Capital Budgeting Paper 22

1

Capital Invest Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year.
Project 1 Project 2 Project 3 Project 4
Initial capital outlay $200,000 $298,000 $248,000 $272,000
Annual net cash inflows
Year1 $65,000 $100,000 $80,000 $95,000
Year 2 70,000 135,000 95,000 125,000
Year 3 80,000 90,000 90,000 90,000
Year 4 40,000 65,000 80,000 60,000
Net present value (3,798) 4,276 14,064 14,662
Profitability index 98% 101% 106% 105%
Internal rate of return 11% 13% 14% 15%
Which project(s) should Capital Invest Inc. undertake during the upcoming year if it has only $600,000 of funds available?






2

Capital Invest Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year.
Project 1 Project 2 Project 3 Project 4
Initial capital outlay $200,000 $298,000 $248,000 $272,000
Annual net cash inflows
Year1 $65,000 $100,000 $80,000 $95,000
Year 2 70,000 135,000 95,000 125,000
Year 3 80,000 90,000 90,000 90,000
Year 4 40,000 65,000 80,000 60,000
Net present value (3,798) 4,276 14,064 14,662
Profitability index 98% 101% 106% 105%
Internal rate of return 11% 13% 14% 15%
Which project(s) should Capital Invest Inc. undertake during the upcoming year if it has only $300,000 of capital funds available?






3

A depreciation tax shield is






4

Andrew Corporation is evaluating a capital investment that would result in a $30,000 higher contribution margin benefit and increased annual personnel costs of $20,000. The effects of income taxes on the net present value computation on these benefits and costs for the project are to






5

Buff Co. is considering replacing an old machine with a new machine. Which of the following items is economically relevant to Buff’s decision? (Ignore income tax considerations.)
Carrying amount of old machine . . . Disposal value of new machine






6

Assume that Straper Industries is considering investing in a project with the following characteristics:
Initial investment $500,000
Additional investment in working capital 10,000
Cash flows before income taxes for years 1 through 5 140,000
Yearly tax depreciation 90,000
Terminal value of investment 50,000
Cost of capital 10%
Present value of $1 received after 5 years discounted at 10% .621
Present value of an ordinary annuity of $1 for 5 years at 10% 3.791
Marginal tax rate 30%
Investment life 5 years
Assume that all cash flows come at the end of the year. What is the amount of the after-tax cash flows in year 2?






7

Assume that Straper Industries is considering investing in a project with the following characteristics:
Initial investment $500,000
Additional investment in working capital 10,000
Cash flows before income taxes for years 1 through 5 140,000
Yearly tax depreciation 90,000
Terminal value of investment 50,000
Cost of capital 10%
Present value of $1 received after 5 years discounted at 10% .621
Present value of an ordinary annuity of $1 for 5 years at 10% 3.791
Marginal tax rate 30%
Investment life 5 years
Assume that all cash flows come at the end of the year. What is the net present value of the investment?






8

The Madison Company has decided to introduce a new product. The company estimates that there is a 30% probability that the product will contribute $700,000 to profits, a 30% probability that it will contribute $200,000, and a 40% probability that the contribution will be a negative $400,000. The expected contribution of the new product is






9

The Madison Company has decided to introduce a new product. The company estimates that there is a 30% probability that the product will contribute $700,000 to profits, a 30% probability that it will contribute $200,000, and a 40% probability that the contribution will be a negative $400,000. The expected contribution of the new product is






10

The Madison Company has decided to introduce a new product. The company estimates that there is a 30% probability that the product will contribute $700,000 to profits, a 30% probability that it will contribute $200,000, and a 40% probability that the contribution will be a negative $400,000. The expected contribution of the new product is






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