Exam 21: Information for Capital Expenditure Decisions

Net present value analysis often indicates that investment proposals in advanced technologies should be rejected when in reality the investment is justified. This can occur because:

A machine costs $25 000. It is expected to generate annual revenue of $8000 and annual expenses of $2000 each year for five years. The required rate of return is 12 per cent. What is the net present value of the machine?

Which of the following statements regarding capital budgeting decision errors is/are true?

The mayor of Smalltown, Western Australia, is considering the purchase of a computer system to automate the city's rate collections. The system costs $75 000 and has an estimated life of five years. The mayor estimates the following savings will result if the system is purchased. If Smalltown uses a 10 per cent discount rate for capital budgeting decisions, what is the net present value of the computer system?

The profitability index is a tool for ranking investment proposals.

Suppose a firm has an asset that originally cost $5000 and currently has accumulated depreciation of $2000. The firm is subject to a 28 per cent income tax rate. Suppose the firm sells the asset for $2000. What will be the loss without regard to taxes?

A project's time-adjusted rate of return is the actual economic return earned by the asset over its life. It is also known as the:

The main concept of time value of money is:

When assessing three projects with profitability indexes of 1.05, 1.7 and 1.2, unless all projects have the same lives it is impossible to rank them accurately.

The assumption that current cash flows will be maintained if the project does not go ahead, contributes to investment in advanced technologies being rejected when using the net present value investment decision model.

Refer to the following information about three projects with the same expected lives. If a company wants to rank these three projects:

Which of the following capital investment decision methods typically adjust for risk?

A series of equivalent cash flows is called an:

When firms are analysing a capital investment proposal, which of the following items, if any, have no after-tax consequences?

Which of the following is not a difficulty in applying the net present value investment decision model to investments in advanced technologies?

The following data applies: What would be the present value of the after-tax cash flow for year 0?

Veritas Ltd is considering investing in a new machine which costs $450 000. For accounting purposes this machine can be fully depreciated over 6 years; but for tax purposes, the machine can be fully depreciated over 5 years. The machine has no resale value. The annual cost savings resulting from the purpose of this machine is $100 000. Assume a tax rate of 30 per cent. The annual net cash flow is:

A capital expenditure decision where the objective is to minimise the NPV of the costs to be incurred is known as the least-cost decision.

Which of the following is not an advantage of using the net present value (NPV) approach to evaluate investments?

What is the quantitative decision rule for the internal rate of return method?