Exam 21: Information for Capital Expenditure Decisions

Which of the following statements about capital budgeting post-audits is/are true? i. The post-audit can be used to detect desirable projects that were rejected. ii. The post-audit can be used to detect undesirable projects that were accepted. iii. A post-audit may reveal shortcomings in the cash-flow projections process.

Charlotte Computer Services is considering purchasing equipment at $100 000. It is anticipated the equipment will have a useful life of five years. It will be depreciated on a straight-line basis. Operating revenue is expected to be $74 000 per annum and operating expenses $25 000 per annum. The equipment is subject to an investment allowance of 10 per cent and the tax rate is 30 per cent. The after-tax hurdle rate is 12 per cent. What is the net present value of the investment?

Which of the following costs would not be included in the net present value analysis?

Which of the following statements is incorrect?

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 payback period is: