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Exam 16: Planning for Capital Investments

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Question 21

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Southport Company is considering the purchase of a piece of equipment that costs $100,000. The equipment would be depreciated on a straight-line basis to its expected salvage value of $10,000 over its 10 years useful life. Assuming a tax rate of 40%, what is the annual amount of the depreciation tax shield provided by this investment?

A) $4,000
B) $9,000
C) $3,600
D) None of these answers is correct.

E) B) and C)
F) B) and D)

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Question 22

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Which of the following is not a factor in explaining why the present value of a future dollar is less than one dollar?

A) Inflation
B) Interest
C) Risk of failure to receive expected cash inflows
D) Historic cost

E) A) and D)
F) C) and D)

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Question 23

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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.

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

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.

Which of the following is the approximate internal rate of return for an investment that costs $33,550 and provides a $5,000 annuity for 10 years?

Which of the following does not represent an advantage of the unadjusted rate of return over the payback method for evaluating capital projects?

Because of the expense of applying multiple techniques, managers should use a single capital budgeting technique to analyze potential capital investments.

Six years ago, Neighborhood Hardware paid a contractor $45,000 to expand the store. At that time, the company calculated a net present value of about $6,000 for the expansion. Now, the company believes that the investment increased annual cash inflows by $8,000 per year for each of the six years. The company has a desired rate of return of 10%. Ignoring income tax considerations, what was the net present value actually achieved for this capital investment? (Do not round your intermediate calculations. Round your answer to the nearest dollar.)

A customary assumption in capital budgeting analysis is that:

Theresa is considering starting a small business. She plans to purchase equipment costing $145,000. Rent on the building used by the business will be $26,000 per year while other operating costs will total $30,000 per year. A market research specialist estimates that Theresa's annual sales from the business will amount to $80,000. Theresa plans to operate the business for 6 years. Disregarding the effects of taxes, what will be the amount of annual net cash flow generated by the business?

Which of the following would be considered a cash inflow in determining the value of a capital investment?

Select the incorrect statement concerning the present value index (PVI) .

The difference between an ordinary annuity and an annuity due is:

Sources of cash outflows from capital investments include incremental expenses and installation costs.

Cash inflows generated by capital investments include all of the following except:

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Using the incremental approach, the payback period for the investment is:

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

Jiminez Company has two investment opportunities. Both investments cost $5,000 and will provide the following net cash flows: What is the net present value of Investment A's cash flows assuming an 8% minimum rate of return? Use Appendix Table 2. (Do not round your intermediate calculations. Round your answer to the nearest whole dollar.)

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?