Exam 19: Capital Investment

Clementine Company is considering the purchase of a new machine for $160,000. The machine would generate an annual cash flow before depreciation and taxes of $62,588 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the annual net after-tax cash flow per year?

If the net present value is greater than zero, the investment is profitable and acceptable.

If the net present value is positive, it could signal

Macadamia Company is considering an investment in equipment for $55,000. Chocolate uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value. The expected income before depreciation and taxes is projected to be $30,000 per year. What is the annual cash flow for Year 1?

Independent projects directly affect the cash flows of other projects once accepted or rejected.

NPV reveals the wealth-maximization of a project more consistently than IRR.

Investment outlays may be affected by substantial resources required by items.

In an independent project, the required rate of return is used to calculate the future value of future cash flows.

Monocle Corporation is considering an investment in equipment for $50,000. Data related to the investment is as follows: Cash Flow before Year Depreciation and Taxes 1 $25,000 2 25,000 3 25,000 4 25,000 Monocle uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 35 percent and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent. What is the annual cash flow for Year 1?

Callendula Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the internal rate of return for the machine rounded to the nearest percent?

The following information pertains to an investment: Ignoring income taxes, the present value of the salvage value (rounded) is

RentitAll Management Services is considering an investment of $60,000. Data related to the investment are as follows: Cost of capital is 18 percent. What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

Los Gatos Shop is considering the purchase of a used wide-format printer costing $9,600. The wide-format printer would generate a net cash inflow of $4,000 per year for three years. At the end of three years, the printer would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid?

A project requires an investment of $40,000 in equipment. Annual cash flows of $8,000 are expected to occur for the next eight years. No salvage value is expected. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The accounting rate of return on the original investment for the project is

Gunslinger Company is considering the purchase of pipe cutting equipment. Data on the equipment are as follows: The company uses the straight-line method of depreciation with no mid-year convention. What is the accounting rate of return on original investment rounded to the nearest percent, assuming no taxes are paid?

Heckrwee Industries is considering a project that would require an initial investment of $101,000. The project would result in cost savings of $62,000 in year 1 and $70,000 in year 2. The internal rate of return is

NVP measures the in a firm's wealth caused by a project.

Marion Dexter Company is evaluating a proposal to purchase a new machine that would cost $100,000 and have a salvage value of $10,000 in four years. It would provide annual operating cash savings of $10,000, as follows: If the new machine is purchased, the old machine will be sold for its current salvage value of $20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in one year the old machine will require repairs predicted to cost $35,000. Marion Dexter's cost of capital is 14 percent. Required: Should the new machine be purchased? Why or why not?

What are the differences that affect capital investment decisions regarding advanced technology and environmental considerations?

The accounting rate of return considers the profitability of a project as well as the time value of money.