Capital Budgeting Paper 6


A disadvantage of the net present value method of capital expenditure evaluation is that it


Jackson Corporation uses net present value techniques in evaluating its capital investment projects. The company is considering a new equipment acquisition that will cost $100,000, fully installed, and have a zero salvage value at the end of its five-year productive life. Jackson will depreciate the equipment on a straight-line basis for both financial and tax purposes. Jackson estimates $70,000 in annual recurring operating cash income and $20,000 in annual recurring operating cash expenses. Jackson’s desired rate of return is 12% and its effective income tax rate is 40%. What is the net present value of this investment on an after-tax basis?


A weakness of the internal rate of return (IRR) approach for determining the acceptability of investments is that it


The internal rate of return (IRR) is the


Suzie owns a computer reselling business and is expanding it. She is presented with two options. Under Proposal A, the estimated investment for the expansion project is $85,000, and it is expected to produce after-tax cash flows of $25,000 for each of the next 6 years. Proposal B involves an investment of $32,000 and after-tax cash flows of $10,000 for each of the next 6 years. Between which two desired rates of return will Suzie be indifferent to either proposal?


The net present value method of capital budgeting assumes that cash flows are reinvested at


The net present value of a proposed investment is negative; therefore, the discount rate used must be


Dr. G invested $10,000 in a lifetime annuity for his granddaughter Emily. The annuity is expected to yield $400 annually forever. What is the anticipated internal rate of return for the annuity?


Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for 5 years?


What is the approximate IRR for a project that costs $50,000 and provides cash inflows of $20,000 for 3 years?


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