Exam 21: Capital Budgeting and Cost Analysis

Diemia Hospital has been considering the purchase of a new x-ray 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 $700,000 and an additional cash investment in working capital of $115,000 will be required.The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital.The investment is expected to net $150,000 in additional cash inflows during the year of acquisition and $180,000 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 9%? Would the hospital want to purchase the new machine?

The nominal rate of return is made up of a risk-free element when there is no expected inflation,a business-risk element,and an inflation element.

A general rule in capital budgeting is that a project is accepted only if the internal rate of return equals or ________.

Pearl Manufacturing Company provides glassware machines for major department store retailers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of six years and the new equipment has a value of $319,400 with a six-year life.The expected additional cash inflows are $113,000 per year.What is the payback period for this investment?

The minimum annual acceptable rate of return on an investment is the ________.

Flilane Tire Company needs to overhaul its auto lift system or buy a new one.The facts have been gathered,and they are as follows: Required: Which alternative is the most desirable with a current required rate of return of 15%? Show computations,and assume no taxes.

In the "make decisions by choosing among alternatives" stage of the capital budgeting process,a company determines which investment yields the greatest benefit and the least cost to the organization.

The payback method of capital budgeting approach to an investment decision ________.

Post-investment audits ________.

Which of the following is the numerator in the mathematical expression for accrual accounting rate-of-return (AARR)?

Assume your goal in life is to retire with three million dollars.How much would you need to save at the end of each year if interest rates average 5% and you have a 10-year work life?

The net present value method accurately assumes that project cash flows can only be reinvested at the company's required rate of return.

The Required Rate of Return (RRR)is set externally by creditors as the interest rate on long term liabilities.

Which of the following methods of capital budgeting divides the average annual accrual accounting income of a project by a measure of the investment in it?

What are the relevant cash inflows and outflows for capital budgeting decisions?

Griffith Vehicle has received three proposals for its new vehicle-painting machine.Information on each proposal is as follows: Required: Determine each proposal's payback.

Unlike the payback method,which ignores cash flows after the payback period,the AARR method considers income earned throughout a project's expected useful life.

The accrual accounting rate-of-return method is similar to the internal rate-of-return method because both methods calculate a rate-of-return percentage.

A capital budget spans only a one-year period.

Cedile Trailer Supply has received three proposals for its new trailer assembly line.Information on each proposal is as follows: Required: Determine each proposal's payback.