Exam 19: Capital Investment

A capital investment project requires an investment of $450,000. It has an expected life of six years with an annual cash flow of $90,000 received at the end of each year. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. Required: a. Compute payback for the project. b. Compute the net present value of the project using a 12 percent discount rate. c. Would you recommend this project be accepted? Why or why not?

Bellamy Company is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: The system will cost $9,000,000 and will last ten years. The company's cost of capital is 12 percent. What is the NPV for the computerized manufacturing system?

The following information pertains to an investment by the Town of Sutton: Ignore income taxes. The present value of the salvage value (rounded) is

Vociferous Company is considering the purchase of production equipment that costs $800,000. The equipment is expected to generate an annual cash flow of $250,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 12 percent. The straight-line method with no mid-year convention is used. Ignoring income taxes, the net present value of the project is

When conflicting signals are received from using NPV and IRR, NPV always produces the correct signal to invest.

The time required by a firm to recover its original investment is called the period.

The present value of $7,500 to be received each year for five years and earning an 10 percent return (rounded) is

A capital investment project requires an investment of $100,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Ignoring income taxes, the net present value of the project using a 8 percent discount rate is

Clemente Company is considering the purchase of a new machine for $160,000. The machine would generate an annual cash flow before depreciation and taxes of $62,588 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the net present value for the machine?

Capital investment decisions are concerned with planning, setting goals, arranging financing, and the selection of __________ assets.

Galveston Corporation is considering an investment in equipment for $45,000. Data related to the investment are as follows: Cash Flow before Year Depreciation and Taxes 1 $30,000 2 30,000 3 30,000 4 30,000 5 30,000 Cost of capital is 18 percent. Galveston uses the straight-line method of depreciation with no mid-year convention. In addition, their tax rate is 40 percent, and the life of the equipment is five years with no salvage value. What is the net present value of the investment?

Canyon Company is considering an investment of $45,000. Data related to the investment are as follows: Cost of capital is 18 percent. What is the net present value of the investment, assuming no taxes are paid?

Bertram Corporation is considering an investment in equipment for $150,000. Data related to the investment are as follows: Income before Year Depreciation and Taxes 1 $60,000 2 60,000 3 60,000 4 60,000 5 60,000 Cost of capital is 10 percent. Bertram uses the straight-line method of depreciation with mid-year convention for tax purposes. In addition, its tax rate is 40 percent and the depreciable life of the equipment is four years with no salvage value. The equipment is sold at the end of the fifth year. Required: Determine the following amounts using after-tax cash flows: a. Payback period b. Accounting rate of return on original investments for each year c. Net present value

The internal rate of return (IRR) is the interest rate that sets the present value of cash inflows of a project equal to the present value of a project's cost.

Beduin Services is considering an investment of $25,000. Data related to the investment are as follows: Cost of capital is 14 percent. What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

Local Construction Company is considering the purchase of a bulldozer for $280,000. The expected life is four years. The company is comparing the depreciation tax shield using MACRS versus the straight-line method. If MACRS is used, the MACRS life is three years with a depreciation rate of 200 percent annually. Regardless of the method of depreciation used, the mid-year convention will be observed. The company's tax rate is 40 percent. The straight-line method assumes mid-year convention, and the cost of capital is 14 percent. Required: (Round all calculations to the nearest dollar.) a. Calculate the tax savings from depreciation for each year using both the MACRS and straight- line methods. b. Calculate the present value of the tax savings for both depreciation methods. c. Which method should be used to minimize the firm's tax liability? Why?

Spiritlight Ventures is considering the following investment: Ignore income taxes. The present value of the annual cash flow (rounded) is

Santander Company is considering a project that requires an investment of $700,000. The project is expected to generate an annual cash flow of $280,000 for six years. The cash flow would be received at the end of each year. The asset is considered 5-year property for depreciation purposes and would be disposed of at the end of the sixth year, at which time it is expected to have no salvage value. The company plans to use MACRS. Assume the cost of capital is 12 percent and the income tax rate is 40 percent. Required: a. Determine the net present value of the asset. (Round amounts to dollars.) b. State your recommendation to the management of the company.

A firm is evaluating a project that has a net present value of $0 when a discount rate of 8 percent is used. A discount rate of 6 percent will result in a

A firm is considering a project requiring an investment of $27,000. The project would generate an annual cash flow of $6,296 for the next seven years. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The approximate internal rate of return for the project is