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Exam 10: Planning for Capital Investments

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Question 41

True/False

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Depreciation on a capital investment (such as equipment) has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

A) True
B) False

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Question 42

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Which method for evaluating capital investment proposals reduces the present value of cash outflows from the present value of cash inflows?

A) Payback method
B) Internal rate of return
C) Net present value
D) Unadjusted rate of return

E) A) and B)
F) C) and D)

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Question 43

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Pierce Company is considering the purchase of new equipment that will cost $150,000. The equipment will save the company $48,000 per year in cash operating costs. The equipment has an estimated useful life of five years and no expected salvage value. The company's cost of capital is 12%.Required: 1) Assuming the company is subject to a 40% tax rate, compute the net present value.2) Compute the amount of the annual depreciation tax shield provided by the new equipment.3) Should the equipment be purchased? Why or why not?

What is a postaudit of a capital investment decision, and how should the postaudit be conducted?

What amount of cash must be invested today in order to have $60,000 at the end of one year assuming the rate of return is 9%?

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Langdon Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $10,000 per year for 3 years. Assuming that Langdon's required rate of return is 8%, what is the present value of these cash inflows? (Do not round your intermediate calculations. Round your final answer to the nearest dollar.)

Seth Morrison is considering alternative proposals that involve different amounts of investments. To compare different size investment proposals, it may be helpful for Sarah to prepare a relative ranking of the proposals by using a(n) :

What is the reinvestment assumption, and how does the assumption affect capital investment analyses?

The rate of return that equates the present value of cash inflows and outflows is the:

The cost of capital is called all of the following except:

The process by which management evaluates long-term investment decisions involving long term operational assets is called:

Saget Company is considering the purchase of equipment that would cost $35,000 and offer annual cash inflows of $10,500 over its useful life of 5 years. Assuming a required rate of return of 8%, what is the net present value of this investment opportunity?

Which of the following would be considered a cash inflow in determining the value of a capital investment?

The present value index indicates the:

Which of the following statements is incorrect?

Findell Corporation is considering two projects, A and B, and it has gathered the following estimates for the projects: What is the net present value of cash flows for project B? $\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project B } \\\hline \text { Useful life } & 5 \text { years } & \text { 5 years } \\\hline \text { Present value of cash inflows } & \$ 84,360 & \$ 55,100 \\\hline \text { Present value of cash outflows } & \$ 77,000 & \$ 49,000 \\\hline & & \\\hline\end{array}$

A customary assumption in capital budgeting analysis is that:

Describe how the unadjusted rate of return for a capital investment is calculated. Should it be based on the net cost of the investment or the average investment?

Which of the following is the approximate internal rate of return for an investment that costs $33,550 and provides a $5,000 annuity for 10 years?