Exam 12: Strategy and the Analysis of Capital Investments

Which one of the following methods assumes (inherently, according to some) that all interim cash inflows generated by an investment earn a return equal to the internal rate of return (IRR) of the investment?

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%. What is the expected net income (after tax) in Year 3 if the proposed investment is undertaken? Round answer to nearest whole dollar.

A widely used approach that managers use to recognize uncertainty about individual items and to obtain an immediate financial estimate of the financial consequences of possible prediction errors is:

Which one of the following is calculated by dividing average annual net operating income of a proposed project by the average investment associated with the project?

Which of the following statements regarding real options is true?

Western Electronics (WE) is reviewing the following data relating to a new equipment proposal: Net initial investment \ 50,000 After-tax cash inflow from disposal of the investment after 5 years \ 10,000 Present value of an annuity of \ 1 at 12\% for 5 years 3.605 Present value of \ 1 at 12\% in 5 years 0.567 WE expects the net after-tax savings in cash outflows from the investment to be equal in each of the 5 years.What is the minimum amount of after-tax annual savings (including depreciation effects) needed to make the investment yield a 12% return (rounded to the nearest whole dollar)?

The payback period for evaluating capital investment projects emphasizes:

Brandon Company is contemplating the purchase of a new piece of equipment for $45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years. The payback period in years (rounded to the nearest 10th of a year) for this proposed investment is (assume that the after-tax cash inflows occur evenly throughout the year):

The net present value (NPV) model of a capital budgeting project is not affected by the

Amster Corporation has not yet decided on its discount rate for use in the evaluation of capital budgeting proposals.This lack of information will prohibit the company from calculating a proposed investment's: Accounting Rate of Return Net Present Value Internal Rate of Return A) No No No B) Yes Yes Yes C) No Yes Yes D) No Yes No E) Yes No Yes

In capital budgeting, the profitability index (PI) decision model is best used to

Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments. What is the net present value (NPV) of the investment, rounded to the nearest whole dollar? (The PV annuity factor for 5 years, 10% is 3.791.) Assume that the cash inflows occur at year-end.

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%. Management requires a minimum after-tax rate of return of 10% on all investments. What is the estimated net present value (NPV) of the proposed investment (rounded to the nearest hundred dollars)? (The PV annuity factor for 10%, 5 years, is 3.791 and for 4 years it is 3.17. The present value $1 factor for 10%, 5 years, is 0.621.) Assume that after-tax cash inflows occur at year-end.

What is the present value of $1 received five years from now (rounded to two decimal places) if the discount rate is 12%?

The internal rate of return (IRR) is the

Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The machine is expected to generate a constant after-tax income of $100,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value. What is the estimated accounting (book) rate of return (rounded to two decimal places) on the initial investment?

The decision technique that measures the estimated performance of a capital investment by dividing the project's annual after-tax income by the average investment cost is called the:

The internal rate of return (IRR) for a project can be determined

Conceptually, a firm's capital structure is its:

The estimated value of a real option: