Exam 19: Capital Investment

Vendome Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: Vendome plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.) The tax savings from depreciation in Year 3 would be

The present value of $10,000 to be received each year for ten years and earning a 14 percent return (rounded) is

Information about a project Dalwhinnie Company is considering is as follows: The property is considered 5-year property for tax purposes. The company plans to use MACRS and dispose of the Property at the end of the sixth year. No salvage value is expected. Assume all cash flows occur at the end of the year. Round amounts to dollars. The tax savings from depreciation in Year 2 would be

Five mutually exclusive projects had the following information: Which project is preferred?

Capital investment decisions are concerned with planning, setting goals, arranging financing, and the selection of long-term assets.

Bodacious 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 annual net after-tax cash flow (rounded)?

Explain what a capital investment decision is. In your answer, distinguish between independent and mutually exclusive capital investment decisions.

Bellamy Company is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: The system will cost $9,000,000 and will last ten years. The company's cost of capital is 12 percent. Which of the following best describes the IRR for this project?

Sansariff Company invests in a new piece of equipment costing $40,000. The equipment is expected to yield the following amounts per year for the equipment's four-year useful life: What is the net present value of this investment in equipment, assuming no taxes are paid?

Jacuzzi Corporation is considering an investment in equipment for $25,000. Data related to the investment are as follows: Cash Flow before Year Depreciation and Taxes 1 $12,500 2 12,500 3 12,500 4 12,500 Jacuzzi 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 four years with no salvage value. Cost of capital is 12 percent. What is the net present value of the investment?

The rate of return uses income instead of cash flows.

Edmundo Services is considering an investment of $25,000. Data related to the investment are as follows: Cost of capital is 14 percent. What is the net present value of the investment, assuming no taxes are paid?

Missoula Office Services is considering the purchase of a new server to replace the one in operation. Data on the new server are as follows: If the existing server is kept and used, it would require the purchase of additional hardware a year from now costing $2,000. After the use of the server for five years, the salvage value would be $300. Additional information on the existing system is as follows: The company uses the straight-line method of depreciation with no mid-year convention. Required: Should the new server be purchased? Why or why not?

The required is used to calculate the present value of future cash flows.

Absentia Company is evaluating a capital expenditure proposal that has the following predicted cash flows: Original investment $45,000 a. Net present value of the investment b. Proposal's internal rate of return c. Payback period

Milagros Company is considering an investment in equipment for $60,000. Milagros 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 payback period in years approximated to two decimal points?

Under the current tax law, an asset that is classified as 5-year property and has a cost of $200,000 would result in a depreciation deduction in Year 2 of

The present value of $10,000 to be received ten years from now and earning a 12 percent return (rounded) is

Avionics Corp. is considering the purchase of a new machine for $76,000. The machine would generate an annual cash flow of $23,214 per year 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. What is the net present value for the machine, assuming no taxes are paid?

The internal rate of return (IRR) is the most widely used capital investment technique because it's an easily understood concept.