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Exam 10: Planning for Capital Investments

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Question 31

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Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years.Assuming the company is subject to a 40% tax rate during the period,and a zero salvage value,what is the depreciable cost of the new asset?

A) $100,000
B) $250,000
C) $400,000
D) Can't be determined from the information provided

E) None of the above
F) A) and B)

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Question 32

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Chichester Company is considering investing in the following two mutually exclusive projects: $\begin{array}{c}\quad \quad \quad \quad \text { Annual Cash Inflows }\\\begin{array}{lll}\text {Year}\\1\\2\\3\\4\\\text {Total}\\\end{array}\begin{array}{c}\text { Project A }\\\hline\$5,000 \\4,000 \\3,000 \\2,000 \\\hline \$ 14,000 \\\hline\end{array}\quad \quad \begin{array}{c}\text { Project B }\\\hline \$ 3,500 \\3,500 \\3,500 \\3,500 \\\hline \$14,000 \\\hline\end{array}\end{array}$ Required: 1)Which project is more desirable strictly in terms of cash inflows? Why? 2)Compute the present value of each project's cash inflows assuming the company's required rate of return is 10%. 3)What is the maximum amount Chichester should be willing to pay for each project? 4)Suppose each project costs $10,000.Which project(s)should be accepted?

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1)Project A is more de...

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Question 33

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Butch's Barbecue thinks that offering delivery will increase their sales.Butch's is considering whether to purchase a used delivery

George Company has the opportunity to purchase an asset that costs $40,000.The asset is expected to increase net income by $10,000 per year.Depreciation expense will be $5,000 per year.Based on this information the payback period is:

Seth Morrison is considering alternative proposals that involve different amounts of investments.To compare different size investment proposals,it may be helpful for Sarah to prepare a relative ranking of the proposals by using a(n) :

What amount of cash would result at the end of one year,if $15,000 is invested today and the rate of return is 8%?

Gordon Company is considering a three-year capital investment that will return $150,000 per year.The present value of this annuity at the company's required rate of return of 12% is $360,275. Required: Complete the table that has been started below to show the return on investment at 12% and the amount of investment recovered each year.Remember that the investment balance should be zero at the end of the three years.(Round to the nearest whole dollar. ) $\begin{array}{|c|c|c|c|c|c|}\hline& \text { a } & \text { b } & \text { c } & \text { d } & \\\hline &\text { Investment } & \text { Annual } & \text { Return on } & \text { Recovered } & \text { Year-end } \\\hline \text {Time} & \text { Balance During } & \text { Cash } & \text { Investment } & \text { Investment } & \text { Investment } \\\hline \text { Period } &\text { the Year } & \text { Inflow } & & & \text { Balance } \\\hline 1&\$ 360,275\\\hline 2 \\\hline 2 \\\hline \end{array}$

Describe what is meant by the time value of money.

Kerwin Company is considering purchase of equipment that costs $50,000.If the useful life is expected to be 5 years and Crown's required rate of return is 12%,what is the minimum annual cash inflow that the equipment must offer for the investment to be acceptable? (Do not round your intermediate calculations.Round your final answer to the nearest dollar. )

Generally,a company should use the MACRS method to calculate depreciation on its income tax return,due to the effects of the time value of money.

Benson Corporation is considering an investment in equipment that would cost $50,000 and provide annual cash inflows of $14,000.The company's required rate of return is 12%;the internal rate of return for the investment is 10.5%.Should the company make this investment?

Which capital budgeting technique defines returns in terms of income instead of cash flows?

Langdon Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $10,000 per year for 3 years.Assuming that Langdon's required rate of return is 8%,what is the present value of these cash inflows? (Do not round your intermediate calculations.Round your final answer to the nearest dollar. )

Joan Osborne is evaluating a potential capital investment.She has calculated the net present value using a minimum rate of return of 10%.Using this rate,the net present value is negative.What does this tell her about the rate of return expected for the project?

Indicate whether each of the following statements is

What is the reinvestment assumption,and how does the assumption affect capital investment analyses?

When a capital investment is expected to provide unequal annual cash inflows,the payback period can be calculated by accumulating the incremental cash inflows until the sum equals the amount of the original investment.

The present value of an annuity of $1 table could be cons

In performing capital budgeting analysis that takes time value of money into account,cash flows generated by a capital project are assumed to be reinvested at the project's rate of return.

Mary needs to have $20,000 one year from today.The formula to compute the amount of money that must be invested today is future value ÷ (1 - interest rate).