Exam 21: Information for Capital Expenditure Decisions

Which of the following are limitations of conventional capital expenditure analysis? i.Hurdle rates are too high ii.Rejection assumes the status quo will apply. iii.There is often a high degree of uncertainty in cash flow forecasts.

The payback period is defined as:

Which of the following reasons would explain the popularity of the payback technique?

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?

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

Assuming interest rates average 6 per cent,how much would you need to save at the end of each year if you wished to accumulate one million dollars over 20 years?

How much money must be invested today to have $25 000 at the end of four years,if the rate of return is 20 per cent?

When a firm is interested in assessing how the results of original predicted data will change if assumptions within a model are changed,the firm will need to do a sensitivity analysis.

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 payback period of the machine?

Rogers Company purchased equipment for $30 000 in December of 2007.It is expected to generate $10 000 per year in additional revenue and $2000 per year in additional cash expenses beginning in 2008.Depreciation in 2008 will be $3000.The firm's tax rate is 40 per cent.What is the annual after-tax cash flow in 2008?

The simple rate of return,rate of return on assets and the unadjusted rate of return are synonymous with:

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.Using the incremental cost approach,calculate the current period (i.e.year zero)cash flows relevant to acquiring the new machine.

The manager of George Pty Ltd is planning to purchase equipment costing $5000.The equipment will reduce operating costs by approximately $2000 per year over its three-year life.The manager has decided to purchase the equipment because over the three years the company will save $1000.The major problem with the manager's analysis is that:

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

Among the benefits of advanced technologies that are difficult to quantify is/are:

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.

Which of the following statements is true?

A machine will cost $28 000.It is estimated that it will generate $8000 in after-tax savings each year during its five-year life.What is the profitability index assuming a hurdle rate of 10 per cent?

Net present value is calculated using the:

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 accounting rate of return is: