Capital Budgeting Paper 2

1

Of the following decisions, capital budgeting techniques would least likely be used in evaluating the






2

Metrejean Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. At the end of 8 years, the equipment must be removed from the plant and will have a net carrying amount of $0, a tax basis of $150,000, a cost to remove of $80000 and scrap salvage value of $20000 . Metrejean’s effective tax rate is 40%. What is the appropriate “end-of-life” cash flow related to these items that should be used in the analysis?






3

Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. The analyst is attempting to determine the appropriate “end-of-life” cash flows for the analysis. At the end of 8 years the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000, a cost to remove of $40,000, and scrap salvage value of $10,000. Kore’s effective tax rate is 40%. What is the appropriate “end-of-life” cash flow related to these items that should be used in the analysis?






4

The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins’ plant will cost $12000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4,000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Dickins has a marginal tax rate of 40%. What is the net cash outflow at the beginning of the first year that Dickins should use in a capital budgeting analysis?






5

The Dickins Corporation is considering the acquisition of a new machine at a cost of $180000. Transporting the machine to Dickins’ plant will cost $12000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4,000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Dickins has a marginal tax rate of 40%. What is the net cash flow for the tenth year of the project that Dickins should use in a capital budgeting analysis?






6

The accounting rate of return






7

What is a challenge that the long-term aspect of capital budgeting presents to the management accountant.






8

Which of the following is not a category of relevant cash flows?






9

The capital budgeting process contains several stages. At which stage are financial and nonfinancial factors addressed?






10

Book rate of return is an unsatisfactory guide to selecting capital projects because
I. It uses accrual accounting numbers.
II. It compares a single project against the average of capital projects.
III. It uses cash flows to gauge the desirability of the project.






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