Exam 12: Strategy and the Analysis of Capital Investments

Given two projects with the same total (i.e., project lifetime) cash flow returns (CFRs), the internal rate of return (IRR) method of capital budgeting would favor a proposal having yearly CFRs that were:

A capital budgeting model that accounts for an assumed rate of return on interim-period cash inflows from an investment is the:

For a capital investment project, a net present value (NPV) of $500 indicates that the:

Which one of the following is the estimated rate (i.e., percentage) that makes the discounted present value of future after-tax cash inflows of a project equal to the initial investment outlay for the project?

Jasper Company has a payback goal of three years on acquisitions of new equipment. A new piece of equipment that costs $450,000 and that has a five-year life is being considered. Straight-line (SL) depreciation will be used, with zero salvage value. Jasper is subject to a 40% combined income tax rate, t. To meet the company's payback goal, the equipment must generate reductions in annual cash operating costs of at least:

A profitable company pays $100,000 wages and has depreciation expense of $100,000. The company's income tax rate, t, is 40%. The after-tax cash flows from these two items are calculated as follows:

The internal rate of return (IRR) for an investment:

Without knowing its required rate of return (i.e., discount rate) for use in the evaluation of capital investment projects, a company will be able to calculate a project's:

Six years ago, Nebrow Inc. purchased a polishing machine for $600,000. The company expected to use the machine for 10 years with no residual value at the end of the tenth year. The machine has been generating annual cash revenue of $460,000 and incurring annual cash operating costs of $210,000. Nebrow is considering the purchase of a new digital polishing machine for $800,000, which will have annual cash revenues of $690,000 and annual cash operating costs of $180,000. The new machine is expected to have a useful life of four years. The company uses the straight-line depreciation method with no salvage value to depreciate all its assets. Assume, for purposes of analysis, that Nebrow is subject to a combined 40% tax rate. Required: What is the annual incremental after-tax cash flow from the new polishing machine, rounded to the nearest whole number?

When employing the MACRS (modified accelerated cost recovery system) method of depreciation in a capital budgeting decision, the use of MACRS as compared to the straight-line method of depreciation will, for an asset with zero estimated salvage value at the end of its useful life, result in

The profitability index (PI) for a proposed project is calculated as:

Carmino Company is considering an investment in equipment that is expected to generate an after-tax income of $6,000 for each year of its four-year life. The asset has no salvage value. The firm is in the 40% tax bracket. The net book value (NBV) of the investment at the beginning of each year is expected to be as follows: Year 1 \3 0,000 Year 2 15,000 Year 3 7,500 Year 4 3,750 Calculate this asset's accounting (book) rate of return (ARR) on average investment (which is defined as a simple average of the average book value of the asset for each year of its four-year life). Round the final answer to the nearest whole %.

When the internal rate of return (IRR) method and the net present value (NPV) method do not yield the same recommendation for the same investment project, the project-selection decision should normally be based on:

Which of the following statements regarding the determination of the weighted-average cost of capital (WACC) is not true?

Intolerance of uncertainty is a behavioral effect that often motivates managers to:

Solich Company is evaluating a new tractor that costs $1,350,000 to replace the tractor purchased years earlier, which currently has no salvage value; the new tractor has an estimated useful life of five years with no disposal value or anticipated cost of disposal. For all its equipment, the company uses straight-line depreciation with no residual value. Solich is subject to a 40% income tax rate, t. The company uses a 12% hurdle rate for evaluating capital investment projects. The PV of an annuity of $1 at 12% for 5 years is 3.605, and the PV of $1 at 12% in 5 years is 0.567. Required: 1. Compute the amount of annual before-tax savings (rounded to nearest whole number) that must be generated by the new tractor to have a payback period of 3.0 years. 2. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an NPV of $500,000 at a discount rate of 12%. (Round your answer to the nearest whole dollar amount.) 3. Compute the amount of annual before-tax savings that must be generated by the new tractor to have an IRR of 12%. (Round your answer to the nearest whole dollar.)

A composite of the cost of various sources of funds comprising a firm's capital structure is its:

GuSont Inc. was considering an investment in the following project: Required initial investment \ 990,000 Net annual after-tax cash inflow \ 165,000 Annual depreciation expense (\ 990,000-\ 165,000)/15 years \ 55,000 Estimated salvage value \ 165,000 Life of the project in years 15 Assume that cash inflows occur evenly throughout the year. The estimated payback period in years (rounded to one decimal place) for the proposed project is:

On January 1, 2018, Crane Company will acquire a new asset that costs $400,000 and that is anticipated to have a salvage value of $30,000 at the end of four years. The new asset: ? qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS) ? will replace an old asset that currently has a tax basis of $80,000 and that can be sold on this date for $60,000 ? will continue to generate the same operating revenues as the old asset ($200,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $120,000 in each of the first three years, and $90,000 in the fourth year. Crane is subject to a combined income tax rate, t, of 40% and rounds all computations to the nearest dollar. Crane's fiscal year coincides with the calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net present value (NPV) method to analyze projects and the factors and rates presented below (based on a discount rate of 14%): Year PV of \ 1 at 14\% PV of \ 1 Annuity at 14\% MACRS 2018 0.877 0.877 33\% 2019 0.769 1.647 45\% 2020 0.675 2.321 15\% 2021 0.592 2.914 7\% The present value of the depreciation tax shield for the 2021 MACRS depreciation of the new asset (rounded to the nearest whole dollar) is:

Which one of the following statements concerning capital budgeting is not true?