Exam 21: Capital Budgeting and Cost Analysis

Book & Bible Bookstore desires to buy a new coding machine to help control book inventories.The machine sells for $36,586 and requires working capital of $4,000.Its estimated useful life is five years and will have a salvage value of $4,000.Recovery of working capital will be $4,000 at the end of its useful life.Annual cash savings from the purchase of the machine will be $10,000. Required: a.Compute the net present value at a 14% required rate of return. b.Compute the internal rate of return. c.Determine the payback period of the investment.

EIF Manufacturing Company needs to overhaul its drill press 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 20%? Show computations,and assume no taxes.

Forge Company wants to purchase a new cutting machine for its sewing plant.The investment is expected to generate annual cash inflows of $140,000.The required rate of return is 10% and the current machine is expected to last for seven years.Of the following choices,which is the dollar amount the company would be willing to spend for the machine,assuming its life is also seven years? Income taxes are not considered.

Accrual accounting rate of return is calculated by dividing increase in expected average annual after-tax operating income by the net initial investment.

Net initial investment includes ________.

How is inflation related to capital budgeting? Discuss.

Managers prefer projects with higher IRRs to projects with lower IRRs,if all other things are equal.

The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does NOT track cash flows and it ignores the time value of money.

Explain why the term tax shield is used in conjunction with depreciation.

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

Which of the following is a stage of the capital-budgeting process that tracks realized cash flows and compares those against estimated numbers?

Sam's Structures desires to buy a new crane and accessories to help move and install modular buildings.The machine sells for $75,000 and requires working capital of $10,000.Its estimated useful life is six years and it will have a salvage value of $17,560.Recovery of working capital will be $10,000 at the end of its useful life.Annual cash savings from the purchase of the machine will be $20,000. Required: a.Compute the net present value at a 12% required rate of return. b.Compute the internal rate of return. c.Determine the payback period of the investment.

In the "Identify projects" stage of capital budgeting,companies gather information from all parts of the value chain to evaluate alternative projects.

Gibson Manufacturing is considering buying an automated machine that costs $600,000.It requires working capital of $60,000.Annual cash savings are anticipated to be $280,200 for five years.The company uses straight-line depreciation.The salvage value at the end of five years is expected to be $24,000.The working capital will be recovered at the end of the machine's life. Required: Compute the accrual accounting rate of return based on the initial investment.

The three common discounted cash flow methods are net present value,internal rate of return,and payback.

AARR indicates the average rate at which ________.

Diemia Hospital has been considering the purchase of a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.If the machine is disposed now,it may be sold for $120,000.The new machine will cost $650,000 and an additional cash investment in working capital of $105,000 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 $130,000 in additional cash inflows during the year of acquisition and $110,000 each additional year of use.The new machine has a five-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 16%? Would the hospital want to purchase the new machine?

List the capital budgeting methods used to analyze financial information.

Hypore Darby Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $348,400.The annual cost savings if the new machine is acquired will be $80,000.The machine will have a 6-year life,at which time the terminal disposal value is expected to be zero.Hypore Park Department is assuming no tax consequences.What is the internal rate of return for Hypore Park Department?

The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $380,000.The investment is expected to generate $225,000 in annual cash flows for a period of four years.The required rate of return is 10%.The old machine can be sold for $30,000.The machine is expected to have zero value at the end of the four-year period.What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered.