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CPA REVIEW SCHOOL OF THE PHILIPPINES Cebu
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MANAGEMENT ADVISORY SERVICES CAPITAL BUDGETING
THEORY
1. Capital Capital budgeting budgeting technique techniquess are least least likely likely to to be used in in evaluating evaluating the the a. Acquis Acquisit ition ion of new new aircra aircraft ft by a cargo cargo company company.. b. Design and implementation of a major advertising program. c. Trade Trade for for a star star quart quarterb erback ack by a foot footbal balll team. team. d. Adoption Adoption of a new method method of allocati allocating ng nontraceab nontraceable le costs costs to product product lines. lines. !. The "inf "inflat lation ion elem element ent## refers refers to to the a. $mpact $mpact that future future price price increases increases will will have on the the original original cost of of a capital capital e%pendi b. &act that the real purchasing power of a monetary unit usually increases over time. c. &uture deteriorati deterioration on of the general general purchasing purchasing power power of the the monetary monetary unit. unit. d. &uture increases increases in in the general general purchasi purchasing ng power of of the monetary monetary unit.
'. (ahlin (ahlin (overs) (overs) $nc. is planning planning to purchase purchase equipment equipment to make make its operation operationss more eff This This equipm equipment ent has an estima estimated ted useful useful life of si% si% years. years. As part part of this acquisit acquisit *1+,),,, investment in working capital is is required. $n a discounted cash flow analysis investment in working capital should be a. Amorti Amorti-ed -ed over over the usefu usefull life life of the equip equipmen ment. t. b. Disregarded because no cash is involved. c. Treated Treated as a recurri recurring ng annual cash cash flow that that is recovere recovered d at the end of si% si% years. years. d. Treated Treated as an immedi immediate ate cash outflo outflow w that is recover recovered ed at the end of si% si% years. years. . To appro%imat appro%imatee annual cash inflow inflow)) depreci depreciation ation is is a. Added Added back back to net inco income me becaus becausee it is an inflo inflow w of cash. cash. b. /ubtracted from net income because it is an outflow of cash. c. /ubtrac /ubtracted ted from from net incom incomee because because it is is an e%pense e%pense.. d. Added back back to net income income because because it is not an outflow outflow of cash. +. $n capita capitall e%pendi e%penditur tures es decisio decisions) ns) the follow following ing are releva relevant nt in estim estimati ating ng operati operating ng e%cept a. &uture costs. b. Cash costs. c. Differential costs. d. 0istorical c
. 2hich of the followin following g best identifies identifies the reason reason for using probabili probabilities ties in capital capital budg is a. Different life of projects. c. 3ncertainty. b. Cost of capital. d. Time value of money. money. 4. $n capital capital budgeting budgeting decisions decisions)) the following following items items are conside considered red among among others5 others5 1. Cash Cash outfl outflow ow for for the the inve investm stment ent.. Sign up to vote on this title !. $ncrea $ncrease se in workin working g capital capital requi requirem rement ents. s. Useful Not useful '. *rof *rofit it on on sale sale of of old old asse assett . 6os 6osss on write writeoff off of old old ass asset. et. &or which of the above items would ta%es be relevant7
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overhauling is done. The finance officer insists that the overhauling be done in year ) n year +. The most likely reason is a. There is lower ta% rate in year +. c. The time value of money is conside b. There is higher ta% rate in year + d. Due statements A and C above. :. An optimal capital budget is determined by the point where the marginal cost of capit A. (inimi-ed. ;.
>? 1. The A>> is based on the accrual basis) not cash basis. !. The A>> does not consider the time value of money. '. The profitability of the project is considered. &rom the above statements) which are considered limitations of the A>> concept7 a. /tatements ! and ' only. c. All the ' statements. b. /tatements ' and 1 only. d. /tatements 1 and ! only. 11. The payback method assumes that all cash inflows are reinvested to yield a return equal a. the discount rate. c. the internal rate of return. b. the hurdle rate. d. -ero. 1!. As a capital budgeting technique) the payback period considers depreciation e%pense and time value of money =T@(? as follows5 a. b. c. d. D< relevant irrelevant $rrelevant relevan T@( relevant irrelevant >elevant irreleva
1'. The bailout payback period is You're Reading a Preview a. The payback period used by firms with government insured loans. Unlock full access with a free trial. b. The length of time for payback using cash flows plus the salvage value to recove original investment Download With Free Trial c. =a? and =b? d. one of the above.
1. 2hich of the following methods measures the cash flows and outflows of a project as if occurred at a single point in time7 a. Cash flow based payback period. c. *ayback method. b. Capital budgeting. d. Discounted cash flow.
1+. 2hen using one of the discountedcashflow methods to evaluate the feasibility of a c budgeting project) which of the following factors generally is not important7 a. The method of financing the project under consideration. b. The impact of the project on income ta%es to be paid. c. The timing of cash flows relating to the project. d. The amount of cash flows relating to the project. Sign up to vote on this title
usefulof the firm 1. $n an investment in plant the return that should keep the market Useful Notprice unchanged is a *ayback c et present value
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18. A company had made the decision to finance ne%t yearBs capital projects through debt than additional equity. The benchmark cost of capital for these projects should be a. The beforeta% cost of newdebt financing. c. The cost of equity financing. b. The afterta% cost of newdebt financing. d. The weightedaverage cost of capital. 1:. All of the following refer to the discount rate used by a firm in capital budgeting e%cept a. 0urdle rate. c. pportunity cost. b. >equired rate of return. d. pportunity cost of capital.
!,. $f a firm identifies =or creates? an investment opportunity with a present value 6ist A cost) the value of the firm and the price of its common stock will 6ist ;E a. b. c. d 6ist A Freater than Freater than
!1. The common assumption in capital budgeting analysis is that cash inflows occur in sums at the end of individual years during the life of an investment project when in fact flow more or less continuously during those years a. >esults in understated estimates of *@. b. $s done because present value tables for continuous flows cannot be constructed. c. 2ill result in inconsistent errors being made on estimating *@s such that project c be evaluated reliably. d. >esults in higher estimate for the $>> on the investment.
!!. An advantage of the net present value method over the internal rate of return mod discounted cash flow analysis is that the net present value method a. Computes a desired rate of return for capital projects. b. Can be used when there is no constant rate of return required for each year of the pro c. 3ses a discount rate that equates the discounted cash inflows with the outflows. You're Reading a Preview d. 3ses discounted cash flows whereas the internal rate of return model does not. Unlock full access with a free trial.
!'. 2hen using the net present value method for capital budgeting analysis) the required r return is called all of the following e%cept the Download With Free Trial A. >iskfree rate. ;. Cost of capital. C. Discount rate. D. Cutoff rate.
!. A projectBs net present value) ignoring income ta% considerations) is normally affected b a. *roceeds from the sale of the asset to be replaced. b. Carrying amount of the asset to be replaced by the project. c. Amount of annual depreciation on the asset to be replaced. d. Amount of annual depreciation on fi%ed assets used directly on the project.
!+. 9ou have determined the profitability of a planned project by finding the present value the cash flows from that project. 2hich of the following would cause the project to look appealing) that is) have a lower present value7 a. The discount rate increases. b. The cash flows are e%tended over a longer period of time. c. The investment cost decreases without affecting the e%pected income and life o Sign up to vote on this title project. isUseful Not useful d. The cash flows are accelerated and the project life correspondingly shortened.
!. 0ow are the following used in the calculation of the internal rate of return of a pro
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!4. The discount rate that equates the present value of the e%pected cash flows with the co the investment is the a. et present value c. Accounting rate of return b. $nternal rate of return d. *ayback period.
!8. 2hich of the following characteristics represent an advantage of the internal rate of r techniques over the accounting rate of return technique in evaluating a project7 $ >ecognition of the projectBs salvage value. $$ ecognition of the time value of money. a. $ only. b. $ and $$. c. $$ and $$$. d. $) $$) and $$$
!:. *olo Co. requires higher rates of return for projects with a life span greater than + *rojects e%tending beyond + years must earn a higher specified rate of return. 2hich o following capital budgeting techniques can readily accommodate this requirement7 a. b. c. d. $nternal >ate of >eturn 9es o o 9e et *resent @alue o 9es o 9e ',. 2hich of the following combinations is T possible7 *rofitability $nde% *@ a. Freater than 1 *ositive b.
$>> (ore than cost of capital
'1. 2hich of the following is always true with regard to the net present value =*@? approa A. $f a project is found to be acceptable under the *@ approach) it would acceptable under the internal rate of return =$>>? approach. You're will Reading a Preview ;. The *@ and the $>> approaches always rank projects in the same order. C. $f a project is found to be acceptable under Unlock full access with a freethe trial. *@ approach) it would acceptable under the payback approach. D. The *@ and payback approaches will always rank projects in the same order. Download With Free Trial '!. 2hen ranking two mutually e%clusive investments with different initial am management should give first priority to the project A. That generates cash flows for the longer period of time. ;. 2hose net afterta% flows equal the initial investment. C. That has the greater accounting rate of return. D. That has the greater profitability inde%.
''. 2hich mutually e%clusive project would you select) if both are priced at H1),,, and discount rate is 1+IJ *roject A with three annual cash flows of H1),,,) or *roject ;) w years of -ero cash flow followed by ' years of H1)+,, annually7 A. *roject A. ;. *roject ;. C. The $>>s are equal) hence you are indifferent. D. The *@s are equal) hence you are indifferent. Sign up to vote on this title
Useful
Not useful
'. *ayback period =**?) profitability inde% =*$?) and simple accounting rate of return =/A are some of the capital budgeting techniques. 2hat is the effect of an increase in the c
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'+. A company is evaluating three possible investments. $nformation relating to the compan the investments follow5 &isher rate for the three projects 4I Cost of capital 8I ;ased on this information) we know that a. all three projects are acceptable. b. none of the projects are acceptable. c. the capital budgeting evaluation techniques profitability inde%) net present value) and internal rate of return will provide a consistent ranking of the projects. d. the net present value method will provide a ranking of the projects that is superior t ranking obtained using the internal rate of return method.
'. /everal proposed capital projects which are economically acceptable may have to be due to constraints in financial resources. $n ranking these projects) the least pertinent i statement. a. $f the internal rate of return method is used in the capital rationing problem) the h the rate) the better the project. b. $n selecting the required rate of return) one may either calculate the organi-ationBs c capital or use a rate generally acceptable in the industry. c. A ranking procedure on the basis of quantitative criteria may be established by sp a minimum desired rate of return) which rate is used in calculating the net present of each project. d. $f the net present value method is used) the profitability inde% is calculated to ran projects. The lower the inde%) the better the project. '4. Capital budgeting methods are often divided into two classifications5 project screeni project ranking. 2hich one of the following is considered a ranking method rather screening method7 A. et present value. C. *rofitability inde%. You're Reading a Preview ;. Timeadjusted rate of return. D. Accounting rate of return. Unlock full access with a free trial.
'8. A company has analy-ed seven new projects) each of which has its own internal return. $t should consider each project whose internal rate of return is KKKKK its marginal Download With Free Trial of capital and accept those projects in KKKKK order of their internal rate of return. A. ;elowJ decreasing. C. AboveJ increasing. ;. AboveJ decreasing. D. ;elowJ increasing.
':. @elasque- L Co. is considering an investment proposal for *1, million yielding a net pr value of *+,),,,. The project has a life of 4 years with salvage value of *!,,),,,. company uses a discount rate of 1!I. 2hich of the following would decrease the net p value7 a. <%tend the project life and associated cash inflows. b. $ncrease discount rate to 1+I. c. Decrease the initial investment amount to *:., million. d. $ncrease the salvage value. ,. 2hat is the effect of changes in cash inflows) investment cost and cashoutfl Sign up to vote on this title profitability =present value? inde% =*$? Useful Not a. *$ will increase with an increase in cash inflows) a decrease in useful investment cost decrease in cash outflows. b. *$ will increase with an increase in cash inflows) an increase in investment cost)
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PROBLEMS 1. Acme is considering the sale of a machine with a book value of H8,),,, and remaining in its useful life. /traightline depreciation of H!+),,, annually is available. machine has a current market value of H1,,),,,. 2hat is the cash flow from sell machine if the ta% rate ,I. a. H!+),,, b. H8,),,, c. H:!),,, d. H1,,),,,
!
0atchet Company is considering replacing a machine with a book value of H,, remaining useful life of + years) and annual straightline depreciation of H8,),, e%isting machine has a current market value of H,,),,,. The replacement machine w cost H++,),,,) have a +year life) and save H4+),,, per year in cash operating costs. replacement machine would be depreciated using the straightline method and the ta% r ,I) what would be the net investment required to replace the e%isting machine7 a. H:,),,,. b. H1+,),,, c. H'',),,, d. H++,),,,
'. Diliman >epublic *ublishers) $nc. is considering replacing an old press that cost *8,,) years ago with a new one that would cost *!)!+,),,,. /hipping and installation would an additional *!,,),,,. The old press has a book value of *1+,),,, and could currently for *+,),,,. The increased production of the new press would increase inven by *,),,,) accounts receivable by *1,),,, and accounts payable by *1,),,,. >epublicBs net initial investment for analy-ing the acquisition of the new press assum '+I income ta% rate would be a. *!)+,),,, b. *!)!+),,, c. *!),,),,, d. *!)!+,),,,
. Mey Corp. plans to replace a production machine that was acquired several year Acquisition cost is *+,),,, with salvage value of *+,),,,. The machine being consi is worth *8,,),,, and the supplier is willing to accept the old machine at a tradein val *,),,,. /hould the company decide not to acquire the new machine) it needs to rep old one at a cost of *!,,),,,. Ta%wise) the tradein transaction will not hav Reading a Preview implication but the cost to repairYou're is ta%deductible. The effective corporate ta% rate is '+ net income subject to ta%. &or Unlock purposes of capital budgeting) the net investment in the full access with a free trial. machine is a. *+,),,, b. *1,),,, c. *,),,, d. *8,,),,, Download With Free Trial
+. Freat @alue Company is planning to purchase a new machine costing *+,),,, with f and installation costs amounting to *1)+,,. The old unit is to be tradedin will be gi tradein allowance of *4)+,,. ther assets that are to be retired as a result of the acqui of the new machine can be salvaged and sold for *'),,,. The loss on retirement of other assets is *1),,, which will reduce income ta%es of *,,. $f the new equipment purchased) repair of the old unit will have to be made at an estimated cost of *),,,. cost can be avoided by purchasing the new equipment. Additional gross working capi *1!),,, will be needed to support operation planned with the new equipment. The net investment assigned to the new machine for decision analysis is a. *+,)!,, b. *+!),, c. *+'),, d. *+4),,
. 0ooker ak &urniture Company is considering the purchase of wood cutting equip Data on the equipment are as follows5 Sign up to vote on this title riginal investment H', Useful Not useful et annual cash inflow H1!),, <%pected economic life in years /alvage value at the end of five years H'
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4. A company is considering putting up *+,),,, in a threeyear project. The comp e%pected rate of return is 1!I. The present value of *1.,, at 1!I for one year is ,.8: two years is ,.4:4) and for three years is ,.41!. The cash flow) net of income ta%es w *18),,, =present value of *1),4? for the first year and *!!),,, =present value of *14 for the second year. Assuming that the rate of return is e%actly 1!I) the cash flow income ta%es) for the third year would be a. *4)1!, b. *1,),,, c. *1)':! d. *!'),!!
8. 6or $ndustries is analy-ing a capital investment proposal for new machinery to prod new product over the ne%t ten years. At the end of the ten years) the machinery mu disposed of with a -ero net book value but with a scrap salvage value of *!,),,,. require some *',),,, to remove the machinery. The applicable ta% rate is '+I. appropriate "endoflife# cash flow based on the foregoing information is a. $nflow of *',),,,. c. utflow of *1,),,,. b. utflow of *)+,,. d. utflow of *14),,,.
:. C Corp. faces a marginal ta% rate of '+ percent. ne project that is currently under eva has a cash flow in the fourth year of its life that has a present value of H1,),,, =afterta Corp. assumes that all cash flows occur at the end of the year and the company us percent as its discount rate. 2hat is the preta% amount of the cash flow in year 7 =>ou the nearest dollar.? a. H1+)181 b. H!')'+ c. H:)88 d. H')'4+
1,. (a%well Company has an opportunity to acquire a new machine to replace one of its pr machines. The new machine would cost H:,),,,) have a +year life) and no est salvage value. @ariable operating costs would be H1,,),,, per year. The present ma has a book value of H+,),,, and a remaining life of + years. $ts disposal value n H+),,,) but it would be -ero after + years. @ariable operating costs would be H1!+),, year. $gnore income ta%es. Considering the + years in total) what would be the differen You're Reading Preview as opposed to retaining the profit before income ta%es by acquiring the newa machine one7 Unlock full access with a free trial. A. H1,),,, decrease ;. H1+),,, decrease C. H'+),,, increase D. H,),,, inc
Download With Free Trial 11. A project under consideration by the 2hite Corp. would require a working capital inves of H!,,),,,. The working capital would be liquidated at the end of the projectNs 1,year $f 2hite Corp. has an afterta% cost of capital of 1, percent and a marginal ta% rate o percent) what is the present value of the working capital cash flow e%pected to be receiv year 1,7 a. H')88 b. H44)1,, c. H+'):4, d. H!')1',
1!. 6yben $nc. is planning to produce a new product. To do this) it is necessary to acquire equipment that will cost the company *1,,),,,. The estimated life of the new equipm five years with no salvage value. The estimated income and costs based on e%pected sa *1,),,, units per year are5 /ales O *1,.,, per unit *1,,),,, Costs O *8.,, per unit 8,),,, et income * !,),,, Sign up to vote on this title The accounting rate of return based on initial investment is !,I Useful Not useful of *1,,), 2hat will be the accounting rate of return basedon initialinvestment management decrease its selling price of the new product by 1,I7 a +I b 1,I c 1+I d !,I
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1. A*P) $nc. is planning to purchase a new machine that will take si% years to recover the The new machine is e%pected to produce cash flow from operations) net of income ta%e *)+,, a year for the first three years of the payback period and *')+,, a year of th three years of the payback period. Depreciation of *'),,, a year shall be charged to in of the si% years of the payback period. 0ow much shall the machine cost7 a. *1!),,, b. *18),,, c. *!),,, d. *'),,,
1+. /weets)
1. 2omark Company purchased a new machine on Panuary 1 of this year for H:,),,,) w estimated useful life of + years and a salvage value of H1,),,,. The machine depreciated using the straightline method. The machine is e%pected to produce cash from operations) net of income ta%es) of H'),,, a year in each of the ne%t + years. The machineBs salvage value is H!,),,, in years 1 and !) and H1+),,,, in years ' and . will be the bailout period =rounded? for the new machine7 a. 1. years. b. !.! years. c. 1.: years. d. '. years.
14. $t is the start of the year and /t. Trope- Co. plans to replace its old singalong equip These information are available5You're Reading a Preview ld ew Unlock full access with a free trial.
18. Cramden Armored Car Co. is considering the acquisition of a new armored truck. The is e%pected to cost H',,),,,. The companyNs discount rate is 1! percent. The firm determined that the truck generates a positive net present value of H14),!!. 0oweve firm is uncertain as to whether it has determined a reasonable estimate of the salvage val the truck. $n computing the net present value) the company assumed that the truck wou salvaged at the end of the fifth year for H,),,,. 2hat e%pected salvage valuefor the Sign up to vote on this title would cause the investment to generate a net present value of H,7 $gnore ta%es. useful Useful Notd. a. H',),,, b. H, c. H++)!48 H!):48
1:. ;ooker /teel $nc. is considering an investment that would require an initial cash outl
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!,. /alvage Co. is considering the purchase of a new oceangoing vessel that could poten reduce labor costs of its operation by a considerable margin. The new ship would H+,,),,, and would be fully depreciated by the straightline method over 1, years. A end of 1, years) the ship will have no value and will be sunk in some already polluted ha The /alvage Co.Ns cost of capital is 1! percent) and its marginal ta% rate is , percent. ship produces equal annual labor cost savings over its 1,year life) how much do the a savings in labor costs need to be to generate a net present value of H, on the project7 => to the nearest dollar.? a. H8):! b. H11)1+ c. H88):! d. H14)84
!1. The (cally Co. is considering an investment in a project that generates a profitability of 1.'. The present value of the cash inflows on the project is H),,,. 2hat is th present value of this project7 a. H1,)1+ b. H1')!,, c. H+4)!,, d. H'')8
!!. The Geron Corporation wants to purchase a new machine for its factory operations at a of H:+,),,,. The investment is e%pected to generate H'+,),,, in annual cash flows period of four years. The required rate of return is 1I. The old machine can be H+,),,,. The machine is e%pected to have -ero value at the end of the fouryear period. is the net present value of the investment7 2ould the company want to purchase the machine7 $ncome ta%es are not considered. a. H11:)++,J yes b. H:)++,J no c. H1),1:)++,J yes d. H'!)4+,J n
!'. Drillers $nc. is evaluating a project to produce a hightech deepsea oil e%ploration de The investment required is H8, million for a plant with a capacity of 1+),,, units a year years. The device will be sold for a price of H1!),,, per unit. /ales are e%pected to be 1! units per year. The variable cost is H4),,, and fi%ed costs) e%cluding depreciation) ar million per year. Assume Drillers employs straightline depreciation on all depreciable a and assume that they are ta%ed at a rate of 'I. $f the required rate of return is 1!I) w You're Reading a Preview the appro%imate *@ of the project7 A. H14)!!+),,, ;. H!1)+11),,, D. H+)114),, Unlock full access C. withH!)48,),,, a free trial.
!. PP Corp. is considering the purchase of a new machine that will cost *'!,),,,. $t h Download With Free Trial estimated useful life of ' years. Assume that ',I of the depreciable base will be deprec in the first year) ,I in the second year) and ',I in the third year. $t has a resale val *!,),,, at the end of its economic life. /avings are e%pected from the use of ma estimated at *14,),,, annually. The company has an effective ta% rate of ,I. $t uses as hurdle rate in evaluating capital projects. /hould the company proceed with the *'! capital investment7 9ear *resent @alue of *1 *resent @alue of an rdinary Annuity of *1 1 ,.8! ,.8! ! ,.4' 1.,+ ' ,.1 !.! a. 9es) due to *@ of *)++. c. 9es) due to *@ of *1)8!,. b. 9es) due to *@ of *11)8. d. o) due to negative *@ of *1)1'
!+. A companyNs marginal cost of new capital =(CC? is 1,I up to H,,),,,. (CC incr Sign up to vote on this title +I for the ne%t H,,),,, and another .+I thereafter. /everal proposed capital projec Useful useful Not under consideration) with projected cost and internal rates of return =$>>? as follows5 *roject Cost $>> A H1,, ,,, 1, +I
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MSQ-01 - Activity Cost & CVP
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!. The following forecasts have been prepared for a new investment by %ford $ndustr H!, million with an 8year life5 *essimistic <%pected ptimistic (arket si-e ,),,, :,),,, 1,),,, (arket share) I !+ ', '+ 3nit price H4+, H8,, H84+ 3nit variable cost H+,, H,, H'+, &i%ed cost) millions H4 H H'.+ Assume that %ford employs straightline depreciation) and that they are ta%ed Assuming an opportunity cost of capital of 1I) what is the *@ of this project) base e%pected outcomes7 A. H!)!)1+ ;. H)+')+,+ C. H)4!!)1,: D. H8),++)4!!
!4. The following data pertain to /unlight Corp.) whose management is planning to purcha automated tanning equipment. 1.
!8. *ayback Company is considering the purchase of a copier machine for *!)8!+. The c machine will be e%pected to be economically productive for years. The salvage value You're Reading a Preview end of years is negligible. The machine is e%pected to provide 1+I internal rate of The company is subject to ,IUnlock income ta% rate. present value of an ordinary annu full access with aThe free trial. 1 for periods is !.8+:8. $n order to reali-e the $>> of 1+I) how much is the estim beforeta% cash inflow to be provided by the machine7 Download With Free Trial A. *14)8, ;. *1+),,, C. *!+),,, D. *'+)4,,
!:. *ara Co. is reviewing the following data relating to an energy saving investment proposa Cost H+,) >esidual value at the end of + years 1, *resent value of an annuity of 1 at 1!I for + years *resent value of 1 due in + years at 1!I 2hat would be the annual savings needed to make the investment reali-e a 1!I yield7 a. H8)18: b. H11)111 c. H1!)', d. H1')88:
',. /moot Automotive has implemented a new project that has an initial cost) and then gen inflows of H1,),,, a year for the ne%t seven =4? years. The project has a payback peri ., years. 2hat is the projectNs internal rate of return =$>>?7 A. 1.4:I ;. 1.''I C. 18.+I D. 1+.1I Sign up to vote on this title
Notmachine useful Useful '1. ;erry *roducts is considering two pieces of machinery. The first costs *+ more than the second machine. During the twoyear life of these two alternatives) the machine has *1++),,, more cash flow in year one and a *11,),,, less cash flow in yea
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'!. The Geron Corporation recently purchased a new machine for its factory operations at a of H:!1)!+,. The investment is e%pected to generate H!+,),,, in annual cash flows period of si% years. The required rate of return is 1I. The old machine has a remainin of si% years. The new machine is e%pected to have -ero value at the end of the si% period. The disposal value of the old machine at the time of replacement is -ero. 2hat internal rate of return7 a. 1+I b. 1I c. 14I d. 18I
''. >ohan Transport is considering two alternative buses to transport people between citi are in the /outheastern 3./.) such as ;aton >ouge and Fainesville. A gaspowered bus cost of H++),,,) and will produce endofyear net cash flows of H!!),,, per year for y A new electric bus will cost H:,),,,) and will produce cash flows of H!8),,, per year years. The company must provide bus service for 8 years) after which it plans to give franchise and to cease operating the route. $nflation is not e%pected to affect either co revenues during the ne%t 8 years. $f >ohan TransportNs cost of capital is 14 percent) by amount will the better project increase the companyNs value7 A. H+)'+, ;. H14)1 C. H1,)4,1 D. H!4)8,1
'. 3nion
'+. (ulva $nc. is considering the following five independent projects5 *roject >equired Amount of Capital $>> You're Reading a Preview A H',,),,, !+.'+I ; +,,),,, !'.!!I Unlock full access with a free trial. C ,,),,, 1:.1,I D ++,),,, :.!+I Download With Free Trial < +,),,, 8.+,I The company has a target capital structure which is , percent debt and , percent eq The company can issue bonds with a yield to maturity of 1, percent. The compan H:,,),,, in retained earnings) and the current stock price is H, per share. The flotation associated with issuing new equity are H! per share. (ulvaNs earnings are e%pect continue to grow at + percent per year. e%t yearNs dividend =D1? is forecasted to be H The firm faces a , percent ta% rate. 2hat is the si-e of (ulvaNs capital budget7 A. H1)!,,),,, ;. H1)4+,),,, C. H!),,),,, D. H8,,),,,
'. A ta%e%empt foundation) /incerely &oundation) $nc. intends to invest *1 million in year project. The foundation estimates that the annual savings from the project will am to *'!+),,,. The *1 million asset is depreciable over five =+? years on a straightline The foundationBs hurdle rate is 1!I and as a consultant of the foundation) you are ask determine the internal rate of return and advise if the project should be pursued. Sign up to vote on this title To facilitate computations) below are present value factors5 Not useful Useful 1I R+ 1!I 1I *resent value of *1 ,.+4 ,.+! ,.8 *resent value of an annuity of *1 ' , ' , ' ',
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'4. The following data relate to two capitalbudgeting projects of equal risk5 *resent @alue of Cash &lows *eriod *roject A *roject ; , H=1,),,,? H=',),,,? 1 )++, 1')+, ! )1+, 1!)+, ' ')4+, 11)!+, 2hich of the projects will be selected using the profitability inde% =*$? approach an *@ approach7 a. b. c. d. *$ ; > 1!I 8I 1'I 1,I 2hich project is preferred7 a. A c. C b. ; d. D
':. The ativity Corporation has the following investment opportunities5 *roposal *rofitability $nde% $nitial Cash utlay 1 1.1+ *!,,),,, ! 1.1' 1!+),,, ' 1.11 14+),,, 1.,8 1+,),,, The firm has a budget constraint of *',,),,,. 2hat proposal=s? should be accepted7 Reading a Preview a. *roposal 1 because it has theYou're highest profitability inde%. b. *roposal because it has the lowest profitability inde%. Unlock full access with a free trial. c. *roposals ! and ' because their total net present values are the highest among all p proposal combinations. Download With Free values Trial are the highest among all po d. *roposals 1 and ! because their total net present proposal combinations. ,. $nformation on three ='? investment projects is given below5 *roject $nvestment >equired et *resent @alue S *1+,),,, *'),,+ F 1,,),,, !!)4, 2 ,),,, 1'),! >ank the projects in terms of preference5 a. 1st 2J !nd FJ 'rd S. c. 1st SJ !nd FJ 'rd 2. b. 1st FJ !nd 2J 'rd S. d. The ranking is the same.
*roblem 1 and ! are based on the following information. DanecheBs) a ta%e%empt entity) plans to purchase a new machine which they pro up new to vote on this title depreciate over a tenyear period without salvage value.Sign The machine will cost *!, Useful and is e%pected to generate cash savings of *,),,, per year in operating costs. DanecheN Not useful of capital is 1!I. &or ten periods at 1!I) the present value of *1 is *,.'!!,) while the present value of an ord
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a. 1+I
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c. !+I
d. one of the
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uestions ' and are based on the following information. The construction of a waste treatment plant was arrived at after a careful costbenefit ana During the construction period a status report was presented for your review5 completed cost as originally estimated) *+ million I of actual completion to date) +I actual cost to date) *'.4+ million • • •
'. Assuming cost is evenly distributed throughout the construction period) how much wi completion cost be most likely7 a. The original cost estimate of *+ million. b. *+ million plus a cost overrun of about *4:),,, c. *+,,),,, less than the original cost at completion. d. About *1,,),,, above the original cost at completion. . 2hat would be an appropriate action to take considering the situation in number !87 a. o need to take any action. b. $mmediately stop further work on the project. c. >ecommend immediate review with the project implementation team to determ cause of overrun and the corrective actions to be taken. d. 2ait for the ne%t quarterly status report on the project.
uestions + and are based on the following information. ;eta Company plans to replace its company car with a new one. The new car costs *1! and its estimated useful life is five years without scrap value. The old car has a book val *1+),,, and can be sold at *1!),,,. The acquisition of the new car will yield annua savings of *!,),,, before income ta%. $ncome ta% rate is !+I. =(? You're Reading a Preview +. The net investment of the new car is Unlock full accessc. with*1,4)!+, a free trial. a. *1,8),,, b. *1,8)4+,
d. *1,4),,,
. The payback period of the investment is =(? Download With Free Trial a. +.1 years b. +.18 years c. +.11 years
d. +.,:+ years
4. Telephone Corp. is contemplating four projects5 6) () ) and . The capital costs fo initiation of each mutuallye%clusive project and its estimated afterta%) net cash flow listed below. The companyBs desired afterta% opportunity costs is 1!I. $t has *:, capital budget for the year. $dle funds cannot be reinvested at greater than 1!I. $n Thousand *esos 6 ( $nitial cost ,, 4, '8, !, Annual cash flows 9ear 1 11' 18, :, 8, ! 11' 14, 11, 1,, ' 11' 1+, 1', 1!, 11' 11,up to vote on1, 1', Sign this title + 11' 1,, 1+,useful 1+, Useful Not
et present value
*4)+,
*+:)+
*+)
*=1+)4,8?
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MSQ-01 - Activity Cost & CVP
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uestions 8 through ++ are based on the following information. The ;urgos Corporation is considering investing in a project. $t requires an immediat outlay of *1,,),,,. $t has a life of four years and will be depreciated on a straightline bas salvage value?. The firmBs ta% rate is !+I and requires a return of 1,I. $ncome b depreciation is projected to be5 9 1 ! ' $ncome before depreciation *',),,, *',),,, *,),,, *,),, The present value factors for *1 at 1,I is 9ear 1 ! ' *resent @alue &actor ,.:,: ,.8! ,.4+1 ,.8' 8. The net cash flow for year 1 is a. *!+)8+, b. *!8)4+,
c. *'1)!+,
d. *')+,
:. The net cash flow for year is a. *'+)8+, b. *'+):+,
c. *',)1+,
d. *')!+,
+,. The payback period for the project is a. ' years b. '.14 years
c. '.+ years
d. years.
+1. The accounting rate of return of the project is a. 4I b. :I c. 1!I
d. 1+I
+!. The present value of year twoBs cash flow is a. *!')44.+, b. *!+)8+.!+ c. *!)1,,.4+
d. *!:)4+,.4+
+'. The present value of the projectBs net cash flow is a. *:+)+,.1+ b. *:8)1+1.!+ c. *1,1)8'.4+
d. *1,)4+,.!+
You're=rounded Readingto a Preview +. The profitability inde% of the project the nearest hundredth? is a. ,.: b. ,.:8Unlock full accessc.with1.,! d. 1.,+ a free trial.
++. The project would be accepted on the basis of the Download With Free Trial a. *ayback and present value results. b. Accounting rate of return and profitability inde% results. c. *ayback results only d. a and b combined
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Anse! S"ee# T"e$!% 1. D !. C '. D . D +. D . C 4. ; 8. A :. D 1,. D 11. D 1!. ; 1'. ; 1. D 1+. A 1. D 14. A 18. D 1:. C !,. A
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