Deck 13: Capital Budgeting and Strategic Investment Decisions

Question 1

Cash flows for a capital budgeting analysis are affected by inflation, but not by deflation.

Answer 1

B

Question 2

The accrual accounting rate of return method does not consider the time value of money.

Answer 2

A

Question 3

In general, the initial project investment does not require discounting in a net present value analysis.

Answer 3

A

Question 4

The first step in addressing capital budgeting decisions is to identify relevant cash flows.

Question 5

Uncertainty is very often a factor when estimating a project's terminal value for an NPV analysis.

Question 6

The effect of a strategic investment decision on a company's reputation is often difficult to quantify.

Question 7

Managers responsible for proposing a project are likely to be favourably biased in their estimates of future project cash flows.

Question 8

Income taxes have a major effect on capital budgeting decisions.

Question 9

Managers should consider qualitative information in making capital budgeting decisions.

Question 10

In capital budgeting decisions, depreciation shields part of operating profit from the effect of income taxes.

Question 11

Capital budgeting is a process managers' use when choosing investments with multi-year cash flows.

Question 12

A capital investment's expected useful life is inversely correlated with the uncertainty of its cash flows.

Question 13

Incremental operating cash flows can be associated with changes in capacity or product quality in capital budgeting decisions.

Question 14

Cash flows to be considered in capital budgeting decisions generally fall into three major groups: initial investment, incremental operating cash flows, and terminal cash flows.

Question 15

Because of its complex calculation, few managers rely on the payback period as a capital budgeting analysis tool.

Question 16

Under the general quantitative rule, a project with a net present value less than zero should not be accepted.

Question 17

The internal rate of return method assumes that future cash flows can be reinvested to earn the same return generated by a capital investment project.

Question 18

Sensitivity analysis is usually performed after applying quantitative analysis techniques in a capital budgeting decision.

Question 19

The time value of money is important in completing a net present value analysis.

Question 20

The cost of disposing of an old asset is considered irrelevant in capital budgeting decisions.

Question 21

For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true?

A) The project is acceptable.
B) The net present value is positive.
C) The internal rate of return is less than the required rate of return.
D) The profitability index is less than one.

Question 22

A firm's required rate of return is the rate which makes the

A) Determination of the NPV possible.
B) Net present value equal to zero.
C) Internal rate of return equal to the average rate of return.
D) Profitability index greater than zero.

Question 23

Capital budgeting decisions typically fall into which of the following major categories?
I $\quad$ Developing or expanding products or services
II $\quad$ Allocating costs to products or services
III $\quad$ Replacing or reorganising assets or services

A) I, II, and III
B) I and II only
C) II and III only
D) I and III only

Question 24

Philipp would like to automate its calligraphy operation. The equipment will cost $150,000 plus freight, installation, and testing costs of $5,500. The expected life of the project is 8 years, with annual cost savings of $20,000. The minimum rate of return is 12% and estimated terminal value is $3,000. Ignore income taxes. The profitability index of the project is

A) 0.65
B) 1.55
C) 1.57
D) 0.67

Question 25

Which of the following is not a step in the process for addressing capital budgeting decisions?

A) Perform sensitivity analysis.
B) Identify decision alternatives.
C) Identify financial statement effects.
D) Apply quantitative analysis techniques.

Question 26

Hewitt Ltd has chosen four potential investment projects. Listed below are some relevant data on these projects: $\begin{array}{c}\begin{array}{c}\underline{\text { Project} } \\ 1 \\2 \\3 \\4\end{array}\begin{array}{c}\underline{\text { Investment }} \\ \$ 125,000 \\150,000 \\75,000 \\112,500 \end{array}\begin{array}{c}\underline{\text { Net Present Value }} \\ \$ 62,500 \\45,000 \\52,500 \\45,000 \end{array}\end{array}$
Use the profitability index to rank these investments in terms of preference.

A) 3, 1, 4, 2
B) 1, 3, 2, 4
C) 2, 1, 4, 3
D) 1, 2, 3, 4

Question 27

The nominal method of NPV analysis adjusts future cash flows for the impact of inflation.

Question 28

The time value of money means

A) The more you invest, the smaller your return is
B) A dollar received today will be worth more than a dollar received in the future
C) A dollar received today will be worth less than a dollar received in the future
D) Ignoring the profitability of a capital investment

Question 29

The process that managers use when they evaluate multi-year investments is called

A) Breakeven analysis
B) Capital budgeting
C) Activity-based budgeting
D) Short-term decision making

Question 30

The local school board is considering the purchase of a new computer system. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.

A) $23,656
B) $25,714
C) $23,142
D) $24,776

Question 31

Hay Ltd is considering the purchase of a new truck which costs $14,340. The truck is expected to save $3,600 in operating costs annually for the next 7 years. How low can the annual cost savings be and still provide a 15% return? Ignore income taxes.

A) $3,441
B) $5,967
C) $475
D) $7,458

Question 32

Richard borrows $10,000 from his mother. He will repay her $2,000 at the end of each of the next four years and the balance at the end of the fifth year. If the interest rate is 12%, what is the amount to be paid at the end of the fifth year?

A) $2,000.00
B) $3,926.00
C) $6,924.16
D) $5,869.65

Question 33

The net present value method is

A) The sum of the projected cash inflows and outflows valued in today's dollars.
B) Used to appraise a capital project's qualitative factors.
C) Used to show how long the initial investment will be at risk.
D) The sum of the cash inflows, discounted to time zero.

Question 34

Robertson is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. The net present value for this investment is

A) Cannot be determined
B) Positive
C) Zero
D) Negative

Question 35

Last semester a class gave a teacher $810 to fly to Bali. However, he decided not to go until he had enough money to fly back, an additional $690. If he invests the $810 at 8%, when can he make the trip, assuming no change in ticket prices?

A) 2 years
B) 8 years
C) 6 years
D) 4 years

Question 36

Which of the following is the best example of a capital budgeting decision?

A) Deciding which product to emphasise when there are constrained resources
B) Deciding the price of a product for the next six months
C) Forecasting accrual basis profits for the next five years
D) Purchasing a piece of equipment with an expected life of eight years

Question 37

Erwin Ltd is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is

A) Acceptable, because it earns exactly 12%.
B) Unacceptable, because it earns a rate below 12%.
C) Acceptable, because it has a positive NPV.
D) Unacceptable, because it has a 0 NPV.

Question 38

You are currently entering university and you want to buy your uncle's Mercedes when you graduate. He has promised to sell it to you for $18,000. How much will you have to deposit now, in an account earning 8%, to have enough money buy the car in 4 years?

A) $3,060
B) $6,122
C) $4,500
D) $13,230

Question 39

Some of the steps in the process for addressing capital budgeting decisions are listed below. Which lettered choice puts the steps in the proper order?
1 Identify relevant cash flows.
2 Perform sensitivity analysis.
3 Apply quantitative techniques.

A) 1, 3, 2
B) 1, 2, 3
C) 2, 3, 1
D) 3, 1, 2

Question 40

Which of the following is not a quantitative technique commonly used in capital budgeting decisions?

A) Payback
B) Net present value
C) Activity-based budgeting
D) Internal rate of return

Question 41

Melvin Ltd has the following equity structure: $\begin{array}{c}\begin{array}{lll}\\\text {Long-term debt}\\ \text {Preference shares}\\ \text {Ordinary shares} \end{array}\begin{array}{c}\underline{\text { Market Value }} \\\$ 300,000 \\500,000 \\200,000\end{array}\begin{array}{c}\underline{\text { Pretax Cost }} \\ 10 \% \\10 \\15\end{array}\begin{array}{c}\underline{\text { After-Tax Cost }} \\6 \% \\10 \\15 \end{array}\end{array}$
Melvin's weighted average cost of capital is:

A) 12.5%
B) 9.8%
C) 10.3%
D) 11.0%

Question 42

Paul is presenting a capital budgeting project to Karl, his division manager. Which one of the following is likely to have the least amount of bias when evaluating this project?

A) Cannot be determined
B) Sebastian
C) Tamara
D) The company's accountant

Question 43

Meinhardt (Qld) Ltd invested in a 3-year project and expects a 15% rate of return. Annual cash inflows from the project are: year 1 $8,000; year 2 $8,500; and year 3 $9,500. The net present value is $4,000. What was the amount of the original investment? Ignore income taxes.

A) $23,637
B) $17,637
C) $15,637
D) $19,637

Question 44

In completing a sensitivity analysis for a capital budgeting project, which of the following would typically be varied? I $\quad$ Disconnt rate
II $\quad$ Future cash flows
III $\quad$ Future accrual-basis revernues ard expenses

A) I, II, and III
B) I and III only
C) II and III only
D) I and II only

Question 45

Protiviti is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. What is the internal rate of return on this investment?

A) Cannot be determined
B) Less than 20%
C) Equal to 20%
D) More than 20%

Question 46

Uniform cash flows from a capital project are necessary for which of the following calculations?
I $\quad$ Net present value
II $\quad$ Internal rate of return
III $\quad$ Profitability index

A) I and II only
B) II and III only
C) I and III only
D) None of the above (not I, II, or III)

Question 47

Acebeck Pty Ltd is considering a project that would provide a single cash inflow eight years from now of $80,000. What is the most that Acebeck would be willing to spend on this project if the discount rate is 16%?

A) $22,191
B) $262,295
C) $24,400
D) $288,400

Question 48

Grant Ltd invested in a machine that has a 3-year useful life. The company's discount rate is 12%, and the net present value of the investment is $(573). Annual cost savings are: year 1 $3,000; year 2 $4,000; and year 3 $5,000. Determine the original cost of the machine. Ignore income taxes.

A) $9,500
B) $12,000
C) $8,500
D) $10,000

Question 49

The rate of return that results in a zero net present value for a project is called the:

A) Discount rate of return
B) Average rate of return
C) Internal rate of return
D) Required rate of return

Question 50

If the internal rate of return exceeds the discount rate, the net present value is:

A) Negative
B) Zero
C) Less than one
D) Positive

Question 51

Grant Ltd has the following equity structure: $\begin{array}{c}\begin{array}{l}\\ \text {Long-term debt}\\ \text {Preference shares}\\ \text {Ordinary shares}\end{array}\begin{array}{c}\underline{\text { Market Value }} \\\$ 700,000 \\50,000 \\250,000 \end{array}\begin{array}{c}\underline{\text { Cost} } \\15 \% \\5 \\15 \end{array}\end{array}$
The weighted average cost of capital is:

A) 10.3%
B) 14.5%
C) 8.2%
D) 8.7%

Question 52

A negative net present value means that the:

A) Company chose the wrong discount rate
B) Internal rate of return is less than the required rate of return
C) Project is acceptable
D) Present value of the inflows exceeds the present value of the outflows

Question 53

What is the net present value of a capital project to buy new equipment for replacing old equipment, given the following data and a minimum return of 12%? Ignore income taxes. $\begin{array}{lrr}&\text {Old}&\text { New}\\&\underline{\text { Equipment }}&\underline{\text { Equipment }}\\\text { Purchase price } & \$ 21,600 & \$ 36,000 \\\text { Accumulated depreciation } & 7,200 & 0 \\\text { Remaining useful life (years) } & 8 & 8 \\\text { Current salvage value } & 12,000 & 0 \\\text { Salvage value in 8 years } & 1,000 & 2,000 \\\text { Annual operating costs } & 14,000 & 8,000\end{array}$

A) $7,020
B) $6,616
C) $(5,788)
D) $4,596

Question 54

Which of the following statements regarding NPV analysis is true?

A) The timing of incremental revenues and costs is irrelevant in NPV analysis
B) Uncertainties increase as the dollar value of an investment increases
C) The discount rate can be calculated with certainty if it is based on the weighted average cost of capital
D) Managers should generally accept projects with an NPV greater than zero

Question 55

Which of the following capital budgeting methods ignores the time value of money?

A) Payback period
B) Internal rate of return
C) Net present value
D) Profitability index

Question 56

Philipp is considering automating its production line. It will cost $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 per year for 14 years. The firm requires a 20% return. Ignoring income taxes, what is the payback period?

A) 6 years
B) 3 years
C) 4.2 years
D) 5 years

Question 57

Sapient Ltd is contemplating the purchase of a piece of equipment with the following cash flow data: $$\begin{array} { c c c c } &&\text { Incremental }\\\underline{\text { Year }} & \underline{\text { Initial Cost } }&\underline{\text { Contribution }} & \text { Terminal Value } \\ 0 & \$ 84,000 & & \\1 & & \$ 30,000 & \\2 & & 25,000 & \\3 & & 20,000 & \\4 & & 15,000 & \$ 9,000\end{array}$$ Ignoring income taxes, what is the payback period?

A) 3.50 years
B) 3.00 years
C) 3.33 years
D) 3.60 years

Question 58

Wingbury Ltd has invested in a project with a cost of $36,504, annual net cash flows of $12,000, a terminal value of $4,000, and a 5-year useful life. The firm uses a 16% discount rate. Compute the internal rate of return to the nearest tenth of a percent. Ignore income taxes.

A) 18.8%
B) 19.2%
C) 20.8%
D) 19.8%

Question 59

Christoph wants to purchase a machine for a new product line that costs $138,750. The company's engineering department estimates the machine will last 10 years and provide an annual contribution margin of $25,000. Ignore income taxes. The internal rate of return to the nearest tenth of a percent is:

A) 12.64%
B) 12.4%
C) 11.6%
D) 13.46%

Question 60

Which of the following factors are subject to uncertainty in an NPV analysis? I $\quad$ Project life
II $\quad$ Appropriate discount rate
III $\quad$ Terminal value

A) I, II, and III
B) I and II only
C) II and III only
D) I and III only

Question 61

Teddy & Sons invested in a project that cost $100,000. It had a net present value of $15,975 and a useful life of 8 years. The firm uses a 14% discount rate, and the project has an internal rate of return of 16%. What are the annual cost savings provided by the project?

A) $8,600
B) $25,000
C) $26,698
D) $9,263

Question 62

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine } & \$ 100000 \\\text { Annual cost savings in cash expenses } & 45000 \\\text { Terminal value } & 8000 \\\text { Maintenance required in the 4th year } & 5000 \\\text { Book value of the old machine } & 20000\end{array}$ The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the maintenance cost in year 4 is:

A) $420
B) $2,226
C) $3,180
D) $954

Question 63

Leopold Ltd has invested in a machine with a cost of $37,164 and annual cost savings of $6,000. The discount rate is 8%, and the machine's internal rate of return is 12%. Ignore income taxes. The estimated life of the machine is:

A) 12 years
B) 8 years
C) 6.2 years
D) Cannot be determined

Question 64

Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: $\begin{array}{c}\begin{array}{lr}\quad\quad\quad\quad\quad\underline{\text { Old Machine }}\\\text { Cost } & \$ 40,000 \\\text { Accumulated depreciation } & \$ 20,000 \\\text { Remaining life } & 4 \text { years } \\\text { Current salvage value } & \$ 5,000 \\\text { Salvage value in 4 years } & \$-0- \\\text { Annual cash operating costs } & \$ 18,000\end{array}\begin{array}{lr}\quad\quad\quad\quad\quad\underline{\text { New Machine }}\\\text { Cost } & \$ 19,000 \\\text { Estimated useful life } & 4 \text { years } \\\text { Salvage value in 4 years } & \$ 5,000 \\\text { Annual cash operating costs } & \$ 14,000\\\\\\\end{array}\end{array}$ The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 2015, $5,700 in 2016, $3,800 in 2017, and $1,900 in 2018. Assume Marie would purchase the new machine in December 2014 and dispose of the old machine in January 2015. Marie's 2014 depreciation tax shield for the old machine is:

A) $2,000
B) $5,000
C) $4,000
D) $3,000

Question 65

AGL is considering the purchase and implementation of an enterprise-wide information system. Which of the following would be the least biased source of qualitative information about the project?

A) Employees who would use the system
B) Information technology staff who would implement the system
C) The software vendor
D) Other companies that have implemented the same system

Question 66

Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: $\begin{array}{c}\begin{array}{lr}\quad\quad\quad\quad\quad\underline{\text { Old Machine }}\\\text { Cost } & \$ 40,000 \\\text { Accumulated depreciation } & \$ 20,000 \\\text { Remaining life } & 4 \text { years } \\\text { Current salvage value } & \$ 5,000 \\\text { Salvage value in 4 years } & \$-0- \\\text { Annual cash operating costs } & \$ 18,000\end{array}\begin{array}{lr}\quad\quad\quad\quad\quad\underline{\text { New Machine }}\\\text { Cost } & \$ 19,000 \\\text { Estimated useful life } & 4 \text { years } \\\text { Salvage value in 4 years } & \$ 5,000 \\\text { Annual cash operating costs } & \$ 14,000\\\\\\\end{array}\end{array}$ The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 2015, $5,700 in 2016, $3,800 in 2017, and $1,900 in 2018. Assume Marie would purchase the new machine in December 2014 and dispose of the old machine in January 2015. The net cash flow associated with selling the old machine in January 2015 (i.e., the value of the sale and any tax consequences) would be:

A) $11,000
B) $5,000
C) $15,000
D) $20,000

Question 67

McKinsey & Co. invested in a project that was to last for 2 years. The project has an internal rate of return of 12%. The project is expected to produce cash inflows of $70,000 in the first year and $80,000 in the second year. The project cost is:

A) $126,270
B) $143,760
C) $142,510
D) $150,000

Question 68

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine } & \$ 100000 \\\text { Annual cost savings in cash expenses } & 45000 \\\text { Terminal value } & 8000 \\\text { Maintenance required in the 4th year } & 5000 \\\text { Book value of the old machine } & 20000\end{array}$ The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the total savings (excluding the maintenance in year 4) in annual cash operating costs is:

A) $50,167.50
B) $48,667.50
C) $162,225.00
D) $113,557.50

Question 69

An organisation that provides housing for abused women has limited housing, so it pays rent for several families. The director is considering expanding the housing facilities by purchasing a duplex that has a useful life of 10 years. The estimated cost is $100,000. Using a discount rate of 15%, the present value of the future savings on rent is $120,000. To yield an internal rate of return that is at least 15%, the actual cost cannot exceed the estimated cost of $100,000 by more than:

A) $2,000
B) $10,038
C) $3,985
D) $20,000

Question 70

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine } & \$ 100000 \\\text { Annual cost savings in cash expenses } & 45000 \\\text { Terminal value } & 8000 \\\text { Maintenance required in the 4th year } & 5000 \\\text { Book value of the old machine } & 20000\end{array}$ The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the total tax savings from the depreciation tax shield is:

A) $19,899.60
B) $21,630.00
C) $46,432.40
D) $50,470.00

Question 71

Qualitative factors often influence strategic investment decisions. Which of the following is the best example of such a factor?

A) Discount rate estimates
B) Changes in product prices based on consumer demand
C) Changes in consumer demand based on product prices
D) Increased ability to ship product in a timely manner

Question 72

Acroe Trading Pty Ltd. has $100,000 available for long-term investment. Which projects should be selected from the list below? $\begin{array}{c}\begin{array}{c}\underline{\text { Project} } \\ 1 \\2 \\3 \\4 \\5\end{array}\begin{array}{c}\underline{\text { Cost }}\\\$ 60,000\\40,000 \\40,000 \\20,000 \\60,000\end{array}\begin{array}{c}\underline{\text { IRR }} \\16 \% \\20 \% \\24 \% \\14 \% \\18 \%\end{array}\begin{array}{c}\underline{\mathrm{NPV}}\\\$ 3,413 \\7,563 \\8,036 \\1,313 \\14,583 \end{array}\begin{array}{c}\underline{\text { Profitability Index } }\\ 1.057 \\1.190 \\1.201 \\1.066 \\1.243\end{array}\end{array}$

A) 2 and 5
B) 4 and 5
C) 2, 3, and 4
D) 3 and 5

Question 73

The payback period is deficient as a decision criterion for capital projects because it: I $\quad$ Disregards relative profitability
II $\quad$ Ignores income beyond the payback period
III $\quad$ Does not take into account the time value of money

A) I, II, and III
B) I only
C) II only
D) III only

Question 74

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine } & \$ 100000 \\\text { Annual cost savings in cash expenses } & 45000 \\\text { Terminal value } & 8000 \\\text { Maintenance required in the 4th year } & 5000 \\\text { Book value of the old machine } & 20000\end{array}$ The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the cash flows for year 4 is:

A) $21,624
B) $21,319
C) $28,951
D) $23,545

Question 75

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine } & \$ 100000 \\\text { Annual cost savings in cash expenses } & 45000 \\\text { Terminal value } & 8000 \\\text { Maintenance required in the 4th year } & 5000 \\\text { Book value of the old machine } & 20000\end{array}$ The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the cash flows from the sale of the old machine is:

A) $17,860
B) $15,000
C) $13,395
D) $16,340

Question 76

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine } & \$ 100000 \\\text { Annual cost savings in cash expenses } & 45000 \\\text { Terminal value } & 8000 \\\text { Maintenance required in the 4th year } & 5000 \\\text { Book value of the old machine } & 20000\end{array}$
The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the terminal cash flows is:

A) $3,175
B) $8,000
C) $4,536
D) $1,361

Question 77

A company is currently buying a part at a cost of $12 each. It is considering buying a machine that will produce the part at a variable cost of $8. Each unit of input produces the part plus a by-product, which is sold for $1. The machine will cost $40,000 and will have a useful life of 5 years. The company requires an 8% return. What annual volume is necessary to justify making the investment? Ignore income taxes.

A) 8,000 units
B) 2,558 units
C) 3,198 units
D) 12,792 units

Question 78

Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: $\begin{array}{c}\begin{array}{lr}\quad\quad\quad\quad\quad\underline{\text { Old Machine }}\\\text { Cost } & \$ 40,000 \\\text { Accumulated depreciation } & \$ 20,000 \\\text { Remaining life } & 4 \text { years } \\\text { Current salvage value } & \$ 5,000 \\\text { Salvage value in 4 years } & \$-0- \\\text { Annual cash operating costs } & \$ 18,000\end{array}\begin{array}{lr}\quad\quad\quad\quad\quad\underline{\text { New Machine }}\\\text { Cost } & \$ 19,000 \\\text { Estimated useful life } & 4 \text { years } \\\text { Salvage value in 4 years } & \$ 5,000 \\\text { Annual cash operating costs } & \$ 14,000\\\\\\\end{array}\end{array}$
The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 2015, $5,700 in 2016, $3,800 in 2017, and $1,900 in 2018. Assume Marie would purchase the new machine in December 2014 and dispose of the old machine in January 2015. The tax effect of selling the new machine in 2018 would be:

A) $0
B) $5,000
C) $3,000
D) $2,000

Question 79

In January, Thomas Ltd purchased a new machine for $80,000 that has a useful life of 10 years and a terminal value of $5,000. Annual cash operating savings from the machine are $20,000. The income tax rate is 40%. What is the after-tax payback period?

A) 6.67 years
B) 4.00 years
C) 5.26 years
D) 4.85 years

Question 80

Lockhart Hospital is considering the purchase of new medical equipment for $25,000. The old equipment has zero salvage value. The costs associated with operating the equipment are: $\begin{array}{lcc}&\underline{\text { Old Equipment}}&\underline{\text { New Equipment} }\\\text { Labor } & \$ 9,000 & \$ 4,500 \\\text { Maintenance } & 2,000 & 1,200 \\\text { Miscellaneous } & 1,500 & 1,300 \\\text { Depreciation } & 8,000 & 4,750\end{array}$
If the new machine is purchased and ignoring income taxes, the payback period is:

A) 4.55 years
B) 3.57 years
C) 2.13 years
D) 2.86 years