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103. GuSont Inc. was considering an investment in the following project:
Required initial investment $990,000
Net annual after-tax cash inflow $165,000
Annual depreciation expense $55,000
Estimated salvage value $165,000
Life of the project in years 15
Assume that cash inflows occur evenly throughout the year. The estimated payback period in
years (rounded to one decimal place) for the proposed project is:
104. GuSont Inc. was considering an investment in the following project:
Required initial investment $990,000
Net annual after-tax cash inflow $165,000
Annual depreciation expense $55,000
Estimated salvage value $165,000
Life of the project in years 15
The internal rate of return (IRR) is (Note: to solve this problem students will need access either
to Appendix C, Table 2 (Chapter 12) or Excel):
105. LaVar, Inc. has obtained probability estimates from its production and sales departments
regarding the costs and selling prices it can anticipate for a new product line. The company is
uncertain as to which combination of costs and selling prices will occur. The best method for
determining the expected outcome of the investment, based on an assumed probability
distribution associated both sales and costs, is:
106. 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:
107. The internal rate of return (IRR) for an investment:
108. The net present value (NPV) method and the internal rate of return (IRR) method are
used to analyze proposed capital expenditures. The IRR method, as contrasted with the NPV
method:
109. When ranking two mutually exclusive investments with different initial amounts but
approximately the same useful life, and assuming no capital rationing, management should give
first priority to the project:
110. Which of the following is not an important advantage of the net present value (NPV)
method over the internal rate of return (IRR) method in evaluating capital investment proposals?
111. In situations where a firm specifies different required rates of return (i.e., discount rates)
over the years, it is advantageous to use:
112. Which of the following is an example of a
sunk cost
in a capital budgeting decision
regarding the replacement of an existing piece of equipment for a profitable business that pays
taxes?
113. Which of the following items has no after-tax consequences in the analysis of a capital
investment proposal?
114. When we assume in our calculations for capital budgeting decisions that all cash flows
occur at the end of individual years during the life of an investment project when, in fact, they
flow more or less continuously during those years, which of the following statements is true?
115. In addition to a one million dollar acquisition cost, an investment requires $200,000 net
working capital during its useful life. This investment in net working capital should be:
116. Within the context of capital budgeting, a primary goal-congruency problem exists when
DCF models are used for decision-making purposes but accrual-based earnings figures are used
for subsequent performance-evaluation purposes. Which of the following items is not likely to be
useful for addressing this goal-congruency problem?
117. The profitability index (PI) for a proposed project is calculated as:
118. Western Electronics (WE) is reviewing the following data relating to a new equipment
proposal:
Net initial investment outlay $50,000
After-tax cash inflow from disposal of the investment after 5 years $10,000
Present value of an annuity of $1 at 12% for 5 years 3.605
Present value of $1 at 12% in 5 years 0.567
WE expects the net after-tax savings in cash outflows from the investment to be equal in each of
the 5 years. What is the minimum amount of after-tax annual savings (including depreciation
effects) needed to make the investment yield a 12% return (rounded to the nearest whole dollar)?
119. A profitable company pays $100,000 wages and has depreciation expense of $100,000.
The company's income tax rate is 40%. The after-tax cash flows from these two items are
calculated as follows:
120. Conceptually, a firm's
capital structure
is its:
121. Consider two projects, A and B. The present value (PV) of after-tax cash inflows for
project A is $55,000, while the original investment outlay for this project is $50,000. Project B, on
the other hand, has the following characteristics: PV of after-tax cash inflows = $24,000; original
investment outlay = $20,000. Assume that these two projects are mutually exclusive and that the
company has adequate capital to fund either investment option. All of the following statements
are true
except
:
122. XYZ Corporation's capital structure consists of 60% debt with a pretax cost of 10%, and
the balance of common equity, with a cost of 15%. The company's income tax rate (federal and
state combined) is 40%. XYZ's weighted-average cost of capital (WACC), to one decimal point,
is:
123. In capital budgeting, the accounting rate of return (ARR) decision model:
124. All of the following capital budgeting models incorporate the time value of money except:
125. ______________ is the recommended method for determining the optimal capital budget
under conditions of capital rationing.
126. Fitzgerald Company is planning to acquire a $250,000 machine that will provide increased
efficiencies, thereby reducing annual cash operating costs by $80,000. The machine will be
depreciated by the straight line method over a five-year life with no salvage value at the end of
five years. Assuming a 40% income tax rate and that cash flows occur evenly throughout the year,
the machine's estimated payback period (rounded to two decimal places) is:
127. The accounting rate of return (ARR).
128. On January 1, 2016 Crane Company will acquire a new asset that costs $400,000 and that
is anticipated to have a salvage value of $30,000 at the end of four years. The new asset:
• qualifies as three-year property under the Modified Accelerated Cost Recovery System
(MACRS)
• will replace an old asset that currently has a tax basis of $80,000 and that can be sold on this
date for $60,000
• will continue to generate the same operating revenues as the old asset ($200,000 per year).
However, it is predicted that savings in cash operating costs will be experienced as follows: a
total of $120,000 in each of the first three years, and $90,000 in the fourth year.
Crane is subject to a combined income tax rate of 40% and rounds all computations to the
nearest dollar. Crane's fiscal year coincides with the calendar year. Assume that any gain or loss
affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses
the net present value (NPV) method to analyze projects using the factors and rates presented
below (based on a discount rate of 14%):
Period PV of $1 at 14% PV of $1 Annuity at 14% MACRS
1 0.88 0.88 33%
2 0.77 1.65 45
3 0.68 2.33 15
4 0.59 2.92 7
The present value of the depreciation tax shield for the 2019 MACRS depreciation of the new
asset is:
