Question 1

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?

Accepted Answer

The answer of Teddy & Sons invested in a project...

Question 2

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:

Accepted Answer

The answer of Bruno is acquiring a new machine with...

Question 3

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:

Accepted Answer

The internal rate of return (IRR) is the discount rate at which the net present value (NPV) of an investment is zero. Given that the IRR is 12% and the cost savings are $6,000 annually, the estimated life of the machine can be calculated using the present value of an annuity formula. Solving for the number of periods (n) when the IRR equals 12% results in approximately 12 years.

Question 4

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:

Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. For the old machine, the depreciation expense is $5,000. The tax rate is 40%. Therefore, the depreciation tax shield is $5,000 * 40% = $2,000. However, the question specifically asks for the 2014 depreciation tax shield for the old machine, which is not directly provided in the given options. Given the provided options and the context, it seems there might be a misunderstanding in the interpretation of the question or a mistake in the calculation or options provided. Based on the standard calculation, the correct depreciation tax shield should be $2,000, but since this option is not available, the closest correct interpretation based on the provided data and standard financial calculations would be $2,000, which is not listed. Therefore, there seems to be a discrepancy in the question or the provided options.

Question 5

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?

Accepted Answer

Other companies that have implemented the same system are likely to provide a more objective assessment of the system's performance and impact, as they do not have a vested interest in AGL's purchase decision.

Question 6

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:

Accepted Answer

The net cash flow from selling the old machine is the salvage value minus the tax effect on the gain/loss. The book value is $20,000 ($40,000 cost - $20,000 accumulated depreciation). Selling for $5,000 results in a $15,000 loss ($5,000 - $20,000). The tax benefit from the loss is $6,000 ($15,000 loss * 40% tax rate). Thus, the net cash flow is $5,000 + $6,000 = $11,000.

Question 7

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:

Accepted Answer

The correct answer is A because the project cost is $126,270. This can be calculated using the following formula:Project cost = Present value of cash inflows / (1 + IRR)^nwhere:IRR = internal rate of returnn = number of yearsIn this case, the IRR is 12% and the number of years is 2. The present value of the cash inflows is $143,760. Therefore, the project cost is $126,270.

Question 8

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:

Accepted Answer

The present value of the total savings is calculated by finding the present value of the annual cash savings of $45,000 over 5 years at a discount rate of 12%. The formula for the present value of an annuity is used here.

Question 9

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:

Accepted Answer

The answer of An organisation that provides housing for abused...

Question 10

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:

Accepted Answer

The present value of the total tax savings from the depreciation tax shield can be calculated using the formula for the depreciation tax shield, which is the depreciation expense multiplied by the tax rate. The depreciation expense for the new machine is its cost ($100,000) minus its terminal value ($8,000), divided by its useful life (5 years), which equals $18,400 per year. The annual tax savings from the depreciation is then $18,400 * 30% = $5,520. The present value of these tax savings over 5 years, discounted at a 12% rate, can be calculated using the present value of an annuity formula or a financial calculator. The correct calculation leads to the present value of the tax shield being closest to $19,899.60.

Question 11

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

Accepted Answer

Increased ability to ship product in a timely manner is a qualitative factor that can influence strategic investment decisions, as it relates to operational efficiency and customer satisfaction, rather than quantifiable financial metrics.

Question 12

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

Accepted Answer

The answer of Acroe Trading Pty Ltd. has $100,000 available...

Question 13

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

Accepted Answer

The payback period is deficient because it disregards relative profitability (I), ignores income beyond the payback period (II), and does not take into account the time value of money (III).

Question 14

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:

Accepted Answer

The answer of Bruno is acquiring a new machine with...

Question 15

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:

Accepted Answer

The answer of Bruno is acquiring a new machine with...

Question 16

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:

Accepted Answer

The terminal cash flow includes the terminal value of the machine and the tax effect of the sale of the machine. The terminal value is $8,000. Since the machine is fully depreciated, its book value is $0, making the entire sale amount taxable. The tax on the terminal value is 30% of $8,000, which is $2,400. Therefore, the after-tax terminal value is $8,000 - $2,400 = $5,600. The present value of $5,600 at the end of 5 years, discounted at 12%, is calculated as $5,600 / (1 + 0.12)^5 = $3,175. However, this calculation is incorrect based on the provided choices and the correct approach. The correct calculation should consider the terminal value without subtracting tax because the question does not specify that the terminal value is taxable or that it results in a gain that would be taxed. Therefore, the correct present value calculation is directly based on the terminal value and the discount rate, which seems to have been miscalculated in this explanation. The correct present value of the terminal cash flows should be calculated using the formula for present value: PV = FV / (1 + r)^n, where FV is the future value ($8,000), r is the discount rate (0.12), and n is the number of years (5).

Question 17

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.

Accepted Answer

The annual volume necessary to justify the investment can be calculated by determining the annual cost savings and then finding the volume that provides a return of 8% on the $40,000 investment. The cost savings per unit is the difference between the current cost of buying the part ($12) and the variable cost of making the part ($8) plus the revenue from the by-product ($1), which equals $5 ($12 - ($8 - $1)). The annual cost savings required to justify the investment is the investment amount ($40,000) divided by the useful life (5 years), which equals $8,000 per year. To achieve an 8% return, the annual savings must be greater than the annual depreciation. However, since taxes are ignored and the return requirement isn't directly applied to calculate volume, we focus on recovering the investment and achieving cost savings. To find the volume, divide the annual savings required ($8,000) by the savings per unit ($5), resulting in 1,600 units per year. However, this calculation seems to have overlooked the incorporation of the required return directly into the volume calculation, suggesting a mistake in the explanation process. The correct approach involves calculating the net present value or using the cost savings to meet the required return, but without the exact formula or method used in the choice provided, the correct answer is based on the premise of recovering costs and achieving savings, which seems to have been misinterpreted in this explanation. The correct volume should ensure the machine's cost and the required return are covered, which typically involves a more complex calculation considering the time value of money, not directly provided in the explanation. Therefore, the correct answer involves calculating the break-even volume that justifies the investment considering cost savings and the sale of by-products, aligning with the options provided.

Question 18

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:

Accepted Answer

The new machine would be sold for $5,000, which is equal to its salvage value. Since the salvage value is the same as the book value, there would be no tax effect on the sale.

Question 19

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?

Accepted Answer

The answer of In January, Thomas Ltd purchased a new...

Question 20

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:

Accepted Answer

The answer of Lockhart Hospital is considering the purchase of...

Quiz 13: Capital Budgeting and Strategic Investment Decisions

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?

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:

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?

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:

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

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

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?

Quiz 13: Capital Budgeting and Strategic Investment Decisions

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?

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:

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?

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:

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

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

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?

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