Deck 7: Capital Budgeting Decision Methods

Question 1

The payback period is best defined as:

A) The time period required for total revenue to equal the initial investment.
B) The time period required to receive cash flows sufficient to cover the initial investment.
C) The time period required for the present value of all cash flows to equal the initial investment.
D) The time period required for the NPV to equal zero.

Answer 1

The time period required to receive cash flows sufficient to cover the initial investment.

Question 2

What is the difference between the payback period and the discounted payback period?

A) The discounted payback period accounts for the time value of money.
B) The discounted payback period takes into account the expected economic life of the project.
C) The discounted payback period discounts the taxes on expected cash flows.
D) The discounted payback period ignores the time value of money.

Answer 2

The discounted payback period accounts for the time value of money.

Question 3

The internal rate of return is best described as the discount rate that:

A) Equates the NPV and the IRR.
B) Equals the required rate of return.
C) Makes the net present value equal to zero.
D) Equates all cash flows to the current market rate.

Answer 3

Makes the net present value equal to zero.

Question 4

Independent projects:

A) Always have negative NPVs.
B) Do not compete with each other for resources.
C) Can be mutually exclusive under certain conditions.
D) Compete with each other for resources.

Question 5

The net present value represents:

A) The percentage return on the project.
B) The dollar profits added to the firm discounting at the cost of capital.
C) The percentage change represented by the project.
D) The dollar change in the firm's value resulting from undertaking the project.

Question 6

Which of the following items would not represent an incremental cash flow?

A) Salvage value of the new asset required for the project.
B) Purchase price of the new asset required for the project.
C) Interest payments for the debt used to finance the project.
D) Salvage value of an existing asset sold to make room for the new asset required for the project.

Question 7

An externality can best be described as:

A) An impact, positive or negative, that a new project would have on existing operations.
B) An example of an opportunity cost.
C) Something that always has a negative impact.
D) Something that should not be included in the capital budgeting process.

Question 8

A cost that has been incurred, or will be incurred, whether a project is accepted or rejected, is known as:

A) An incremental cash flow.
B) An externality.
C) A sunk cost.
D) A terminal cash flow.

Question 9

A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4. All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project's payback period?

Question 10

A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4. All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project's discounted payback period?

Question 11

A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4. All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project's net present value?

Question 12

A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4. All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project's internal rate of return? Calculate to two decimal places.

Question 13

A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4. All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project's modified internal rate of return? Calculate to two decimal places.

Question 14

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the depreciable basis of the new machine?

Question 15

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the net operating cash flow for year 0? Round your answer to the nearest dollar.

Question 16

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the net operating cash flow for year 1? Round your answer to the nearest dollar.

Question 17

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the net operating cash flow for year 2? Round your answer to the nearest dollar.

Question 18

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the net operating cash flow for year 3? Round your answer to the nearest dollar.

Question 19

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the net operating cash flow for year 4? Round your answer to the nearest dollar.

Question 20

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the total of the terminal cash flows for the project? Round your answer to the nearest dollar.

Question 21

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the net operating cash flow for year 5? Round your answer to the nearest dollar.

Question 22

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the project's NPV, using the 8.50% discount rate? Round your answer to the nearest dollar.

Question 23

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the project's IRR? Report your answer to two decimal places.

Question 24

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the project's MIRR, using the 8.50% as the reinvestment rate? Report your answer to two decimal places.

Question 25

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the project's PB? Report your answer to two decimal places.

Question 26

Use the following data to answer questions below
Your firm needs a new machine for producing a specific product, as the old machine is no longer viable. Rather than simply replace the old machine with the same model, your production manager wants to try a new machine using a new technology. The new machine will cost $115,000 and will require another $15,000 to ship it and install it in place. It will also require an increase in net working capital of $8,000 up front. The new machine falls under the MACRS 5-year schedule for depreciation (20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in years 4 and 5 and 5.76% in year 6).
The production manager expects that the new technology will decrease operating costs by $38,000 per year for the five years it will be in operation. At the end of five years, the project will end and the asset will be sold. It is estimated that the new machine will have a salvage (market) value of $12,000 at the end of five years. The appropriate discount rate for the new machine is 8.5%. The firm's tax rate is 35.0%.
-What is the project's DPB, using the 8.50% discount rate? Report your answer to two decimal places.