## Capital Budgeting Questions and Answers

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Which of the following statements about project life in capital budgeting analyses is most correct? A. In all analyses, project life should reflect the best estimate of the project's actual life....

Which of the following statements is wrong about evaluating two independent projects with normal cash flows? a. Both MIRR and IRR methods will lead to the same decision regarding accepting or rejec...

Define the following term: Capital budgeting.

Consider an investment that cost $150,000 and has a cash inflow of $40,000 every year for 5 years. The required return on the investment is 8%. Find the NPV of the investment and determine if it sh...

Accounting profits, adjusted for taxes and differences in accounting methods, provide the best measure of relevant cash flows for capital budgeting purposes. a. True b. False

Purchase of building is which types of expenditure: a. Capital. b. Revenue. c. Deferred Revenue. d. None of the above.

Rebilt Engines, Inc., the stock has a beta of 1.4 and an expected return of 13.7 percent. The risk-free rate is 5.1 percent. What is the market rate of return? a. 10.77 percent b. 10.84 percent c....

Somsom Bhd, a manufacturing firm, is considering investing $110,000 in a new mainframe computer. It is estimated that the net cash flow per year will be $25,000 and the computer will have a 10-year...

If you want to review a project from a benefit-cost perspective, you should use the _______ method of analysis. A. internal rate of return B. profitability index C. discounted payback D. payback E....

Which of the following statements is normally correct for a project with a positive NPV? a) IRR exceeds the cost of capital. b) Accepting the project has an indeterminate effect on shareholders. c)...

Bryson Sciences is planning to purchase a high-powered microscopy machine for $55,000 and incur an additional $7,500 in installation expenses. It is replacing similar microscopy equipment that can...

Cast Out Co. invested $16,200 in a project. At the end of two years, the company sold the project for $23,800. What annual rate of return did the firm earn on this project?

To what amount will $21,000 invest for 5 years at 5 percent compounded annually accumulate?

When a firm has the opportunity to add a project that will utilize excess factory capacity (that is currently not being used), which costs should be used to determine if the added project should be...

Cookie Ltd. receives a four-year, $100,000, zero-interest-bearing note. The present value of this note is $82,270. What is the implicit rate of interest? a. 9% b. 7% c. 3% d. 5%

Canvas Reproductions Inc., has spent $4500 dollars researching a new project. The project requires $20000 worth of new machinery, which would cost $3000 to install. The company would realize $4000...

Why does capital budgeting rely on the analysis of cash flows rather than on net income?

The management of Weimar, Inc., a civil engineering design company, is considering an investment in a high-quality blueprint printer with the following cash flows: Year Investment Cash Inflow 1 $38...

Which of the following investment rules has value-adding-up property? A. The payback period method B. Net present value method C. The book rate of return method D. The internal rate of return method

Describe how project risk is incorporated into capital budgeting analysis.

Diaz Camera Company is considering two investments, both of which cost $10,000. The cash flows are as follows: Year Project A Project B 1 $6,000 $5,000 2 4,000 3,000 3 3,000 8,000 a-1. Calculate th...

Dragoo Building Inc. has a crane with a book value of $258,000 and a 4-year remaining life. A new crane is available at a cost of $633,000. Dragoo can also receive $49,800 for trading in the old pu...

Determine the term being described by the following statement: Project valuation method that does not consider the time value of money. Choose from the following terms: | Accounting rate of retur...

Project Boulder has a payback period of 2.4 years, NPV of $10,000, and a profitability index of 1.10. Project Flintstone has a payback period of 3.0 years, NPV of $10,000 and a profitability index...

A capital budgeting project has a net present value of $30,000 and a modified internal rate of return of 15%. The project's required rate of return is 13%. What is the internal rate of return? a. g...

The required rate of return is 10%. Year Project A Project B 0 -$2,000 -$2,500 1 $900 $1,500 2 $1,100 $1,300 3 $1,300 $800 a. Calculate the payback period for each project. b. Calculate the net pre...

The ABC Company is considering a new project which will require an initial cash investment of $5,018. The project will produce no cash flows for the first 5 years. The projected cash flows for year...

Suppose an investment offers to triple your money in 12 months. What rate of return per quarter is you being offered?

The chief financial officer has asked you to calculate the net present values and the internal rates of return of two $50,000 mutually exclusive investments with the following cash flows: Year Proj...

Management of a firm with a cost of capital of 12 percent is considering a $100,000 investment with an annual cash flow of $44,524 for three years. What are the investment's net present value and i...

Cash flows used in net present value and internal rate of return analyses ignore: A. future increased sales. B. depreciation expense. C. future cost savings. D. residual value.

A project would be acceptable if A) the net present value is positive. B) the payback is greater than the discounted equivalent annual annuity. C) the equivalent annual annuity is greater than or e...

Which of the following statements is correct? Assuming that the project being considered has normal cash flow, with one outflow followed by a series of inflows. A) A project's regular IRR is found...

Under what conditions would each of these funding methods be recommended to pay for information systems expenses: allocation, chargeback, and corporate budget?

At your first full-time job, you are asked the following question. Project Primary has an initial cost of $18,500 and a market value of $32,600. What is the difference between these two values cal...

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? Capital budget $5,000 % Debt 45% Net income (NI) $5,...

A new project you are considering is expected to generate an operating cash flow of $48,210 and will initially free up $21,630 in net working capital. Purchases of fixed assets costing $67,800 will...

The following information is available for a potential capital investment. Initial investment $120,000 Annual net income $15,000 Net annual cash flow $27,500 Salvage value $20,000 Useful life 8 ye...

A local developer is considering building a 30-unit apartment complex in Seri Iskandar. Because of the long-term growth potential of the area, it is felt that the company could average 88% of full...

Kolby's Korndogs is looking at a new sausage system with an installed cost of $625,000. This cost will be depreciated straight line to zero over the project's five-year life, at the end of which th...

Consider the following information: Investment = $100 million Salvage = $8 million MARR = 12% Life = 15 years Capital Costs are generally defined as investment costs minus salvage value account for...

Truman Industries is considering an expansion. The necessary equipment would be purchased for $9 million, and the expansion would require an additional $3 million investment in working capital. The...

Briarcliff Stove Company is considering a new product line to supplement its range line. It is anticipated that the new product line will involve a cash investment of $700,000 at time 0 and $1 mill...

Under the capital asset pricing model (CAPM), why do all investors hold identical risky portfolios?

The capital budgeting decision criterion that should be used for mutually exclusive investment projects is: a. net present value. b. internal rate of return. c. profitability index. d. payback.

Which of the following needs to be excluded while we calculate the incremental cash flows? a. Depreciation. b. Sunk cost. c. Opportunity cost. d. Non-cash item.

The purpose of a flexible budget is to: A. reduce the total time in preparing the annual budget. B. compare actual and budgeted results at virtually any level of production. C. eliminate cyclical f...

Martell Products Inc. can purchase a new copier that will save $3,000 per year in copying costs. The copier will last for six years and have no salvage value. Required: a. What is the maximum purch...

Consider a project that requires a company to invest $100,000 today. The company expects the project to generate $30,000 per year of cash for the next 5 years. The company's WACC is 12%, the projec...

An investment within a firm. The general manager of a soccer club is considering paying $2.5 million per year for five years for a "star" player, along with a $2 million upfront signing bonus. He e...

PPG manufactures an epoxy amine that is used to protect the contents of polyethylene terephthalate (PET) containers from reacting with oxygen. The cash flow (in millions) associated with the proces...

Calculate the IRR of this investment and state if the IRR rule would give you the same answer as if you follow the NPV rule assuming a discount rate of 10%. Year CF 0 -2,400 1 500 2 1,000 3 1,800 a...

An anticipated purchase of equipment for $1,200,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: Year Net Income N...

A project has an operating cash flow of $24,000. Initially, this 4-year project required $3,000 in net working capital, which is recoverable when the project ends. The firm also spent $8,000 on equ...

A new project you are reviewing will generate an operating cash flow of $19,000. The project will free up $3,500 in net working capital. Initially, $4,500 will be needed for fixed asset purchases....

Lauer's have decided to expand their retail shop by building on a vacant lot they own. The company will build a new building at an estimated cost of $1.8 million. The firm will spend another $400,0...

The XYZ company is planning to put up its own building. Two proposals being considered are: a. The construction of the building now to cost P400,000. b. The construction of a smaller building now t...

Compute the benefit-cost ratio and B-C criterion of the following project: Project cost P80,000 Gross income P25,000 per year Opening cost P6,000 per year Salvage value 0 Life of project 10 years R...

Consider how White Valley River Park Lodge could use capital budgeting to decide whether the $13,500,000. River Park Lodge expansion would be a good investment. Assume White Valley's managers devel...

Sierra Mustard Company estimates the following cash flows and depreciation on a project that will cost $200,000 and will last 10 years with no salvage value: Revenues: Sales revenue $80,000 Operati...

Rand Corporation is considering five different investment opportunities. The company's cost of capital is 12%. Data on these opportunities under consideration are given below. Project Investment ($...

Yohai Corporation is thinking of purchasing Klein Corporation for $70,000 in cash. Yohai's current cost of capital is 16 percent. Klein's estimated overall cost of capital is anticipated to be 14 p...

Antonio is analyzing a project with an initial cost of $34,000 and cash inflows of $28,000 a year for 2 years. This project is an extension of the firm's current operations and thus is equally as r...

Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows: Year Plant Expansion Retail Store Expansion 1 $110,000 $92,000 2 90,000 108...

Why are capital budgeting decisions among the most important decisions in the life of a firm?

An all-equity firm is considering the following projects: Project Beta IRR W 0.65 9.5% X 0.74 10.7% Y 1.33 14.2% Z 1.44 17.3% The T-bill rate is 5.3 percent, and the expected return on the market i...

You invest $1,000 in a junk bond that pays no interest but promises to pay back $5,000 after 12 years. What rate of return do you expect to earn?

Consider the following projects: Project C0 C1 C2 C3 C4 C5 A -1,400 +1,400 0 0 0 0 B -2,800 +1,400 +1,400 +4,400 +1,400 +1,400 C -3,500 +1,400 +1,400 0 +1,400 +1,400 a-1. If the opportunity cost of...

Union Bay Plastics is investigating the purchase of automated equipment that would save $100,000 each year in direct labor and inventory carrying costs. This equipment costs $750,000 and is expecte...

Define the capital budgeting process and explain how it helps managers achieve their goals.

Jimmy Reynolds is considering investing R12,000 in a project with the following cash revenues and expenses: Revenues Expenses Year 1 R20,000 R18,000 Year 2 R22,000 R19,000 Year 3 R22,000 R20,000 Ye...

Assume that a new piece of equipment costs $40,000 and that the tax rate is 30%. Should the new piece of equipment be included in the capital budgeting analysis as a cash outflow of $40,000, or as...

Assume that there are two competing projects, A and B. Project A has a net present value of $1,000 and an internal rate of return of 15 percent; Project B has an NPV of $800 and an IRR of 20 percen...

An investment of $1,000 provides an average net income of $220 with zero salvage value. Depreciation is $20 per year. The accounting rate of return using the original investment is: a. 44 percent....

Mutually exclusive capital budgeting projects are those that: a. If accepted or rejected do not affect the cash flows of other projects. b. If accepted will produce a negative NPV. c. If accepted p...

Capital investments should: a. Earn back their original capital outlay. b. Only be analyzed using the ARR. c. Always produce an increase in market share. d. Always be done using a payback criterion...

What does the organisation monitor in terms of measuring budget performance?

Alfred's requires an average accounting return (AAR) of at least 19 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $141,000. This equipment will have...

Margaret River Wines (MRW) has a project available that will provide after-tax cash flows of $215,000 for the next eight years. The project has more risk than the company, so the general manager ha...

Project A \\ ($200) \\ $100 \\ $100 \\ $100 \\ $100 \\ \\ Project B \\ ($1,000) \\ $400 \\ $400 \\ $400 \\ $400 \\ a) Find the NPV, IRR, PI, and payback period. b) Rank the two projects, which one...

You must evaluate a proposed spectrometer for the R&D department. The base price is $170,000, and it would cost another $42,500 to modify the equipment for special use by the firm. The equipment fa...

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and tha...

Using discounted cash flow models to make capital investment decisions Brighton Manufacturing is considering three capital investment proposals. At this time, Brighton only has funds available to p...

Combi Bhd is considering purchasing a machine that would cost RM201,600 and has a useful life of 9 years. The machine would reduce cash operating costs by RM37,334 per annum. The machine would have...

Year Cash Flow 0 $(10,000.00) 1 $2,000.00 2 $2,000.00 3 $4,000.00 4 $4,000.00 5 $5,000.00 Calculate the payback period, internal rate of return, and net present value.

The Moby Computer Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash flow (I) Cash flow (II) 0 -$20,000 -$3,000 1 10,000 2,500 2 10,000 2,500 3...

Each project should be judged against the: A. The going interest rate at that point in time. B. The cost of new common stock equity. C. None of the above.

Norman, Inc., is considering two mutually exclusive projects. Project A is a six-year project with an NPV of $3,000 and Project B is a four-year project with an NPV of $2,278. Project A has an equi...

Your firm is evaluating the merits of several different machines. Machine A has a useful life of 5 years, generates an NPV of $53,250, an IRR of 13.6%, and an equivalent annual cost of $10,316. Mac...

A project, with a cost of capital of 10%, has the following expected net cash flows: Year NCF 0 -5 1 30 2 -30 1. Calculate the NPV of this project if the cost of capital is 10%. Should the project...

Rambus Inc. would like to purchase a production machine for $325,000. The machine is expected to have a life of three years, and a salvage value of $50,000. Annual maintenance costs will total $12,...

You must evaluate a proposal to buy a new milling machine. The base price is $148,000, and shipping and installation costs would add another $17,000. The machine falls into the MACRS 3-year class,...

The following are the cash flows of the two projects: Year Project A Project B 0 -$350 -$350 1 180 250 2 180 250 3 180 250 4 180 a. If the opportunity cost of capital is 11%, what is the profitabil...

Which one of the following projects should you accept? A. A project with an IRR of 12.7 percent and a required return of 13 percent. B. A project with an NPV of -$121.21. C. A project with a PI of...

How does accounting help the capital allocation process attract Investment capital? a. Provides timely, relevant information. b. Encourages innovation. c. Promotes productivity. d. a and b above.

A firm can lease a truck for 4 years at a cost of $30,000 annually. It can instead buy a truck at a cost of $80,000, with annual maintenance expenses of $10,000. The machine lasts four years. The d...

Hollister & Hollister is considering a new project. The project will require $522,000 for new fixed assets, $218,000 for additional inventory, and $39,000 for additional accounts receivable. Short-...

From a financial manager's perspective, what is the capital-budgeting process used to identify projects that add to the firm's value?

Describe the following method of capital budgeting: Net present value method.

Your neighborhood self-service laundry is for sale and you consider investing in this business. For the business alone and no other assets (such as building and land), the purchase price is $240,00...

Nature's Way Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The garden tool is expected to generate additional annual sales of 1,600 units at $75 each. The new...

Determine the average rate of return for a project that is estimated to yield a total income of $180,000 over five years, has a cost of $400,000, and has a $50,000 residual value.

The following data are accumulated by Lone Peak Inc. in evaluating two competing capital investment proposals: 3D Printer Truck Amount of investment $40,000 $50,000 Useful life 7 years 10 years Est...

A project is estimated to cost $362,672 and provide annual net cash flows of $76,000 for nine years. Determine the internal rate of return for this project.

Determine the average rate of return for a project that is estimated to yield a total income of $36,000 over three years, has a cost of $70,000, and has a $10,000 residual value.

A project has estimated annual net cash flows of $95,200. It is estimated to cost $580,720. Determine the cash payback period.

A project has estimated annual net cash flows of $9,300. It is estimated to cost $41,850. Determine the cash payback period.

Price Industries purchased a piece of milling equipment four years ago for $149,000 and, at the beginning of last year, spent $11,000 to update the equipment with the latest technology. The company...

The accounting rate of return is calculated as: A) The cash flows divided by the total investment B) The average investment divided by the after-tax income C) The after-tax income divided by the to...

Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of $680,000. The lot was recently appraised at $722,000. At the time of the purchase, the company spent $34,000 to gra...

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.94 million. The fixed asset falls into the three-year MACRS class. The project...

The Angry Bird Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 -$69,000 -$17,500 1 31,000 9,450 2 31,000 9,450 3 31...

Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons so that it can expand its desert sunset tours. Various information about the proposed investment follows: Initial in...

Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, an auction house sold a painting at auction for a price of $10,401,500. Unfortun...

Opie, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the...

When evaluating Capital Budgeting decisions, which of the following items should not be included in the construction of cash flow projections for purposes of analysis? a. Land and building expenses...

National Geographic is replacing an old printing press with a new one. The old press is being sold for $350,000 and it has a net book value of $75,000. Assume that National Geographic is in the 40%...

The annualized cost method is used to evaluate alternatives when their useful lives are different. a) True. b) False.

The following data are accumulated by Reynolds Company in evaluating the purchase of $99,000 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $29,000 $49,000 Year 2 $18...

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $840,000, and it would cost another $19,000 to install it. The machine falls i...

Vilas Company is considering a capital investment of $190,000 in additional production facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation...

Consider the following cash flows on two mutually exclusive projects: The cash flows for Project A: -63,000, 43,000, 38,000, and 33,000 for years 0, 1, 2, and 3 respectively. The cash flows for Pro...

You are analyzing a project and have prepared the following data: Year Cash Flow 0 -$169,000 1 $46,200 2 $87,300 3 $41,000 4 $39,000 The required Payback period is 2.5 Years. The required Return is...

Patrick Motors has several investment projects under consideration, all with positive net present values. However, due to a shortage of trained personnel, a limit of $1,250,000 has been placed on t...

The Angry Bird Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 -$67,000 -$17,700 1 30,500 9,550 2 30,500 9,550 3 30...

Which of the following capital budgeting techniques ignores the time value of money? A) Payback B) Net present value C) Internal rate of return D) Two of the above.

A $60,000 outlay for a new machine with a usable life of 15 years is called: A) capital expenditure B) operating expenditure C) replacement expenditure D) None of the above.

The first step in the capital budgeting process is: A) review and analysis B) implementation C) decision-making D) proposal generation

The final step in the capital budgeting process is: A) implementation B) follow-up C) re-evaluation D) education

The most common motive for adding fixed assets to the firm is: A) expansion B) replacement C) renewal D) transformation

Tuttle Enterprises is considering a project that has the followingcash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected. WAC...

Which one of the following correctly defines the average accounting return? A. Average cash flow divided by average book value. B. Average net income divided by average book value. C. Average book...

Precision Metals, Inc. is considering the replacement for its existing lathe, which cost $200,000 at the time of purchase five years ago, and which now has a remaining life of five years with no sa...

A new machine can be purchased for $1,000,000. It will cost $65,000 to ship and $35,000 to modify the machine. A $30,000 recently completed feasibility study indicated that the firm can employ an e...

The firm should accept independent projects if: A. the payback is less than the IRR B. the profitability index is greater than 1.0 C. the IRR is positive D. the NPV is greater than the discounted p...

The accounting rate of return on stockholders' investments is measured by: A. return on assets B. return on equity C. operating income return on investment D. realized rate of inflation

A situation in which the taking of one investment will prevent the taking of another is called a(n) _____. a. stand-alone investment b. opportunity cost c. marginal revenue investment d. mutually e...

Sagara shipping company Ltd. is exploring expansion possibilities for 2021 and beyond by buying more ships. A suitable new ship would cost Rs. 6 million and has an expected life of 4 years. A ship...

When making capital budgeting decisions for a firm, the average net income divided by the average book value equals the ____. a. average accounting return b. net present value c. internal rate of r...

The difference between an investment's market value and its cost is called the ____. a. discounted cash flow b. net present value c. average accounting return d. probability index

A situation in which a company can't raise financing for a project under any circumstances is called ____. a. simulation analysis b. operating leverage b. hard rationing d. forecasting risk

A cost that has already been incurred and that should therefore not be considered in an investment decision is called a(n) ____. a. pro forma b. erosion c. sunk cost d. opportunity cost

The Shine Clothing Factory wants to replace an old machine with a new one. The cost of the new machine is Rs. 360,000. The supplier is willing to deduct Rs. 10,000 for providing the old machine to...

Which of the following statements is correct? A) The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions...

Preston Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return? a....

Amazon.com stock prices gave a realized return of 5%, -5%, 10%, and -10% over four successive quarters. What is the annual realized return for Amazon.com for the year?

Generally speaking, when ranking two mutually exclusive investments with different initial amounts, management should give first priority to the project: A. that generates cash flows for the longer...

The decision technique that measures the estimated performance of a capital investment by dividing the project's annual after-tax income by the average investment cost is called the: a. Break-even...

The MHS Chief Financial Officer is considering alternate proposals for the hospital radiology department. The Director of Radiology has suggested purchasing one of two pieces of equipment. Machine...

What are the strengths and weaknesses of the following methods in investment or financial appraisal? Payback, return on capital employed, net present value, and internal rate of return.

Britannia Company has two investment opportunities. A cash flow schedule for the investments is provided below: Year Investment A Investment B Year 0 ($5,000) ($6,000) Year 1 2,000 3,000 Year 2 2,0...

Butler Corp paid a dividend today of $5 per share. The dividend is expected to grow at a constant rate of 6.5% per year. If Butler Corp stock is selling for $50.00 per share, the stockholders' expe...

True or False: If its IRR is greater than the cost of capital, a project should be accepted.

True or False: If the NPV is greater than the cost of capital, a project should be accepted.

Capital budgeting is concerned with: 1. whether a company's assets should be financed with debt or equity. 2. managing a firms cash budgeting procedures. 3. what long-term investments a firm should...

Fill in the blank. To determine the interest paid each compounding period, take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest r...

Following is information on two alternative investments being considered by Jolee Company. The company requires a 12% return on its investments. Project A Project B Initial investment $(189,325) $(...

A project that carries a normal amount of risk and does not affect the risk exposure of the firm should be discounted back at the ____. a. coefficient of variation b. beta c. risk-free rate d. weig...

In a replacement decision, if an old asset sells below book value, from a tax standpoint there is _____. a. a decrease in cash flow b. an increase in cash flow c. no effect on cash flow d. a decrea...

The internal rate of return and net present value methods ____. a. always give the same investment decision answer b. never give the same investment decision answer c. usually give the same investm...

What is the present value of a perpetuity that pays you $50,000 a year, with the first payment paid today, the interest rate is 5%?

Which one of the following is included when calculating the cash flow in a capital budgeting decision? a) Depreciation on old equipment b) Depreciation on new equipment c) Net book value of old equ...

A firm has a $100 million capital budget. It is considering two projects, each costing $100 million. Project A has an IRR of 20%; has an NPV of $9 million; and will be terminated after 1 year at a...

Briefly describe the term discount rate adjustment technique.

Kaul Construction must choose between two pieces of equipment. Tamper A costs $600,000 and it will last five years. This tamper will require $110,000 of maintenance each year. Tamper B costs $750,0...

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.31 million. The fixed asset will be depreciated straight-line to zero...

You are evaluating two different silicon wafer milling machines. The Techron I costs $279,000, has a three-year life, and has pretax operating costs of $76,000 per year. The Techron II costs $485,0...

Because of the uncertainty and large cost involved in investments in automated equipment, any intangible benefits from these projects should be ignored. True or false?

When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inf...

When considering a number of investment projects, the project that has the best payback period will also always have the highest net present value. True or false?

Both the net present value method and the internal rate of return method can be used as screening tools in capital budgeting decisions. True or false?

The net present value (NPV) method of investment project analysis assumes that the project's cash flows are reinvested at the A) internal rate of return. B) discount rate used in the NPV calculati...

Consider the two projects below. The cash flows as well as the NPV and IRR for the two projects are given. For both projects, the required rate of return is 10%. Cash flow Year 0 1 2 3 4 NPV IRR (%...

Kim Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10%. What is the pro...

You and your friends are thinking about starting a motorcycle company named Apple Valley Choppers. Your initial investment would be $500,000 for depreciable equipment, which should last 5 years, an...

Southern California Publishing Company is trying to decide whether or not to revise its popular textbook, Financial Psychoanalysis Made Simple. They have estimated that the revision will cost $40,0...

Rieger International is attempting to evaluate the feasibility of investing $83,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the propo...

Mason Co. is evaluating two alternative investment proposals. Below are data for each proposal: Proposal A Proposal B Initial investment cost $84,000 $96,000 Estimated useful life 5 years 6 years E...

True or False: Under the annual rate of return method, a project is acceptable if its rate of return is less than management's minimum rate of return.

True or False: A simple method of comparing alternative projects that takes into account both the size of the original investment and the discounted cash flows is the profitability index.

True or False: The process of making capital expenditure decisions in business is known as capital budgeting.

What is the most prominent issue faced by a financial manager in any capital budgeting decision?

You can buy property today for $3 million and sell it in 5 years for $4 million. (You earn no rental income on the property.) a. If the interest rate is 8 percent, what is the present value of the...

A project costs $10 million and has NPV of $2.5 million. The NPV is computed by 1 answer below Flotation Costs. A project costs $10 million and has NPV of $2.5 million. The NPV is computed by dis...

Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales incre...

Mutually exclusive investments are investments that if you do one: a. you must do the other. b. you will not do the other. c. has no effect if you do the other. d. you cannot afford to do the o...

Project S has a cost of $9,000 and is expected to produce benefits (cash flows) of $2,700 per year for 5 years. Project L costs $26,000 and is expected to produce cash flows of $7,100 per year for...

We are examining a new project. We expect to sell 10,000 units a year of a new golf video at $200 net cash flow each for the next five years. The relevant discount is 15 percent and the initial req...

A project has an initial cost $60,000, expected net cash inflow of $10,000 per year for 8 years, and a cost of capital of 12%. a) What is the project's NPV? b) What is the project's IRR? c) What i...

You are considering a project with an initial cash outlay of 60,000 Lira and expected free cash flows of 20,000 Lira at the end of each year for 5 years. The required rate of return for this projec...

Which of the following is the most reliable method for making capital budgeting decisions? a. ROR method b. Post-audit method c. NPV method d. Payback method

Which of the following methods does not consider the investment's profitability? a. ROR b. Payback c. NPV d. IRR

Home Publications Inc. is considering two new magazine products. The estimated net cash flows from each product are as follows: Year Home & Garden Music Beat 1 $173,000 $145,000 2 $142,000 $170,000...

Mrs. Leskoshe, VP of operations at ADM, has to decide between two investment alternatives. The first investment is to invest in Machine-A and the second investment is to invest in Machine-B. Mrs. L...

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $335,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $33...

Capital budgeting decisions are risky because: a. the outcome is uncertain. b. large amounts of money are usually involved. c. the investment involves a long-term commitment. d. the decision co...

When would you prefer a savings plan with high liquidity over one with a high rate of return? Explain your answer.

A newly constructed bridge costs $5,000,000. The same bridge is estimated to need renovation every 15 years at a cost of $1,000,000. Annual repairs and maintenance are estimated to be $100,000 per...

Davidson Company uses the equity method and acquired 30% of the common stock of Otter Corporation at underlying book value. For the same year, Otter reported net income of $25,000, which includes a...

Brady Service Center just purchased an automobile hoist for $32,560. The hoist has an 8-year life and an estimated salvage value of $3,340. Installation costs and freight charges were $3,531 and $8...

A factory costs $890,000. You reckon that it will produce an inflow after operating costs of $179,000 a year for 13 years. a. If the opportunity cost of capital is 15%, what is the net present valu...

The accounting rate of return uses cash flows in its calculation. a. True. b. False.

A group of private investors borrowed $30 million to build 300 new luxury apartments near a large university. The money was borrowed at 6% annual interest, and the loan is to be repaid in equal ann...

Da Miao Company had an investment that cost $260,000 and led to a salvage value at the end of its useful life of zero. If Da Mario's expected annual accounting net income is $15,000, the Annual Ave...

The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net i...

The owner of a business is considering investing $55,000 in new equipment. He estimates that the net cash flows will be $5,000 during the first year, but will increase by $2,500 per year the next y...

Sunbelt Corporation, an investment company, is considering building a 50-unit apartment complex in a growing area near Tucson, Arizona. Since the long-term growth potential of the town is excellent...

Maintenance money for a new building has been sought. Mr. Kendall would like to donate to cover all future expected maintenance costs for the building. These maintenance costs are expected to be $5...

A large food-processing corporation is considering using laser technology to speed up and eliminate waste in the potato-peeling process. To implement the system, the company anticipates needing $3....

Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$400,000 -$100,000 1 $ 55,000 $ 34,000 2 $ 75,000 $ 32,000 3 $ 75,000 $ 30,000 4 $450,000 $ 20,000...

Carmel Corporation is considering the purchase of a machine costing $43,000 with a 6-year useful life and no salvage value. Carmel uses straight-line depreciation and assumes that the annual cash i...

Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $287,100. A new salon will normally generate annual revenues of $61,185, wi...

A company is planning to purchase a machine that will cost $30,600, have a 6-year life, and be depreciated over a three-year period with no salvage value. The company expects to sell the machine's...

Calculate the IRR and NPV for the following capital project: The initial outlay is $700,000.00. The Net Cash Flow is constant at $118,861.00 for 10 years. The salvage value is zero. The required ra...

Which of the following methods of analyzing capital investments factors in the time value of money? A. Payback period. B. Internal rate of return. C. Accounting rate of return. D. All of the above...

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 7% of par, and a current market price of: A. $68.00 B. $78.00 C. $116.00 D. $147.0...

Match the following business activities to the steps in capital budgeting process. A step may match more than one activity. Business activities: 1. A manager evaluates progress one year into the p...

Park Co. is considering an investment that requires immediate payment of $37,500 and provides expected cash inflows of $10,600 annually for four years. If Park Co. requires a 5% return on its inves...

Quintana Electronic Company is considering purchasing new robot-welding equipment to perform operations currently being performed by less efficient equipment. The new machine s purchase price is $1...

Xiao Miao company projects an increase in accounting net income of $225,000 each year for the next five years if it invests $900,000 in new equipment. The equipment has a five-year life and an esti...

Legend Service Center just purchased an automobile hoist for $33,600. The hoist has an 8-year life and an estimated salvage value of $3,290. Installation costs and freight charges were $4,220 and $...

Quintana Company decided to purchase the Model A equipment. Two years later, even better equipment (called Model B) came onto the market, making Model A obsolete, with no resale value. The Model B...

Georgia Ceramic Company has an automatic glaze sprayer that has been used for the past 10 years. The sprayer can be used for another 10 years and will have a zero salvage value at that time. The an...

Project A requires a $400,000 initial investment for new machinery with a five-year life and a salvage value of $37,500. The company uses straight-line depreciation. Project A is expected to yield...

The Daily Brew has a debt-equity ratio of 0.64. The firm is analyzing a new project that requires an initial cash outlay of $420,000 for equipment. The flotation cost is 9.6 percent for equity and...

Vextra Corporation is considering the purchase of new equipment costing $42,000. The projected annual cash inflow is $12,400, to be received at the end of each year. The machine has a useful life o...

Fimbrez Corporation has provided the following data concerning an investment project that it is considering: Initial investment $270,000 Annual cash flow $125,000 per year Expected life of the proj...

Edders, Inc. has a truck purchased seven years ago at a cost of $6,000. At the time of purchase, the ultimate salvage value was estimated at $500, but salvage value was ignored in depreciation dedu...

A piece of labor-saving equipment has just come onto the market that Mitsui Electronics, Ltd., could use to reduce costs in one of its plants in Japan. Relevant data relating to the equipment follo...

Paris Ltd is considering the purchase of a new equipment. The following data are available for this project: \\ Equipment cost: $20,000 Estimated life: 5 years Estimated residual value: $2,000...

Cardinal Company is considering a project that would require a $2,810,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equ...

Salt River Company is evaluating a capital expenditure proposal that has the following predicted cash flows: Initial investment: $46,420 Operation Year 1: $20,000 Year 2: $20,000 Year 3: $20,000...

Sheridon Corporation is investigating automating a process by purchasing a new machine for $521,000 that would have a 5-year useful life and no salvage value. By automating the process, the company...

Explain the procedure of control, including tools for changing the budget and the discretion-abuse-control cycle, concerning the congressional defense budget process.

Which is included in a Capital budget? (A) Income received from public borrowings. (B) Income received from tax-sources. (C) Income received from non-tax sources. (D) All of the above.

Chee Corporation has gathered the following data on a proposed investment project: Investment required in equipment $610,000 Annual cash inflows $88,000 Salvage value $0 Life of the investment 16...

Consider the three mutually exclusive alternative investments for a period of 50 years. Alt. A Alt. B Alt. C PWC -160 -189 -172 PWB 208 238 218 Determine which investment is preferable by using inc...

Which of the following questions do all types of capital budgeting techniques try to answer? a. Is the investment too expensive? b. Do the future benefits from the investment exceed the cost of mak...

Determine whether the following statement is true or false: When the internal rate of return is the same as the required rate of return, the net present value of an investment will be positive.

Determine whether the following statement is true or false: Net present value and internal rate of return consider the time value of money, so they are appropriate for longer-term capital investmen...

Determine whether the following statement is true or false: Two methods of analyzing potential capital investments - payback and accounting rate of return - ignore the time value of money.

Suppose that Metrics, Inc., has a capital budgeting for the upcoming year of 100 million and expects a net income of 80 million. The firm's optimal capital structure is 40% debt and 60% equity. If...

Permit Industries has $135,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B Cost of equipment required $135,000 $0...

The Jackson Company has invested in a machine that cost $90,000, has a useful life of nine years, and has no salvage value at the end of its useful life. The machine is being depreciated by the str...

A corporation requires a minimum rate of return of 5% on its invested capital. The cost of capital is currently averaging 4% per year. If a specific project is expected to result in a 7.5% per year...

Kenny. Inc.. is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $8 million in anticipation of using it as a warehouse and distribution...

You are considering purchasing a CNC machine which costs $150,000. This machine will have an estimated service life of 10 years with a net after-tax salvage value of $15,000. Its annual after-tax o...

Watson Corporation is considering buying a machine for $25,000. Its estimated useful life is 5 years, with no salvage value. Watson anticipates an annual net income after taxes of $1,500 from the n...

Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $400,000, has an expected useful life of 10 years, a salvage value of zero, and is...

A cash purchase is similar to a capital budgeting decision. a. True. b. False.

Cash outflows generated by capital investments include all of the following except: a. depreciation expense. b. increase in the required amount of working capital. c. transportation costs. d. i...

The transactions for the year 2017 for Brilliant Architects have already been recorded. This problem shows how to prepare adjusting entries for Brilliant Architects for December 2017. - Dec. 31....

Roger is considering the expansion of his business into a property he purchased two years ago. Which of the following items should not be included in the analysis of this expansion? a. Roger can l...

The rate of return on investment also called the yield, is the relationship between the yearly (annual) inflow from the investment and the cost of the investment. For example, a $100 savings accoun...

If Tom invests $120,000 in a taxable corporate bond that provides a 7 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assu...

A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000. The lot was purchased for $50,000. How do you determine the...

When the internal rate of return is the same as the required rate of return, the net present value of an investment will be positive. a. True b. False

The net present value and internal rate of return methods are appropriate for longer-term investments because they ignore the time value of money. a. True b. False

The rate of return which equates the net present value to zero is the: a) hurdle rate. b) internal rate of return. c) payback return. d) accounting rate of return.

Which of the following techniques uses time value of money concepts? a) payback method b) internal rate of return c) accounting rate of return d) relative sales value method

Sibble Corporation is considering the purchase of a machine that would cost $440,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $82,000. By reducin...

Your company, Apollo, operates in the manufacturing industry, with a market leading product called Rover. This product currently brings in a quarter of the organization's revenue and is responsible...

Mcvean Corporation to make one of its products. A total of 13,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing t...

Project Alpha requires an initial outlay of $35,000 and results in a single cash inflow of $56,367.50 after five years. (a) If the cost of capital is 8%, what are Alpha's NPV and PI? Is the projec...

An investment of $5,000 provides an average net cash flow of $320 with zero salvage value. Depreciation is $35 per year. The accounting rate of return using the original investment is __________.

When two projects are mutually exclusive, accepting one project implicitly eliminates the other. True False

The goal of the capital budgeting decisions is to select capital projects that will decrease the value of the firm. True False

The process of selecting among potential major corporate investments is called capital budgeting. True False

Brady Service Center just purchased an automobile hoist for $33,260. The hoist has an 8-year life and an estimated salvage value of $3,790. Installation costs and freight charges were $3,826 and $7...

When most people refer to mean rate of return, they are referring to the: A. holding period rate of return B. arithmetic average rate of return C. geometric average rate of return D. cumulative ave...

The discounted cash flow methods of evaluating capital investments are superior because they consider both the time value of money and the profitability of the investment. a. True b. False

Explain the steps to be followed during the capital budgeting decision-making process.

Explain the term "capital budgeting" and give some of its importance.

A company is planning to purchase a machine that will cost $35,400, have a six-year life, and be depreciated over a three-year period with no salvage value. The company expects to sell the machine'...

During August, Diga Corporation plans to serve 34,000 customers. The company uses the following revenue and cost formulas in its budgeting, where q is the number of customers served: Revenue: $4.4...

XYZ Company has a large number of potential investment opportunities that are acceptable. However, XYZ Company does not have enough investment funds to invest in all of them. Which calculation woul...

______ is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth. a. Ratio analysis b. Recapitalizing assets c. Capital bu...

Consider four mutually exclusive alternatives: | | A | B | C | D | Initial cost | $100 | $80 | $60 | $50 | Annual benefit | $12.2 | $12.0 | $9.7 | $12.2 | Salvage value | $75 | $50 | $50 | $0 Ea...

A machine costs $200,000 and is expected to yield an after-tax net income of $5,000 each year. Management predicts this machine has an 8-year service life and a $40,000 salvage value, and it uses s...

When we evaluate investment projects,

All of the following are examples of capital investment decisions except: a. performing routine maintenance on equipment. b. purchasing vehicles. c. constructing an addition on a building. d. inst...

A company is deciding to invest in a new project at a cost of $2 million dollars. The cost of capital is 6%. Projected annual cash flows are: Year 1 $500,000 Year 2 $600,000 Year 3 $700,000 Year 4...

The Regal Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $14,100 in labor costs per month. Company-owned vehicles n...

A company buys a machine for $69,000 that has an expected life of 7 years and no salvage value. The company anticipates a yearly net income of $3,300 after taxes of 38%, with the cash flows to be r...

Suppose Francine Dunkelberg's Sweets is considering investing in warehouse-management software that costs $550,000, has a $75,000 residual value, and should lead to cost savings of $130,000 per yea...

Which of the following does not use the time value of money? A. Accounting rate of return B. Internal rate of return C. Net present value D. None of the above

Brady Service Center just purchased an automobile hoist for $31,800. The hoist has an 8-year life and an estimated salvage value of $3,460. Installation costs and freight charges were $3,704 and $7...

Compute the rate of return for a project that has an initial cost of $35,000 and would provide positive cash flows of $6,000 the first year, $7,000 the second year, $8,000 the third year, $9,000 th...

The following are 10 technical accounting terms. Net present value Capital budgeting Incremental analysis Discount rate Payback period Present value Sunk cost Salvage value Return on avera...

Find internal rate of return of a project with an initial cost of $43,000, expected net cash inflows of $9,550 per year for 8 years, and a cost of capital of 8.35%. a. 11.47% b. 16.54% c. 13.70%...

Jacob Elsea, CFO of Colburn Enterprises, is evaluating an opportunity to invest in additional manufacturing equipment that will enable the company to increase its net cash inflows by $200,000 per y...

"We R Toys" (WRT) is considering expanding into new geographic markets. The expansion will have the same business risk as WRT's existing assets. The expansion will require an initial investment of...

NPV calculations seem scientific and precise. What aspects of the NPV process involve judgment?

Darth Vader, Inc. is looking at setting up a new manufacturing plant in Death Star to produce TIE fighters. The company bought some land a decade ago for $40 billion. The land was appraised recentl...

Clairmont Corporation is considering the purchase of a machine that would cost $170,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $19,000. By redu...

Budgets are: a. required by Generally Accepted Accounting Principles (GAAP). b. future-oriented. c. only used by large corporations. d. prepared by the Controller for the entire company.

What are the two major approaches to the investment process?

Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would co...

University of Rochester Medical center is considering purchasing an ultrasound machine for $1,135,000. The machine has a 10-year life and an estimated salvage value of $40,000 (assume straight-line...

If the sign of the cash flows for a project changes two times, then the project likely has: A. one IRR. B. two IRRs. C. three IRRs. D. four IRRs.

The following are measures used by firms when making capital budgeting decisions except: A. Payback period. B. Internal rate of return. C. P/E ratio. D. Net present value.

Given the following cash flows, the appropriate required rate of return is 10%. Year Cash flows 0 -$50,000 1 $25,000 2 $25,000 3 $25,000 4 -$25,000 5 $25,000 6 $25,000 A. What is the project's MIRR...

What are some factors to be considered in making capital investment decisions?

Post-audits offer an incentive for managers to provide accurate estimates for capital budgeting decisions. A. True B. False

To evaluate long-term investments using the net present value approach, future cash flows of these investments must be stated in future value equivalents. A. True B. False

The following project is being considered in this year's capital budget. Calculate the NPV, the IRR, and the MIRR for the projects and indicate the correct adopt-reject decision. Your firm's cost o...

Which of the following should NOT be considered when determining the analysis for a project? a. Time Value of Money b. Cost of Capital c .Cost of borrowed money d. Inflation e. Sunk Costs

You are considering investing in a project that is a cost-cutting proposal. Additional net revenues from the project are expected to equal $83.33 for each of the three years of the project life. Th...

Consider the current budget problem of many states. What is it? Explain. What are the two basic choices for them to get out of financial trouble? Explain the impact of each.

Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$342,000 -$50,500 1 $53,000 $24,800 2 $73,000 $22,800 3 $73,000 $20,300 4 $448,000 $15,400 Whichever proj...

Dilwater Furniture purchased a corner lot in Pittsburgh five years ago at a cost of $890,000. The lot was recently appraised at $1,070,000. At the time of the purchase, the company spent $80,000 to...

Long-term investments are made by the manager of an investment division for the purpose of: a. increasing profits. b. decreasing profits. c. increasing interest liability. d. decreasing debt liabi...

What is a budget? Why is it important?

What is the present-day value of a 10-year coupon bond with a face value of $1,000 and a coupon rate of 7%, if the market interest rate is 7%?

Troy has offered you the following annual return on a $100,000 investment. Year 1 $10,000 Year 2 $20,000 Year 3 $30,000 Year 4 $40,000 Year 5 $50,000 Evaluate the investment assuming you have a tar...

Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $136,000 and will increase annual expenses by $74,000 including depre...

If a company's required rate of return is 10% and, in using the net present value method, a project's net present value is zero, this indicates that the _____. a. project's rate of return exceeds 1...

The following data concerns a proposed equipment purchase: | Cost | $145,900 | Salvage value | $4,100 | Estimated useful life | 4 years | Annual net cash flows | $46,200 | Depreciation method | St...

Project ABC is under consideration. Annual cash flows equal $50,000 per year for 5 years. During the first three years, the required rate of return is 2 percent. The required rate of return for cas...

Trower Corp. has a debt-equity ratio of .80. The company is considering a new plant that will cost $106 million to build. When the company issues new equity, it incurs a flotation cost of 7.6 perce...

After-tax net income divided by the average amount invested in a project is the ___________.

The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows: Year Project A Project B Project C 0 -$185,000 -$350,000 -$185,000 1 121,000 220,000 13...

The Fitzhugh Division of General Enterprises has a negative residual income of $540,000. Fitzhugh's management is contemplating an investment opportunity that will reduce this negative amount to $4...

The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows: Year Project A Project B Project C 0 -$185,000 -$350,000 -$185,000 1 121,000 220,000 131...

A Project manager would like to select the more economical of two alternatives for excavation dust control. Help the project manager evaluate and select the proper alternative knowing that the esti...

The main concept to investing is diversifying your investments. The old saying of "don't put all of your eggs in one basket" exemplifies this concept. Kerry Stutsman has saved $2,400 and is wonder...

Brenda has received a $10,000 gift from her mother and is trying to decide how to invest it. She thinks she would like to invest it in stocks because she knows that stocks have been earning about 1...

In reviewing the accounting records of the transportation services fund, an internal service fund of Douglas city, you notice that the fund uses budgetary accounts. this is most likely because

Your company has a cost of capital equal to 10%. If the following projects are mutually exclusive, and you only have the information that is provided, which should you accept? A B C E Payback (year...

A company buys a color printer that will cost $18,000 to buy and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this dea...

Magic Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $133,306 and have an estimated useful life of 7 years. It will be sold for $65,400...

The costs and revenues associated with two alternatives are listed below: Alternative 1 Alternative 2 Projected revenue $120,000 $150,000 Unit-level costs $24,000 $36,000 Batch-level costs $24,000...

The following data have been gathered for a capital investment decision. Cash inflows: Year 1 $40,000 Year 2 $50,000 Year 3 $30,000 Year 4 $40,000 Year 5 $40,000 The minimum rate of return for this...

"I'm not sure we should lay out $250,000 for that automated welding machine," said Jim Alder, president of the Superior Equipment Company. "That's a lot of money, and it would cost us $80,000 for s...

You have a 1999 Nissan that is expected to run for another three years, but you are considering buying a new Hyundai before the Nissan wears out. You will donate the Nissan to Goodwill when you buy...

Which of the following does NOT represent an option to abandon a project? A. Your friend builds a custom-made home. B. You enroll in five classes, planning to drop one class before the semester e...

A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount rate changes from 12% to 15%, what is the change in the NPV of the project (approxima...

A firm is considering three possible one-year investments, which we will name X, Y, and Z. Investment X would cost $10 million now and would return $11 million next year, for a net gain of $1 milli...

A company purchases a piece of manufacturing equipment for rental purposes. The expected income is $10,000 the first year and increases by $100 every year thereafter. Its useful life is 6 years. Ex...

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at int...

A flexible budget is a summary of expected costs for a range of activity levels and is geared to changes in the level of productive output. True or False?

A project has a one-year life. It has an outlay of Rupee 1,500 million. At the end of Year 1, the net inflow is likely to be Rupee 2,200 million. The pretax cost of debt is 11%, the cost of equity...

Would you invest in the P'kolino firm? Why or why not? Share the reasoning and the rationale for your decision to invest or not invest in this firm.

A firm has a capital budget of $100 which must be spent on one of two projects, each requiring a present outlay of $100. Project A yields a return of $120 after one year, whereas Project B yields $...

A firm is considering a project which involves investing $100 now for a return of $112 a year from now. What are the values of the following variables? A. The marginal productivity of the capital...

Using a 5% discount rate, calculate the Net Present Value, Payback, Profitability Index, and IRR for the investment project below: Initial Invest = $800,000, cash inflows of $300,000 for years 1-5...

Using a 5% discount rate, calculate the Net Present Value, Payback, Profitability Index, and IRR for the investment project below: Initial invest = $500,000, cash inflows of $100,000 for years 1-5...

Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $24,200. Each project will last for 3 years and produce the following net annual cash...

Tooth Tortures is considering an addition to their building. They estimate the construction of the new office to total $220,000. Their cost of capital is 12%. They have forecasted the following cas...

The owners of Up Right Paddlers Company anticipate selling a new product, which is a stand-up paddle board for streams and rivers, for $100 each. They estimate the fixed cost for equipment and spac...

A contractor is trying to decide between a gasoline or a diesel bulldozer engine. The gasoline engine will cost $2,000 and have an annual maintenance cost of $200. It will consume $7.20 per hour wo...

Connor Corporation is considering two projects. For your analysis, assume these projects are mutually exclusive with a required rate of return of 10%. Compute the net present value, the profitabil...

What do organizations invest most of their capital in, and how liquid is their capital once invested.

The ABC Corporation, a merchandising firm, has budgeted its activity for November according to the following information: - Sales at $450,000, all for cash. - Merchandise inventory on October 31...

Professor Shelley is creating a budget for her recently awarded a research grant. Her research requires a heavy-duty generator that has an initial cost of $39,135. She estimates she will need to pa...

ABX is facing two mutually exclusive projects (Gold & Copper) both have project WACC of 5 %. Project Gold has a payback of 2 years, NPV of $80,000, and IRR of 17 %. However Project Copper has a pay...

Butler Corporation is considering the purchase of new equipment costing $75,000. The projected annual after-tax net income from the equipment is $2,700, after deducting $25,000 for depreciation. Th...

Simply Chocolate is considering two possible expansion plans. Prop X involves opening 5 stores in Indiana at the cost of $2,400,000. Under Prop Y, the company would focus on Kentucky and open 6 sto...

Cardinal Company is considering a project that would require a $2,782,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equ...

A local company is considering in investing in new, more productive equipment. Data concerning the three best alternatives are shown below. The useful life of the equipment is 20 years and MARR =7%...

A project produces an annual net income of $11,500, $13,700, and $16,900 over the three years of its life, respectively. The initial cost of the project is $257,000. This cost is depreciated straig...

MacDonald Publishing is considering entering a new line of business. The new business will require a capital expenditure of $5 million at t = 0. This expenditure will be used to purchase new equipm...

The lower the interest rate, the lower the: A. present value B. net present value C. Both present value and net present value are correct. D. Neither present value nor net present value is correct.

Let i = 15% per year, compounded anually. Determine the NPV of the following cash flows.

Suppose a hospital writes checks of $100,000 per day and it takes, on average, seven days for them to be received by and clear the banking system. Furthermore, the hospital receives $120,000 in che...

When Long Term Capital Management (LTCM) was selling Put options on European equity indices, LTCM was betting that: A. The options could be directly exchanged for stock shares when LTCM exercised t...

A firm is considering an investment. The most likely data values were found during the feasibility study. Analyzing past data of similar projects shows that optimistic values for the first cost and...

Vasquez Corporation is considering investing in two different projects. It could invest in both, neither, or just one of the projects. The forecasts for the projects are as follows. | | Project A...

In capital budgeting computations, discounted cash flow methods: A. automatically provide for recovery of the initial investment B. can't be used unless cash flows are uniform from year to year C....

Consider a 30-year, 2% coupon-rate bond, selling at par. Suppose the yield on long bonds is 4% next year. What is the one-year rate of return?

Consider a project with the expected cash flows: Year Cash flow 0 -$815,000 1 $141,000 2 $320,000 3$ 440,000 A. What is this project's internal rate of return? B. If the discount rate is 1%, what...

Labeau Products, Ltd., of Perth, Australia, has $34,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: Invest in Project X Invest in Project Y Inv...

In ranking choices with the break-even time (BET) method, the investment with the longest BET gets the highest rank. a. True b. False

Bon Terra Resources Inc. wants to purchase a new tunnel boring machine (TBM). There are three options, with the following information. Options Useful Life (years) Initial Cost Annual Maintenance Co...

The computation of operating income for Frisco Company for 2008 follows: Sales $1,800,000 Cost of goods manufactured and sold: Direct materials $360,000 Direct labor 240,000 Variable manufacturing...

You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.4 million, which will be depreciated straight-line to ze...

Your investment advisor has offered you an investment that will provide you with one cash flow of $152,000 at the end of 35 years if you pay premiums of $250 per year at the end of each year for 35...

Calculate the MIRR given the following cash flows if the appropriate required rate of return is 12% (use this as the investment rate). Year Cash Flow ($) 0 -40,000 1 35,000 2 35,000 3 35,000 4 -35,...

Artie's Wrestling Stuff is considering building a new plant. This plant would require an initial cash outlay of $8 million and will generate annual free cash inflows of $1 million per year for 8 ye...

Wendell's Donut Shoppe is investigating the purchase of a new $39,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings...

The general rule in capital budgeting decisions is to: A. accept projects with rates of return greater than the cost of capital B. reject projects with rates of return greater than the cost of capi...

Camp. Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into t...

Saxon Products, Inc., is investigating the purchase of a robot for use on the company's assembly line. Selected data relating to the robot are provided below: Cost of the robot $1,750,000 Installat...

If you insulate your office for $21,000, you will save $2,100 a year in heating expenses. These savings will last forever. a. What is the NPV of the investment when the cost of capital is 4%? 10%?...

The net present value of a project is normally distributed with an expected value of $1,258,900 and a standard deviation of $960,850. Determine the probability that the project will have a net pres...

What are the channels for an investor to seek out an investment opportunity?

The reason that cash flows, not accounting income, are used in capital budgeting is because: A. Cash rather than income is used to make new investments. B. Value is determined on the basis of proje...

Last year, Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. W...

Automated Manufacturers use high-tech equipment to produce specialized aluminum products for their customers. Each one of these machines costs $1,480,000 to purchase plus an additional $49,000 a ye...

The appropriate rate to be used for evaluating a long-term investment proposal can be referred to as all of the following except: A. the required rate of return. B. the discount rate. C. the cash f...

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS 3-year class, and it will be sol...

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