000 per year for five years. The tax rate for each year is expected to be 20 per cent and the company has an after-tax hurdle rate of 12 per cent. What is the after-tax net present value of the machine?

A piece of equipment costs $24 000. It is expected to generate $7500 of annual cash revenues and $1500 of annual cash expenses. The disposal value at the end of the estimated 10-year life is $2000. What is the payback period?

Net present value analysis The City of Geelong's Council is considering the purchase of a site for a new sanitary landfill. The purchase price for the site is $100 000 and preparatory work will cost $34 200. The landfill would be useable for 10 years. The council hired a consultant, who estimated that the new landfill would cost the city $20 000 per year less to operate than the city's current landfill. The current landfill also will last 10 more years. For a landfill project, the City of Geelong can borrow money at 4 per cent. Calculate the net present value of the new landfill.

Cubbies Pty Ltd is considering the purchase of a new machine to replace an old machine. Selected cost data pertaining to the two machines is provided below. At the end of four years, the company plans to discontinue the product line for which the machines are used. Income taxes can be ignored. Calculate the net present value of the new machine, if Cubbies Pty Ltd's hurdle rate is 14 per cent.

The accounting rate of return is a capital investment decision model that does not provide for the inclusion of tax effects.

The manager of Malan Pty Ltd wants to buy a new machine to replace the one currently being used. The new machine will cost $100 000 with no disposal value at the end of a five-year useful life. The manager estimates that the machine will reduce annual operating costs by $30 000. Depreciation will be $20 000 per year for five years. The tax rate for each year is expected to be 20 per cent and the company has an after-tax hurdle rate of 12 per cent. What is the after-tax accounting rate of return computed based on the initial investment?

Abco Pty Ltd is considering the purchase of $60 000 in tools. The manager estimates that the tools will generate $25 000 in savings during each year of a four-year life. The tools will be depreciated based on the following schedule. The expected tax rate is 30 per cent. What is the tax effect of the depreciation in year 3? (Ignore time value of money)

If $2000 is invested at 10 per cent at the start of every year for three years, how much will you have accumulated at the end of the three years?

A hurdle rate is generally based on an estimate of the ___________________ of acquiring capital.

The internal rate of return is a capital budgeting method that calculates a discount rate at which the net present value of the project is always positive.

Wakefield Company management evaluates future projects based on their profitability index. The company is currently reviewing five similar projects and must choose one project. Pertinent information regarding the projects is as follows. Which project should Wakefield Company select if the decision is based entirely on profitability index?

Capital budgeting decisions involve decisions about:

Abco Pty Ltd is considering the purchase of $60 000 in tools. The manager estimates that the tools will generate $25 000 in savings during each year of a four-year life. The tools will be depreciated based on the following schedule. The expected tax rate is 30 per cent. What is the net present value of the investment, assuming an after-tax hurdle rate of 14 per cent?