Accounting Chapter 12 4 If a company must choose between two mutually exclusive investment projects, the best general method to employ for decision-making purposes

80. Brandon Company is contemplating the purchase of a new piece of equipment for

$45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from

this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5,

respectively. The firm uses straight-line depreciation with no residual value at the end of five

years.

The payback period in years (rounded to the nearest 10th of a year) for this proposed investment

is (assume that the after-tax cash inflows occur evenly throughout the year):

81. Brandon Company is contemplating the purchase of a new piece of equipment for

$45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from

this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5,

respectively. The firm uses straight-line depreciation with no residual value at the end of five

years.

The hurdle rate for accepting new capital investment projects is 4%, after-tax. The estimated

accounting rate of return (ARR) on this project (rounded to two decimal points), based on the

initial investment is:

82. Brandon Company is contemplating the purchase of a new piece of equipment for

$45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from

this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5,

respectively. The firm uses straight-line depreciation with no residual value at the end of five

years.

Assume that the hurdle rate for accepting new capital investment projects for the company is

4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1 = 0.962, for year 2 = 0.925,

for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years =

4.452.) At an after-tax discount rate of 4%, the estimated net present value (NPV) of the

proposed investment is (rounded to the nearest hundred):

83. Brandon Company is contemplating the purchase of a new piece of equipment for

$45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from

this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5,

respectively. The firm uses straight-line depreciation with no residual value at the end of five

years.

Assume that the hurdle rate for accepting new capital investment projects for the company is

4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1 = 0.962, for year 2 = 0.925,

for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years =

4.452.) At an after-tax discount rate of 4%, the estimated PV (present value) payback period, in

years (rounded to two decimal places) is:

84. Brandon Company is contemplating the purchase of a new piece of equipment for

$45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from

this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5,

respectively. The firm uses straight-line depreciation with no residual value at the end of five

years.

Assume that the after-tax hurdle rate for accepting new capital investment projects by the

company is 4%, after-tax. (Note: To answer this question, students will have to be provided with

the Tables provided in Appendix C, Chapter 12. Alternatively, the instructor can provide students

with the following PV $1 factors for 4%: for year 1 = 0.962, for year 2 = 0.925, for year 3 = 0.889,

for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years = 4.452.) The

estimated internal rate of return (IRR) on this investment is:

85. Olsen Inc. purchased a $600,000 machine to manufacture a specialty tap for electrical

equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the

next 10 years. To encourage capital investments, the government exempts taxes on profits from

new investments in. This legislation most likely will remain in effect in the foreseeable future.

The equipment is expected to have 10 years of useful life and no salvage value at the end of this

10-year period. The firm uses straight-line depreciation. The net cash inflow is expected to be

$144,000 each year. Olsen uses a discount rate of 10% in evaluating its capital investments.

Assume that after-tax cash inflows occur evenly throughout the year. The estimated payback

period for this proposed investment, in years, is (rounded to two decimal places):

86. Olsen Inc. purchased a $600,000 machine to manufacture a specialty tap for electrical

equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the

next 10 years. To encourage capital investments, the government exempts taxes on profits from

new investments in. This legislation most likely will remain in effect in the foreseeable future.

The equipment is expected to have 10 years of useful life and no salvage value at the end of this

10-year period. The firm uses straight-line depreciation. The net cash inflow is expected to be

$144,000 each year. Olsen uses a discount rate of 10% in evaluating its capital investments.

The accounting (book) rate of return based on initial investment for this proposed investment (to

two decimal places) is:

87. Olsen Inc. purchased a $600,000 machine to manufacture a specialty tap for electrical

equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the

next 10 years. To encourage capital investments, the government exempts taxes on profits from

new investments in. This legislation most likely will remain in effect in the foreseeable future.

The equipment is expected to have 10 years of useful life and no salvage value at the end of this

10-year period. The firm uses straight-line depreciation. The net cash inflow is expected to be

$144,000 each year. Olsen uses a discount rate of 10% in evaluating its capital investments.

The estimated accounting (book) rate of return (to two decimal places) based on average

investment for this proposed investment is:

88. Olsen Inc. purchased a $600,000 machine to manufacture a specialty tap for electrical

equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the

next 10 years. To encourage capital investments, the government exempts taxes on profits from

new investments in. This legislation most likely will remain in effect in the foreseeable future.

The equipment is expected to have 10 years of useful life and no salvage value at the end of this

10-year period. The firm uses straight-line depreciation. The net cash inflow is expected to be

$144,000 each year. Olsen uses a discount rate of 10% in evaluating its capital investments.

The estimated net present value (NPV) of this proposed investment (rounded to the nearest

thousand) is: (Note: the PV annuity factor from Table 2, Appendix C, 10%, 10 years is 6.145.)

89. Olsen Inc. purchased a $600,000 machine to manufacture a specialty tap for electrical

equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the

next 10 years. To encourage capital investments, the government exempts taxes on profits from

new investments in. This legislation most likely will remain in effect in the foreseeable future.

The equipment is expected to have 10 years of useful life and no salvage value at the end of this

10-year period. The firm uses straight-line depreciation. The net cash inflow is expected to be

$144,000 each year. Olsen uses a discount rate of 10% in evaluating its capital investments.

The estimated internal rate of return (IRR) on this proposed investment is: (Note: the PV annuity

factor from Table 2, Appendix C, 10%, 10 years is 6.145.)

90. If a company is faced with limited capital funds for investment (i.e., the company faces

capital rationing), the best general method to employ to assess individual project profitability is:

91. If a company must choose between two mutually exclusive investment projects, the best

general method to employ for decision-making purposes is:

92. A widely used approach that managers use to recognize uncertainty about individual

items and to obtain an immediate financial estimate of the financial consequences of possible

prediction errors is:

93. Flex Corporation is studying a capital investment proposal in which newly acquired assets

will be depreciated using the straight-line (SL) method with no salvage value. Which one of the

following statements about the proposal would be incorrect if, instead of SL, the Modified

Accelerated Cost Recovery System (MACRS) is used for determining depreciation expense for

income tax purposes? (Assume that income tax rates are constant over the life of the assets

involved.)

94. Jasper Company has a payback goal of three years on acquisitions of new equipment. A

new piece of equipment that costs $450,000 and a five-year life is being considered. Straight-line

(SL) depreciation will be used, with zero salvage value. Jasper is subject to a 40% combined

income tax rate. To meet the company’s payback goal, the equipment must generate reductions

in annual cash operating costs of at least:

95. Amster Corporation has not yet decided on its discount rate for use in the evaluation of

capital budgeting proposals. This lack of information will render the company unable to calculate

a proposed investment’s:

Accounting Rate of Return

(ARR) Net Present Value

(NPV) Internal Rate of Return

(IRR)

A) No No No

B) Yes Yes Yes

C) No Yes Yes

D) No Yes No

E) Yes No Yes

96. For dealing with uncertainty in the capital budgeting process, all of the following

techniques can be used except which one?

97. Which of the following statements regarding real options is not true?

98. Which of the following is not one of the four general classes of real options?

99. Which of the following statements regarding real options is true?

100. The estimated value of a real option:

101. If the present value payback period is less than the life of the project, one may conclude

that:

102. Which of the following characteristics is not true of the modified internal rate of return

(MIRR)?