Exam 21: Information for Capital Expenditure Decisions

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?

Chelonia Mydas recently 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?

What technique is used to analyse investment proposals when the cash-flow projections are uncertain?

Which of the following relates to an advantage that the accounting rate of return method has over payback?

Both the net present value method and the internal rate of return method focus on:

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:

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

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.The reduction in tax due to the investment allowance is:

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

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?

Which is the optimal technique or rule 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 was the book value before sale?

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.

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)

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

Bravo Pty Ltd is considering the addition of a new product line.The new product will require an initial capital outlay of $70 000 and is expected to have a five-year life cycle.The manager estimates that because of the new product,cash flow will increase over the next five years by the following amounts.If Bravo's hurdle rate is 14 per cent,calculate the net present value of the new product line.(Income taxes can be ignored. )

Projects with a zero or positive net present value (NPV)are accepted using the net present value method.Why is this so?

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:

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?

Which method of capital expenditure appraisal is used to rank projects of different initial outlays?