Deck 18: Capital Budgeting and Cost Analysis

Question 1

A capital budget spans only a one-year period.

Answer 1

False

Question 2

What stage of the capital budgeting process involves choosing the projects for implementation?

A)Make decisions by choosing among alternatives stage
B)Management-control stage
C)Evaluate each possible course of action stage
D)Identify the problem stage

Answer 2

A

Question 3

Explain capital budgeting and briefly discuss each of the five stages of a capital budgeting project.
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Answer 3

Capital budgeting is long-run planning for investment projects that usually have a life that is greater than one year.
Stage 1 of a capital budgeting project is the identify projects stage in which a firm determines which types of capital investments are necessary to accomplish organisation objectives and strategies.
Stage 2 is the obtain information stage in which a firm gathers information from all parts of the value chain to analyse alternative projects.
Stage 3 is the make predictions stage in which the firm forecasts all potential cash flows attributable to the alternative projects.
Stage 4 is the make decisions by choosing among alternatives stage in which the firm determines which investment yields the greatest benefit and the least cost to the organisation.
Stage 5 is the implement the decision,evaluate performance,and learn stage that is further separated into two sub stages:(1)obtain funding and make the investments selected in the stage 4 process,and (2)track the realised cash flows,compare against the forecast numbers and revise plans if necessary.

Question 4

The following are included in the formal financial analysis of a capital budgeting program except for:

A)safety of employees.
B)quality of the output.
C)cash flow.
D)both A and B.

Question 5

Match each one of the examples below with one of the stages of the capital budgeting decision model.
Stages:
1.Identify Projects
2.Obtain Information
3.Make Predictions
4.Make Decisions by Choosing Among Alternatives
5.Implement the Decision,Evaluate Performance and Learn

a.Issuing shares for the funds to purchase new equipment
b.Learning that to effectively operate Machine #8 only takes 15 minutes
c.The need to reduce the costs to process the vegetables used in producing goulash
d.Monitoring the costs to operate a new machine
e.Percentage of defective merchandise is considered too high
f.Will introducing the new product substantially upgrade our image as a producer of quality products?
g.Research indicates there are five machines on the market capable of producing our product at a competitive cost
h.Use of the internal rate of return for each alternative

Question 6

During which stage of the capital budgeting process does marketing query the potential revenue numbers?

A)Implement the decision stage
B)Make decisions by choosing among alternatives stage
C)Identify the problem stage
D)Collect information stage

Question 7

Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project.

Question 8

The stage of the capital-budgeting process in which projects get underway and performance is monitored is the:

A)identify problems stage.
B)collect relevant information stage.
C)implement the decision,evaluate performance,and learn stage.
D)evaluate each possible course of action stage.

Question 9

The 'identify the problem' stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects.

Question 10

The 'determine possible courses of action and consider the consequences of each' stage of the capital budgeting process consists of forecasting all potential net profit additions that are attributable to the alternative projects.

Question 11

During which stage of the capital budgeting process does a firm obtain funding for the project?

A)Make decisions by choosing among alternatives stage
B)Implement the decision,evaluate performance and learn stage
C)Evaluate each possible course of action stage
D)Collect relevant information stage

Question 12

______________________ involves significant financial investments in projects to develop new products,expand production capacity or remodel current production facilities.

A)Capital budgeting
B)Working capital
C)Project-cost budgeting
D)Master budgeting

Question 13

Explain why a corporation's customer base is considered an intangible asset.
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Question 14

The 'evaluate each possible course of action and select the best one' stage of the capital budgeting process consists of determining which investment yields the greatest benefit and the least cost to the organisation.

Question 15

The 'collect relevant information' stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects.

Question 16

During which stage of the capital budgeting process is the type of capital expenditure project identified as being necessary to accomplish organisation objectives?

A)Make decisions by choosing among alternatives stage
B)Collect information stage
C)Implement the decision stage
D)Identify the problem stage

Question 17

What are the two factors capital budgeting emphasises?

A)Qualitative and non-financial
B)Quantitative and non-financial
C)Qualitative and financial
D)Quantitative and financial

Question 18

The very last step in the final stage in the capital budgeting process is to make the investment identified previously.

Question 19

The stage of the capital budgeting process that considers the expected costs and the expected benefits of alternative capital investments is the:

A)evaluate each possible course of action stage.
B)collect information stage.
C)identify the problem stage.
D)make decisions by choosing among alternatives stage.

Question 20

What is the accounting system that corresponds to the project dimension in capital budgeting called?

A)Accrual accounting rate-of-return
B)Net present value method
C)Life-cycle budgeting and costing
D)Internal rate-of-return

Question 21

Assume your goal in life is to retire with one million dollars.How much would you need to save at the end of each year if investment rates average 9% and you have a 15-year work life?

A)$41 286
B)$34 059
C)$37 853
D)$25 554

Question 22

Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.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 20%? Would the hospital want to purchase the new machine?

A)$(6170);yes
B)$(6170);no
C)$6170;yes
D)$25 350;yes

Question 23

Assume your goal in life is to retire with 1.5 million dollars.How much would you need to save at the end of each year if interest rates average 5% and you have a 25-year work life?

A)$33 754
B)$27 798
C)$31 429
D)$24 555

Question 24

Aluminum Casting Company wants to buy a moulding machine that can be integrated into its computerised manufacturing process.It has received three bids,and related manufacturer's specifications,for the machine.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 $8000 of each other.The CEO just doesn't know which vendor to choose since all of the selection criteria are so close together.
Required:
What suggestions do you have for the CEO?
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Question 25

Which of the following methods is not one used by management in analysing the expected results of capital budgeting decisions?

A)Payback method
B)Future-value cash-flow method
C)Discounted cash-flow method
D)Accrual accounting rate-of-return method

Question 26

What does it mean when the net present value for a project is zero or positive?

A)Project should be accepted
B)Expected rate of return is below the required rate of return
C)Project should not be accepted
D)Both A and C are correct.

Question 27

What rate of return is used in calculating net present value of a project?

A)Internal rate of return
B)Rate of return required by the investment bankers
C)Required rate of return
D)None of these answers are correct.

Question 28

Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.The working capital investment will not be recovered at the end of the asset's life.
Which of the following results of the net present value method in capital budgeting is the LEAST acceptable?

A)$0
B)$(18 000)
C)$(7000)
D)$(10 000)

Question 29

What does the net present value method focus on?

A)Cash outflows
B)Accrual-accounting net income
C)Cash inflows
D)Both A and C are correct

Question 30

Nullabor Park Department is considering buying a new grass mowing machine.The cost of the machine will be $150 000 and will provide annual cost savings of $40 000.The machine will have a five-year life,at which time the terminal disposal value is expected to be $20 000.Nullabor Park Department is assuming no tax consequences.If Nullabor Park Department has a required rate of return of 10%,which of the following is closest to the present value of the project?

A)$1632
B)$150 000
C)$14 060
D)$12 418

Question 31

Answer the following questions using the information below:
Cronulla Cleaners is 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.The machine may be sold for $50 000 now.The new machine will cost $200 000 and an additional cash investment in working capital of $50 000 will be required.The new machine will reduce the average time required to wash clothing and will decrease labour costs.The investment is expected to net $45 000 in additional cash inflows during the year of acquisition and $135 000 each additional year of use.The new machine has a three-year life,and zero disposal value.These cash flows will occur throughout the year but will be recognised 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 24%? Would the company want to purchase the new machine?

A)$32 800;no
B)$(5240);no
C)$(32 800);yes
D)$5240;yes

Question 32

Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.The working capital investment will not be recovered at the end of the asset's life.
In using the net present value method,only projects with a zero or positive net present value are acceptable because:

A)the return from these projects equals or exceeds the cost of capital.
B)the company will be able to pay the necessary payments on any loans secured to finance the project.
C)a positive net present value on a particular project guarantees company profitability.
D)Both A and B are correct.

Question 33

What is the definition of an annuity?

A)A series of equal cash flows at regular intervals
B)Similar to the definition of a life insurance policy
C)An investment product whose funds are invested in the stock market
D)Both A and B are correct.

Question 34

Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.The working capital investment will not be recovered at the end of the asset's life.
The 'required rate-of-return' can also be expressed as:

A)cost of capital.
B)discount rate.
C)hurdle rate.
D)All of these answers are correct.

Question 35

Assume your goal in life is to retire with one million dollars.How much would you need to save at the end of each year if interest rates average 6% and you have a 20-year work life?

A)$120 102
B)$27 184
C)$376 476
D)$14 565

Question 36

Answer the following questions using the information below:
Cronulla Cleaners is 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.The machine may be sold for $50 000 now.The new machine will cost $200 000 and an additional cash investment in working capital of $50 000 will be required.The new machine will reduce the average time required to wash clothing and will decrease labour costs.The investment is expected to net $45 000 in additional cash inflows during the year of acquisition and $135 000 each additional year of use.The new machine has a three-year life,and zero disposal value.These cash flows will occur throughout the year but will be recognised 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 10%? Would the company want to purchase the new machine?

A)$53 800;yes
B)$45 000;no
C)$(53 800);no
D)$(45 000);yes

Question 37

Which of the following capital budgeting methods calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return?

A)Net present value method
B)Accrual accounting rate-of-return method
C)Payback method
D)Sensitivity method

Question 38

What do discounted cash flow methods for capital budgeting focus on?

A)Cash outflows
B)Operating profit
C)Cash inflows
D)Both A and C are correct.

Question 39

Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.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 12%? Would the hospital want to purchase the new machine?

A)$83 415;yes
B)$25 715;no
C)$62 235;yes
D)$(62 235);no

Question 40

The following capital budgeting technique(s)measure all expected future cash inflows and outflows as if they occurred at a single point in time:

A)internal rate-of-return
B)net present value
C)payback
D)Both A and B are correct.

Question 41

Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.The working capital investment will not be recovered at the end of the asset's life.
If the net cash inflows were $20 000 in the first year and $110 000 in the following years,should the X-ray machine be purchased? What is the net present value of the investment,assuming the required rate of return is 14%? Would the hospital want to purchase the new machine?

A)$25 350;yes
B)$8590;yes
C)$8590;no
D)$(8590);yes

Question 42

Nullabor Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $144 192.The annual cost savings if the new machine is acquired will be $40 000.The machine will have a five-year life,at which time the terminal disposal value is expected to be zero.What is the internal rate of return for Nullabor Park Department? Ignore taxes.

A)10%
B)12%
C)14%
D)16%

Question 43

Gold Coast Glass Company provides glassware 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 five years and the new equipment has a value of $117 320 with a five-year life.The expected additional cash inflows total $35 000 per year.What is the internal rate of return?

A)10%
B)12%
C)15%
D)20%

Question 44

Alice Springs Tailors wants to purchase a new cutting machine for its sewing plant.The investment is expected to generate annual cash inflows of $400 000.The required rate of return is 12% and the current machine is expected to last for four years.What is the maximum dollar amount Alice Springs Tailors would be willing to spend for the machine,assuming its life is also four years? Ignore income taxes.

A)$820 600
B)$991 740
C)$607 000
D)$1 214 800

Question 45

Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.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 14%? Would the hospital want to purchase the new machine?

A)$25 715;no
B)$(62 235);no
C)$42 910;yes
D)$83 415;yes

Question 46

What is an important advantage of the net present value method of capital budgeting over the internal rate-of-return method?

A)The net present values of individual projects can be added to determine the effects of accepting a combination of projects
B)The net present value method is expressed as a percentage
C)There is no advantage.
D)Both A and B are correct.

Question 47

Coolangatta Corporation recently purchased a new machine for $485 650 with a 10-year life.The old equipment has a remaining life of 10 years and no disposal value at the time of replacement.Net cash flows will be $85 956 per year.What is the internal rate of return?

A)12%
B)16%
C)20%
D)24%

Question 48

Wet'n'Wild Water Company provides white water rafting experiences to outdoor enthusiasts.The company is in the process of analysing the purchase of new inflatable rafts and jet boats.Information on the proposal is provided below.

$\begin{array}{lr}\text {Initial investment:}\\\text { Asset } & \$ 130000 \\\text { Working capital } & \$ 32000 \\\text { Operations (per year for four years): } & \\\text { Cash receipts } & \$ 150000 \\\text { Cash expenditures } & \$ 88000\\\text { Disinvestment: } \\\quad \text { Salvage value of drill (existing) } & \$ 10000 \\\text { Discount rate } & 20 \%\end{array}$
What is the net present value of the investment? Assume there is no recovery of working capital.

A)$(2140)
B)$8456
C)$86 336
D)$42 362

Question 49

Bendigo Gold Extrusions Corporation recently purchased a new machine for its factory operations at a cost of $521 250.The investment is expected to generate $141 452 in annual cash flows for a period of six years.The required rate of return is 14%.The old machine has a remaining life of six years.The new machine is expected to have zero value at the end of the six-year period.The disposal value of the old machine at the time of replacement is zero.What is the internal rate of return?

A)15%
B)16%
C)17%
D)18%

Question 50

Mildura 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 three years and the new equipment has a value of $73 250 with a three-year life.The expected additional cash inflows are $34 782 per year.What is the internal rate of return?

A)20%
B)16%
C)10%
D)8%

Question 51

Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.The working capital investment will not be recovered at the end of the asset's life.
If the net cash inflows were $20 000 in the first year and $100 000 in the following years,should the X-ray machine be purchased? What is the net present value of the investment,assuming the required rate of return is 14%? Would the hospital want to purchase the new machine?

A)$(16 960);yes
B)$(16 960);no
C)$16 960;yes
D)$25 350;yes

Question 52

Bendigo Gold Extrusions Corporation wants to purchase a new machine for its factory operations at a cost of $770 000.The investment is expected to generate $290 000 in annual cash flows for a period of four years.The required rate of return is 14%.The old machine can be sold for $50 000.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? Ignore income taxes.

A)$124 770;yes
B)$844 770;yes
C)$69 550;no
D)$126 750;no

Question 53

In capital budgeting,a project is accepted only if the internal rate of return equals or:

A)exceeds the net present value.
B)is less than the required rate of return.
C)exceeds the accrual accounting rate of return.
D)exceeds the required rate of return.

Question 54

It is advantageous to use _______________________in situations where the required rate of return is not constant for each year of the project.

A)the net present value method
B)the internal rate-of-return method
C)the adjusted rate-of-return method
D)sensitivity analysis

Question 55

Discounted cash flow methods focus on operating profit.

Question 56

Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.

Question 57

Investment A requires a net investment of $800 000 today.If you require an annuity for the next four years and the required rate of return is 12%,what are the annual cash flows if the net present value (rounded)equals 0?

A)$189 483
B)$263 418
C)$295 733
D)$274 848

Question 58

Hunter Valley Horticulture Company provides flowers and other nursery products for decorative purposes in medium to large restaurants and businesses.The company has been investigating the purchase of a new specially equipped van for deliveries.The van has a value of $62 755 with a seven-year life.The expected additional cash inflows total $13 750 per year.What is the internal rate of return?

A)10%
B)12%
C)15%
D)20%

Question 59

What is the minimum annual acceptable rate of return on an investment called?

A)Hurdle rate
B)Accrual accounting rate of return
C)Internal rate of return
D)Net present value

Question 60

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

A)internal rate of return
B)payback method
C)accrual accounting rate-of-return method
D)net present value method

Question 61

A capital budgeting project is accepted if the required rate-of-return equals or exceeds the internal rate-of-return.

Question 62

Rockhampton Engineering needs to overhaul its drill press or buy a new one.The facts have been gathered,and they are as follows:
$$\begin{array} { | l | r | r | } \hline & \text { Current Machine } & \text { New Machine } \\\hline \text { Purchase Price, New } & \$ 80000 & \$ 100000 \\\hline \text { Current book value } & 30000 & \\\hline \text { Overhaul needed now } & 40000 & \\\hline \text { Annual cash operating costs } & 70000 & 40000 \\\hline \text { Current salvage value } & 20000 & \\\hline \text { Salvage value in five years } & 5000 & 20000 \\\hline\end{array}$$
Required:
Which alternative is the most desirable with a current required rate of return of 20%? Show computations,and assume no taxes.
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_____________________________________________________________________________________________

Question 63

The net initial investment for a piece of construction equipment is $1 000 000.Annual cash inflows are expected to increase by $200 000 per year.The equipment has an eight-year useful life.The payback period is ______________:

A)8 years
B)7 years
C)6 years
D)5 years

Question 64

Adelaide Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $83 840 and has predicted cash inflows of $20 000 per year for 10 years.It will have no salvage value.
Required:
a.Using a required rate of return of 16%,determine the net present value of the investment proposal.
b.Determine the proposal's internal rate of return.
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Question 65

Darwin Dental Services is considering purchasing a new dental chair for $727 000.It will require additional working capital of $63 000.Its anticipated eight-year life will generate additional client revenue of $303 000 annually with operating costs,excluding depreciation,of $150 000.At the end of eight years,it will have a salvage value of $59 500 and return $15 000 in working capital.Ignore taxes.
Required:
a.If the company has a required rate of return of 14%,what is the net present value of the proposed investment?
b.What is the internal rate of return?
_____________________________________________________________________________________________
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Question 66

The net present value method can be used in situations where the required rate-of-return varies over the life of the project.

Question 67

Retail Outlet is looking for a new location near a shopping centre.It is considering purchasing a building rather than leasing,as it has done in the past.Three retail buildings near a new shopping centre are available but each has its own advantages and disadvantages.The owner of the company has completed an analysis of each location that includes considerations for the time value of money.The information is as follows:
$$\begin{array} { | l | r | r | r | } \hline & \text { Location A } & \text { Location B } & { \text { Location C } } \\\hline \text { Internal rate of return } & 13 \% & 17 \% & 20 \% \\\hline \text { Net present value } & \$ 25000 & \$ 40000 & \$ 20000 \\\hline\end{array}$$
The owner does not understand how the location with the highest percentage return has the lowest net present value.
Required:
Explain to the owner what is (are)the probable cause(s)of the comparable differences.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 68

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

Question 69

The net present value method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the hurdle rate.

Question 70

A 'what-if' technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes is called:

A)adjusted rate-of-return analysis.
B)sensitivity analysis.
C)internal rate-of-return analysis.
D)net present value analysis.

Question 71

Nullabor Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $144 192.The annual cost savings if the new machine is acquired will be $40 000.The machine will have a five-year life,at which time the terminal disposal value is expected to be zero.Nullabor Park is assuming no tax consequences.Nullabor Park has a 10% required rate of return.What is the payback period on this investment?

A)3 years
B)3.6 years
C)4.2 years
D)5 years

Question 72

Lake Torrens Boating Company is interested in replacing a moulding machine with a new improved model.The old machine has a salvage value of $20 000 now and a predicted salvage value of $4000 in six years,if rebuilt.If the old machine is kept,it must be rebuilt in one year at a predicted cost of $40 000.
The new machine costs $160 000 and has a predicted salvage value of $24 000 at the end of six years.If purchased,the new machine will allow cash savings of $40 000 for each of the first three years,and $20 000 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%?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 73

The Rockhampton Chronicle needs to overhaul its printing press or buy a new one.The facts have been gathered,and they are as follows:
$$\begin{array} { | l | r | r | } \hline & \text { Current Machine } & \text { New Machine } \\\hline \text { Purchase Price, New } & \$ 240000 & \$ 450000 \\\hline \text { Current book value } & 90000 & \\\hline \text { Overhaul needed now } & 120000 & \\\hline \text { Annual cash operating costs } & 210000 & 120000 \\\hline \text { Current salvage value } & 60000 & \\\hline \text { Salvage value in five years } & 15000 & 60000 \\\hline\end{array}$$
Required:
Which alternative is the most desirable with a current required rate of return of 20%? Show computations,and assume no taxes.
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Question 74

What does the payback method of capital budgeting approach highlight?

A)the liquidity of the investment
B)cash flow over the life of the investment
C)having as lengthy payback time as possible
D)the tax savings of the depreciation amounts

Question 75

Network Service centre is considering purchasing a new computer network for $82 000.It will require additional working capital of $13 000.Its anticipated eight-year life will generate additional client revenue of $33 000 annually with operating costs,excluding depreciation,of $15 000.At the end of eight years,it will have a salvage value of $9500 and return $5000 in working capital.Ignore taxes.
Required:
a.If the company has a required rate of return of 14%,what is the net present value of the proposed investment?
b.What is the internal rate of return?
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Question 76

Maremount Tyre Company needs to overhaul its auto lift system or buy a new one.The facts have been gathered,and they are as follows:
$$\begin{array} { | l | r | r | } \hline & \text { Current Machine } & \text { New Machine } \\\hline \text { Purchase Price, New } & \$ 112500 & \$ 148000 \\\hline \text { Current book value } & 33500 & \\\hline \text { Overhaul needed now } & 27500 & \\\hline \text { Annual cash operating costs } & 63000 & 48000 \\\hline \text { Current salvage value } & 40000 & \\\hline \text { Salvage value in five years } & 8000 & 35000 \\\hline\end{array}$$
Required:
Which alternative is the most desirable with a current required rate of return of 15%? Show computations,and assume no taxes.
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Question 77

Townsville Optical needs to overhaul its vision tester or buy a new one.The facts have been gathered,and they are as follows:
$$\begin{array} { | l | r | r | } \hline & \text { Current Machine } & \text { New Machine } \\\hline \text { Purchase Price, New } & \$ 112500 & \$ 248000 \\\hline \text { Current book value } & 33500 & \\\hline \text { Overhaul needed now } & 82500 & \\\hline \text { Annual cash operating costs } & 70000 & 40000 \\\hline \text { Current salvage value } & 50000 & \\\hline \text { Salvage value in five years } & 18000 & 70000 \\\hline\end{array}$$
Required:
Which alternative is the most desirable with a current required rate of return of 15%? Show computations,and assume no taxes.
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Question 78

Internal rate-of-return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.

Question 79

The net present value method can indicate erroneous decisions as it implicitly assumes that project cash flows can be reinvested at the project's rate-of-return.

Question 80

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 is called:

A)the accrued accounting rate-of-return method.
B)the book-value method.
C)internal rate-of-return method.
D)payback method.