Exam 11: Capital Budgeting

An asset of $270,000 is expected to generate $180,000 in operating income annually for three years.Assume straight-line depreciation is used.The asset has no expected residual value.Ignore income taxes.The accounting rate of return based on the initial investment is ________.

The lower the minimum desired rate of return,the lower the present value of each future cash inflow from an investment.

The present value of tax savings from depreciation is greater for straight-line depreciation than an accelerated depreciation method.

A disadvantage of the accounting rate of return model is ________.

Tax avoidance is demonstrated by recording fictitious deductions and failing to report income.

Dolly Company is contemplating three different equipment investments.The relevant data follows: The present value factor of an ordinary annuity for 10 periods at 12% is 5.6502. The present value factor of one for 10 periods at 12% is 0.322. Required: A)Compute the net present value of each investment.Ignore income taxes. B)If only one investment can be acquired,which investment should be chosen?

An asset with a book value of $320,000 is sold for $560,000.The tax rate is 20%.What is the net after-tax cash inflow resulting from this transaction?

Accelerated depreciation methods ________.

Forever Company has a tax rate of 40% and a required rate of return of 10%.Depreciation expense relating to operating equipment is $100,000 per year.What is the after-tax cash flow from the annual depreciation expense?

Ajax Company pays 15% on the first $50,000 of pretax income and 28% on any additional pretax income.Ajax Company currently earns $52,000.An investment under consideration is expected to add $20,000 in pretax income.What is the tax rate on the additional income from the investment?

In the NPV method,errors in forecasting terminal disposal values are usually not crucial because the present value of these cash flows is small.

The net present value of a project is zero.The minimum desired rate of return used to obtain the net present value is 8%.Which of the following statements is TRUE?

Which of the following statements about the payback model is FALSE?

Under the NPV method,the higher the risk of a project,the lower the desired rate of return.

A recognized loss on the sale of a long-term asset causes a company's tax liability to decrease.

You can receive $10,000 today or $3,000 per year for the next five years.If the required rate of return is 10%,what option should be selected? (The present value of an ordinary annuity at 10% for five periods is 3.7908.The present value of one at 10% for five periods is 0.6209.)

The real rate of interest equals the risk-free rate plus the business-risk rate.

The NPV method computes the present value of all expected future cash flows from a project using a maximum desired rate of return.

Jesse Company has obtained the following data about a possible planned investment: The company uses the straight-line depreciation method for taxes. Required: A)Compute the net present value of the investment. B)Compute the net present value of the investment if the terminal salvage value is estimated to be $50,000 in 10 years.

________ shows the financial consequences that would occur if actual cash flows differ from expected cash flows.