Capital Budgeting Paper 6

1

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






2

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?






3

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






4

The internal rate of return (IRR) is the






5

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?






6

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






7

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






8

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?






9

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






10

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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