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Exam 12: Strategy and the Analysis of Capital Investments

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Question 51

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Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 each year for the next 5 years.Expenses are expected to include direct materials,direct labor,and factory overhead (excluding depreciation) totaling $80,000 per year.The firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the investment's net present value (NPV) of the proposed investment (rounded to the nearest hundred) ? (The PV annuity factor for 10%,5 years,is 3.791 and for 4 years it is 3.17.The present value factor for 10%,5 years,is 0.621. ) Assume that cash inflows occur at year-end.

A) $48,800.
B) $79,800.
C) $99,000.
D) $112,000.

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Question 52

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Consider two projects,A and B.The present value (PV) of cash inflows for project A is $55,000,while the present value of cash outflows for this project is $50,000.Project B,on the other hand,has the following characteristics: PV of cash inflows = $24,000;PV of cash outflows = $20,000.Assume that these two projects are mutually exclusive.Assume that the company has adequate capital to fund either investment option.All of the following statements are true except:

A) The NPV of Project A is $5,000.
B) The IRR of Project A is greater than the cost of capital (discount rate) .
C) The profitability index (PI) for Project A is 1:1.
D) Project A is preferable to Project B (all else held constant) .

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Question 53

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Which one of the following is true for the IRR method?

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 each year for the next 5 years.Expenses are expected to include direct materials,direct labor,and factory overhead (excluding depreciation) totaling $80,000 per year.The firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the payback period for the new machine (rounded to the nearest one-tenth of a year) ? Assume that the cash inflows occur evenly throughout the year.

Tyson Company has a pre-tax net cash inflow of $1,200,000.The company can claim depreciation expense of $500,000 this year.The company is subject to a combined income tax rate of 26%.What is the after-tax cash flow for the year?

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 each year for the next 5 years.Expenses are expected to include direct materials,direct labor,and factory overhead (excluding depreciation) totaling $80,000 per year.The firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the annual book (accounting) rate of return based on the initial investment?

For a typical capital investment project,the bulk of the investment-related cash outflow occurs:

All of the following capital budgeting models incorporate the time value of money except:

Which one of the following statements concerning capital budgeting is not true?

The process of identifying,evaluating,selecting,and controlling capital investments is referred to as:

Green Leaf Inc.is considering the purchase of a new piece of equipment for $30,000.The projected after-tax net income per year on this investment is estimated to be $5,000.The firm uses straight-line depreciation.This asset is expected to have a useful life of 5 years and no salvage value at the end of its useful life.Management of the company considers a 10% return on investment to be satisfactory.The present value factor for 10%,5 years = 0.621,while the present value annuity factor for 5 years at 10% is 3.791. Required: 1.What is the estimated net present value (NPV)of the machine? 2.What is the profitability index (or,present value index),PI,for this proposed investment? 3.For what purpose is the profitability index (PI)useful,in a capital budgeting context? 4.Use the built-in function in Excel to estimate this project's internal rate of return (IRR). 5.Use the built-in function in Excel to estimate the project's modified internal rate of return (MIRR)under the assumption that the interim cash flows from the investment generate a rate of return of: (a)10%,and (b)20%. 6.How does the MIRR measure differ from the conventional IRR calculation?

Which of the following methods can be used to deal formally with uncertainty in the capital-budgeting process?

Which of the following statements regarding real options is true:

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 ten years.The government exempts taxes on profits from new investments in order to encourage capital investments.This legislation most likely will remain in effect in the foreseeable future.The equipment is expected to have ten years of useful life with no salvage value.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 average investment (rounded to two decimal places) is:

Without knowing its required rate of return (i.e. ,hurdle rate) for use in the evaluation of capital investment projects,a company will be prohibited from calculating a project's:

Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 each year for the next 5 years.Expenses are expected to include direct materials,direct labor,and factory overhead (excluding depreciation) totaling $80,000 per year.The firm uses straight-line depreciation with no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.What is the net present value (NPV) of the investment? (The PV annuity factor for 5 years,10% is 3.791. ) Assume that the cash inflows occur at year-end.

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 ten years.The government exempts taxes on profits from new investments in order to encourage capital investments.This legislation most likely will remain in effect in the foreseeable future.The equipment is expected to have ten years of useful life with no salvage value.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 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.

Income tax effects are associated with all of the following except:

Quip Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can produce sales of $200,000 each year for the next 5 years.Expenses are expected to include direct materials,direct labor,and factory overhead (excluding depreciation) totaling $80,000 per year.The firm uses the straight-line depreciation and expects the machine to have a residual value of $50,000.Quip's tax rate is 40%.Management requires a minimum of 10% return on all investments.What is the net income (after tax) in Year 3?

Which one of the following methods assumes that all interim cash inflows generated by an investment earn a return equal to the internal rate of return (IRR) of the investment?