Acteating 3Prof. Stevess Supplemental Prebioms Capital Budgeting Decleians () V Given: Cort of equipment -S41,000 Useful ife6 years Salvage vale 0 Cost of eapital- 10 Bequired Compare the dellar bensfis of sing acoelernted deprecintion (double declining balance methed) ined of saightline depoecintion sader the followingg sumptione A) tan nates of J0% continge throngh the eeet six yeas 3 for the fest three years thent4 for the next three ye 2/ A specini machine can seve $2,100 per year in cash operating expenses for the ne years. The cost is $11,000. No aivage vale is expected. Asume t averages (2/7) o txable incoore ad the cot of capital-10% fround to oarent dollhr). Reguirod Cempute uring straight-line depreciation: a) paytack period b) internal rate of retum * e) net prtsant value, 3/ Given Project A. Iritial oost $30,000 20,000 20,000 10,000 30,000 Lift tyers) Cash flow $18,760 6,600 10,000 2,000 6,600 Which projects should be selected if's40,000 in available for invetmect EssO 000 10 avallable? 4/ Given: Cost of an investment-$200,000 Life -5 yees Salvage valae -D cost of capital- t-4 What CFBT (cash lows before taxes) is nerded to achieve a set present value-$10 (NPV is calenlated using CFAT, cash flow after tases.) Luse s/a dapuc, 1. An investment will generate annual CFAT (cash flows after taxes) of $630,000. It would cost $1,680,000 to acquire and should last five years with no salvage value expected. The payback period for this investment is: a. 6.27 years b. 2 years and 6 months c. 2 years and 8 months d. 2.8 years 2. Refer to the preceding question. The investment's accounting rate of return using its initial investment and straight-line depreciation is: a. 35% b. 17.5% c. 25.4% d. Cannot be determined from the given information 3. The Queens Co. estimates it can save $4,200 per year in cash operating costs for the next 10 years if it buys a special-purpose machine at a cost of $16,500. No salvage value is expected. The company's minimum required rate of return is 14%. a. The investment is acceptable because the c. The project is acceptable because the IRR NPV is positive. b. The investment should be rejected because d. The project should be rejected based on its the NPV is negative. is less than the cost of capital rate. IRR. 4. Refer to question 3. The NPV is (rounded): a. $16,500 b. $21,900 c. $5,407 d. ($5,407) 5. The reason depreciation must be considered in a NPV analysis is: a. Depreciation is a cash flow item b. Depreciation has no tax effects c. Depreciation should not be considered d. Depreciation can save income taxes 6. A company is considering investing in one of two machines: one new and one it already has been using. If the old machine, acquired three years ago, has four years of remaining life, what is the present value of the tax savings generated by straight-line depreciation over its remaining life. The original cost of the machine was $448,000, The cost of capital is 12% and the tax rate - 40%. Round to nearest whole dollar. a. $25,600 b. $77,747 e. S112,000 d. $136,058 7. The cost of equipment is $168,000; the useful life is 6 years. Salvage value is zero and the cost of capital- 10% and the tax rate - 30%. The present value of the tax savings resulting from the double-declining balance method of depreciation is approximately (round to the nearest whole dollar): e. $50,400 d. $36,840 a $45,976 b. $153,252 8. Refer to the preceding question. It would be reasonable to expect that the present value of the tax savings resulting from the use of the straight-line method of depreciation is: a. More than the preceding result b. Less than the preceding result C. Equal to the preceding result d. Not related to the preceding result 9. A special machine can save $11,200 per year in cash operating expenses for the next 10 years. The cost is $44,000. No salvage value is expected. Assume the tax rate averages 2/7 of tasable income, straight-line depreciation is used, and the cost of capital - 109%. The CFAT is (round to the nearest dollar): a SI1,200 b. $9.258 C 6,800 d. $4,000 10. Refer to the preceding question. The internal rate of return, using linear interpolation and rounding to two decimal places, is: a. 25.45% b. 21.04% C. 1234% d. 16.47% 11. A machine is being considered as a capital investment. Its cost is exactly equal to the present value of the inflows promised by the machine over its useful life discounted at the company's cost of capital. If the cost of capital is 14%, then the internal rate of returm (IRR) of this machine is: a. Greater than 14% b Less than 14% C. Equal to 14% d. Cannot be determined from the given information 12. Refer to the preceding question. The net present value (NPV) of the machine must be: a. Greater than zero b. Less than zero c. Zero d. Cannot be determined from the given information 13. An assumption made by the net present value method is that: All cash flows occur at the beginning of the period b. All cash flows are reinvested in other projects that yield the internal rate of return C All cash flows ignore the time value of moey d. All cash flows are reinvested in other projects that yield the cost of capital 14. You want to determine the internal rate of retum ofa project that generates non-equal cash flows over its life. By trial and error, you find that a discount rate of 16% yields a negative net present value, but a discount rate of 10% yields a positive net present value. The true rate of returm must be: a Greater than 16% or less than 10% b. Less than 16% but greater than 10% C. Greater than 16% d. Cannot be determined from the given information 15. Given cash flows for an ivestment proposal: Years 1/54.000, 2/ S3.600 3/53,000 4/52,400, and 5 $2.000 If the investment's cost is $9,000, the payback period (rounded to nearest tenth) is 25 years 4. 29 years 16. A vendor sells fresh flowers bundled into umall units He waits for his supplier to deliver fresh units of Bowers cach moming He can only sell fresh flowers (not yestenday's leftoven) and has develped the follewing probability distribution of daily demand for this item Probability per unit. Using net profit as a payoff, and the expected value criterion, how many units should the vender ender cach day to maximie prodit over the long-term CS-(oneao a nghe ansees IS-A Sus on o9s sbe o oo 17. Refer so the previous questien The mog the vendor should be willing to pan for ans information conceming demand is CIS Table, hased on net peodies used to make a decision involving variable demand considers which kind e Les from obolete items a Lous of fubure profits A Loss from undendock costs Criterion of rationality 4 Table of regrets T nad pout a ues an u oap fape C y Masimas criterie AMasimin criterion 20. Asacher is f omputer te The researcher has develped tis peobablity diaribution concening his mondhly ne of consputer time II hours of use per month 30 Probability 10 60 15 25 30 100 150 200 20 Which option should be selected, using the expected value criterion, so as to minimire monthly conts (Construct a payoff table reflecting the possible costs for each combination of action and event. Then apply the EV criterion.) a Option I b. Option 2 c Oprion 3 d. It does not matter which option is chosen 21. When the EOQ formula is used, which costs are minimized? a. Order costs and carrying costs b. Order costs and stockout costs c. Order, carrying and stockout costs d. Carrying costs and stockout costs 22. What assumption is made in developing and applying the EOQ model? a. Demand is variable b. Demand is always maximized c. Demand is known and constant d. Demand is not relevant 23. The Queens Box Company experiences a constant demand of 48,000 boxes per year to operate its business The unit cost is 30 (cents). Placing an order costs $20 and annual carry ing costs are $2 unit. The company operates 250 days per year and maintains a safety stock of 576 boxes. The lead time for an order of boves is 4 business days. The EOQ (rounded to the nearest whole number) is: a 576 units b. 490 units C. 3098 units d. 980 units 24. Refer to the preceding question. The total order and carrying costs associated with the EOQ level is: a $980 b. $490 e S1960 d. None of these 25. Refer to question 23. The reorder point, R, is a 1,344 units e $76 units d. Cannot be determined from this information b. 768 units