Exam 21: Capital Budgeting and Cost Analysis

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced?

Assume your goal in life is to retire with 1 million dollars.How much would you need to save at the end of each year if investment rates average 5% and you have a 16-year work life?

A weaknesses of the payback method is that it does not consider a project's cash flows after the payback period.

Gavin and Alex,baseball consultants,are in need of a microcomputer network for their staff.They have received three proposals,with related facts as follows: The company uses straight-line depreciation for all capital assets. Required: a.Compute the payback period,net present value,and accrual accounting rate of return with initial investment,for each proposal.Use a required rate of return of 14%. b.Rank each proposal 1,2,and 3 using each method separately.Which proposal is best? Why?

Locil Corporation recently purchased a new machine for $307,890 with a eight-year life.The old equipment has a remaining life of eight years and no disposal value at the time of replacement.Net cash flows will be $90,000 per year.What is the internal rate of return?

A company is looking to purchase and replace a fixed asset for $245,000.It will sell the asset that will be replaced for $46,000 but will incur a $20,000 gain upon that sale.It must also commit $30,000 of working-capital to the investment.The firm's tax rate is 35%.What is the amount of the relevant initial investment?

Upon which of the following items does discounted cash flow methods for capital budgeting focus?

Which of the following capital budgeting methods uses discounted cash flows?

Which of the following involves the process of making decisions for significant financial investments in projects to develop new products,expand production capacity,or remodel current production facilities?

What are the strengths and weaknesses of the accrual accounting rate-of-return (AARR)method for evaluating long-term projects?

Soda Manufacturing Company provides vending machines for soft-drink manufacturers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of five years and the new equipment will cost $99,825 with a five-year life.The expected additional cash inflows are $25,000 per year.What is the internal rate of return?

The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.

Cast Iron Stove Company wants to buy a molding machine that can be integrated into its computerized manufacturing process.It has received three bids for the machine and related manufacturer's specifications.The bids range from $3,500,000 to $3,550,000.The estimated annual savings of the machines range from $260,000 to $270,000.The payback periods are almost identical and the net present values are all within $8,000 of each other.The president just doesn't know what to do about which vendor to choose since all of the selection criteria are so close together. Required: What suggestions do you have for the president?

A loss on the disposal of a replacement asset is an irrelevant fact when estimating relevant cash flows of a capital asset decision.

Which of the following methods is described as the method that measures the time it will take to recoup,in the form of future cash inflows,the total dollars invested in a project?

As cash flows and time value of money are central to capital budgeting decisions,the AARR method is regarded as better than the IRR method.

Which of the following is a stage of the capital budgeting process that determines which investment Yields the greatest benefit and the least cost to an organization?

Which of the following is a stage of the capital budgeting process in which a firm obtains funding for the project?

ABC Boat Company is interested in replacing a molding machine with a new improved model.The old machine has a salvage value of $10,000 now and a predicted salvage value of $4,000 in six years,if rebuilt.If the old machine is kept,it must be rebuilt in one year at a predicted cost of $20,000. The new machine costs $80,000 and has a predicted salvage value of $12,000 at the end of six years.If purchased,the new machine will allow cash savings of $20,000 for each of the first three years,and $10,000 for each year of its remaining six-year life. Required: What is the net present value of purchasing the new machine if the company has a required rate of return of 14%?

Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.If the machine is disposed now,it may be sold for $170,000.The new machine will cost $360,000 and an additional cash investment in working capital of $170,000 will be required.The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs.The investment is expected to net $130,000 in additional cash inflows during the first year of acquisition and $290,000 each additional year of use.The new machine has a three-year life,and zero disposal value.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment,assuming the required rate of return is 6%? Would the company want to purchase the new machine?