ACCT 3100 Ch 12

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase? The present value of the terminal cash flows is

$4,536

Wiess Corp. is considering the purchase of a new machine. The machine will generate cost savings of $15,000 in year 1, $22,000 in year 2, and $32,000 in year 3. Wiess uses a discount rate of 10%. What is the most that Wiess would be willing to pay for the new machine? Ignore income taxes.

$55,839

What is the net present value of a capital project to buy new equipment for replacing old equipment, given the following data and a minimum return of 12%? Ignore income taxes.

$6,616

The real rate of interest is 15%, and inflation is estimated at 5%. What is the nominal rate of interest?

20.75%

Green Inc. has invested in a project with a cost of $36,504, annual net cash flows of $12,000, a terminal value of $4,000, and a 5-year useful life. The firm uses a 16% discount rate. Compute the internal rate of return to the nearest tenth of a percent. Ignore income taxes.

20.8%

Apex co. has $100,000 available for long term investment. Which projects should be selected from the list below?

3 and 5

Early, Inc. has chosen four potential investment projects. Use the profitability index to rank these investments in terms of preference.

3, 1, 4, 2

An investment of $60,000 will return $18,000 per year. What is its payback period?

3.33 years

The Bonders Corp is contemplating the purchase of a piece of equipment with the following cash flow data: Ignoring income taxes, what is the payback period?

3.60 years

Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. If the new machine is purchased and ignoring income taxes, the payback period is

4.55 years

Phoxco is considering automating its production line. It will cost $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 per year for 14 years. The firm requires a 20% return. Ignoring income taxes, what is the payback period?

5 years

In January, Wilson Company purchased a new machine for $80,000 that has a useful life of 10 years and a terminal value of $5,000. Annual cash operating savings from the machine are $20,000. The income tax rate is 40%. What is the after-tax payback period?

6.67 years

Last semester a class gave a professor $810 to fly to Borneo. However, he decided not to go until he had enough money to fly back, an additional $690. If he invests the $810 at 8%, when can he make the trip, assuming no change in ticket prices?

8 years

Martin Corporation has the following equity structure: Martin's weighted average cost of capital is

9.8%

The time value of money means

A dollar received today will be worth more than a dollar received in the future

Qualitative factors that might override the acceptance of a positive NPV project include

A negative environmental impact that could harm an organization's reputation

Which of the following is not a quantitative technique commonly used in capital budgeting decisions?

Activity-based budgeting

Suppose a project's profitability index is 1.12. Then the project's IRR is

Greater than the discount rate

What is the NPV of a project with an initial outlay of $10,000, cash inflows of $1,000 at the end of years 1 through 9, and a cash inflow of $4,000 at the end of year 10? Assume an 8% discount rate

$(1,901)

Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. The tax effect of selling the new machine in 20x4 would be

$0

Disquoutek, Inc., is a software manufacturer. Managers are considering a new equipment proposal. What is the relevant after-tax cash flow associated with disposing of the new equipment at its salvage value in 8 years?

$1,200

Allen Co. invested in a machine that has a 3-year useful life. The company's discount rate is 12%, and the net present value of the investment is $(573). Annual cost savings are: year 1 $3,000; year 2 $4,000; and year 3 $5,000. Determine the original cost of the machine. Ignore income taxes.

$10,000

Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. The net cash flow associated with selling the old machine in January 20x1 (i.e., the value of the sale and any tax consequences) would be

$11,000

A project has an NPV = 0 and the initial investment is $360,000. If the discount rate is 12%, compute the annual cash inflows, if the project's life is 4 years.

$118,538

George Shaw & Co. invested in a project that was to last for 2 years. The project has an internal rate of return of 12%. The project is expected to produce cash inflows of $70,000 in the first year and $80,000 in the second year. The project cost is

$126,270

You are currently entering college and you want to buy your uncle's Mercedes when you graduate. He has promised to sell it to you for $18,000. How much will you have to deposit now, in an account earning 8%, to have enough money buy the car in 4 years?

$13,230

Disquoutek, Inc., is a software manufacturer. Managers are considering a new equipment proposal. The after-tax cash flows from selling the old equipment are

$13,440

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase? The present value of the cash flows from the sale of the old machine is

$15,000

Benjamin Company invested in a 3-year project and expects a 15% rate of return. Annual cash inflows from the project are: year 1 $8,000; year 2 $8,500; and year 3 $9,500. The net present value is $4,000. What was the amount of the original investment? Ignore income taxes.

$15,637

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase? The present value of the total savings (excluding the maintenance in year 4) in annual cash operating costs is

$162,225.00

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase? The present value of the total tax savings from the depreciation tax shield is

$19,899.60

An organization that provides housing for abused women has limited housing, so it pays rent for several families. The director is considering expanding the housing facilities by purchasing a small triplex that has a useful life of 10 years. The estimated cost is $100,000. Using a discount rate of 15%, the present value of the future savings on rent is $120,000. To yield an internal rate of return that is at least 15%, the actual cost cannot exceed the estimated cost of $100,000 by more than

$20,000

Bell Company is considering a project that would provide a single cash inflow eight years from now of $80,000. What is the most that Bell would be willing to spend on this project if the discount rate is 16%?

$24,400

The local school board is considering the purchase of a computer. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.

$24,776

Bern Company invested in a project that cost $100,000. It had a net present value of $15,975 and a useful life of 8 years. The firm uses a 14% discount rate, and the project has an internal rate of return of 16%. What are the annual cost savings provided by the project?

$25,000

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase? The present value of the cash flows for year 4 is

$28,951

Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. Bailey's 20x0 depreciation tax shield for the old machine is

$3,000

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase? The present value of the maintenance cost in year 4 is

$3,180

Alien Corp. is considering the purchase of a new truck which costs $14,340. The truck is expected to save $3,600 in operating costs annually for the next 7 years. How low can the annual cost savings be and still provide a 15% return? Ignore income taxes.

$3,441

Disquoutek, Inc., is a software manufacturer. Managers are considering a new equipment proposal. What is the relevant after-tax annual cash operating cost associated with this decision?

$3,600

Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. The relevant annual pretax cash operating cost associated with Bailey's decision will be

$4,000

Walter borrows $10,000 from his mother. He will repay her $2,000 at the end of each of the next four years and the balance at the end of the fifth year. If the interest rate is 12%, what is the amount to be paid at the end of the fifth year?

$6,924.16

Carri Company is negotiating for the purchase of a new machine. The machine is expected to generate operating cost savings of $225,000 per year for 4 years. Carri uses a 12% discount rate. What is the most Carri would be willing to pay for this machine? Ignore income taxes

$683,325

If Erika Lee invests $5,000 in a certificate of deposit that pays 5%, compounded annually, what amount will she have in 10 years?

$8,144

Shamus Corp. sold a piece of equipment for $80,000. The asset originally cost $272,000, and accumulated depreciation on the equipment at the date of sale was $174,400. What is the after-tax cash inflow (outflow) from the sale of the equipment, assuming the income tax rate is 40%?

$87,040

The incremental cash tax flow for a capital budgeting project is calculated using which of the following formulas?

(Operating cash flow + annual depreciation) × marginal income tax rate

Phoxco would like to automate its calligraphy operation. The equipment will cost $150,000 plus freight, installation, and testing costs of $5,500. The expected life of the project is 8 years, with annual cost savings of $20,000. The minimum rate of return is 12% and estimated terminal value is $3,000. Ignore income taxes. The profitability index of the project is

0.65

Some of the steps in the process for addressing capital budgeting decisions are listed below. Which lettered choice puts the steps in the proper order? 1. Identify relevant cash flows. 2. Perform sensitivity analysis. 3. Apply quantitative techniques.

1, 3, 2

Rams, Inc. has invested in a machine with a cost of $37,164 and annual cost savings of $6,000. The discount rate is 8%, and the machine's internal rate of return is 12%. Ignore income taxes. The estimated life of the machine is

12 years

The Conroy Co. wants to purchase a machine for a new product line that costs $138,750. The company's engineering department estimates the machine will last 10 years and provide an annual contribution margin of $25,000. Ignore income taxes. The internal rate of return to the nearest tenth of a percent is

12.4%

Allen Corporation has the following equity structure: The weighted average cost of caital is

14.5%

A firm is currently buying a part at a cost of $12 each. It is considering buying a machine that will produce the part at a variable cost of $8. Each unit of input produces the part plus a by-product, which is sold for $1. The machine will cost $40,000 and will have a useful life of 5 years. The firm requires an 8% return. What annual volume is necessary to justify making the investment? Ignore income taxes.

2,558 units

Elkins Co. is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is

Acceptable, because it earns exactly 12%.

The payback method ignores

Both (a) and (b)

Internal rate of return

Calculates the return at which the net present value is zero

Project A has a payback period of 4 years, and Project B has a payback period of 6 years. Which project is more profitable?

Cannot be determined

Sebastian is presenting a capital budgeting project to Viola, his division manager. Which one of the following is likely to have the least amount of bias when evaluating this project?

Cannot be determined

The process that managers use when they evaluate multi-year investments is called

Capital budgeting

A depreciable asset's taxable basis is calculated as its

Cost less accumulated tax depreciation

Inflation refers to the

Decline in general purchasing power of a monetary unit

The tax savings cash flows are treated differently under the nominal and real methods. Which of the following reflects this treatment (Real;Nominal)?

Deflated;Used as is

The net present value (NPV) method of investment project analysis assumes that the project's cash flows are reinvested at the

Discount rate used in the NPV calculation

The internal rate of return is that rate which

Equates the cash inflows and outflows

A zero NPV may indicate that a project

Has an IRR equal to the discount rate used in the NPV analysis

Using a discount rate of 12%, a company determined the NPV of a project to be $12,300. If the NPV was recomputed using a 10% discount rate, the new NPV will be

Higher

In completing a sensitivity analysis for a capital budgeting project, which of the following would typically be varied? I. Discount rate; II. Future cash flows; III. Future accrual-basis revenues and expenses;

I and II only

Several methods are used to make long-term strategic decisions, including: I. Net present value; II. Internal rate of return; III. Cost-volume-profit;

I and II only

Capital budgeting decisions typically fall into which of the following major categories? I. Developing or expanding products or services; II. Allocating costs to products or services; III. Replacing or reorganizing assets or services;

I and III only

The nominal method is preferred to the real method for NPV analysis because: I. Cash flows can be inflated at different rates; II. It includes a risk premium; III. It includes the risk-free rate;

I only

The payback method is: I. A long-term decision making method;II. Uses the time value of money;III. Uses accounting earnings in the calculation;

I only

Depreciation tax savings are: I. The savings on taxes because business equipment can be depreciated; II. The income tax rate times the allowed depreciation for that year; III.Measured in nominal dollars:

I, II, and III

Net Present Value analysis is: I. A long-term decision making method; II. Incorporates the time value of money; III. Used frequently in the U.S.:

I, II, and III

Relevant cash flows for long-term decisions include: I. Revenues for new projects or services; II. Variable costs for new projects or services; III. Labor or electricity savings for replacement of old equipment:

I, II, and III

The payback period is deficient as a decision criterion for capital projects because it: I. Disregards relative profitability;II. Ignores income beyond the payback period;III. Does not take into account the time value of money;

I, II, and III

The time value of money is taken in account when calculating: I. Mortgage payments; II. Car payments; III. Future values of savings accounts:

I, II, and III

Which of the following factors are subject to uncertainty in an NPV analysis? I. Project life; II. Appropriate discount rate; III. Terminal value;

I, II, and III

Which capital budgeting method computes the discount rate that sets the NPV to zero?

IRR method

Which of the following is not a step in the process for addressing capital budgeting decisions?

Identify financial statement effects.

The most appropriate method(s) for long term decisions

Incorporate the time value of money

Qualitative factors often influence strategic investment decisions. Which of the following is the best example of such a factor?

Increased ability to ship product in a timely manner

The rate of return that results in a zero net present value for a project is called the

Internal rate of return

A negative net present value means that the

Internal rate of return is less than the required rate of return

Which of the following is the best example of a tax shield for an asset?

Its periodic depreciation

Phoxco is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. What is the internal rate of return on this investment?

Less than 20%

If project X has a lower IRR than project Y, then project X would tend to have a

Lower NPV

Which of the following statements regarding NPV analysis is true?

Managers should generally accept projects with an NPV greater than zero

An approach that allows analysis of different future rates of inflation or deflation for different cash flows is the

NPV analysis

Phoxco is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. The net present value for this investment is

Negative

The real and nominal methods are most closely associated with

Net present value

A firm's required rate of return is the rate which makes the

Net present value equal to zero.

Which of the following NPV analysis methods requires adjustment of a project's terminal value for inflation (Real;Nominal)?

No;Yes

Uniform cash flows from a capital project are necessary for which of the following calculations? I. Net present value; II. Internal rate of return; III. Profitability index;

None of the above (not I, II, or III)

DBR Corporation is considering the purchase and implementation of an enterprise-wide information system. Which of the following would be the least biased source of qualitative information about the project?

Other companies that have implemented the same system

Which of the following capital budgeting methods ignores the time value of money?

Payback period

If the internal rate of return exceeds the discount rate, the net present value is

Positive

Capital Invest, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year. Which project(s) should Capital Invest, Inc.undertake during the upcoming year if it has only $300,000 of capital funds available?

Project 3

Capital Invest, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year. Which projects should Capital Invest, Inc. undertake during the upcoming year assuming it has no budget restrictions?

Projects 2, 3, and 4

Capital Invest, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year. Which project(s) should Capital Invest, Inc.undertake during the upcoming year if it has only $600,000 of funds available?

Projects 3 and 4.

Which of the following is the best example of a capital budgeting decision?

Purchasing a piece of equipment with an expected life of eight years

If nominal cash flow is calculated as real cash flow × (1 + i)^t in an NPV analysis, i denotes the

Rate of inflation

n a capital budgeting analysis, nominal cash flow is generally calculated as

Real cash flow × (1 + inflation rate)^t

As the number of periods increases for a project having uniform cash flows, the present value of each future discounted cash flow becomes

Smaller

Which of the following statements is false?

The discount rate does not need to be determined in advance for the NPV method

The risk premium for a particular project is

The estimate of a rate of return for a project with similar risk

For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true?

The project is acceptable.

The net present value method is

The sum of the projected cash inflows and outflows valued in today's dollars.