CHAPTER 14 CAPITAL BUDGETING MULTIPLE CHOICE
1.
Whic Which h of the the fol follo lowi wing ng cait caital al !"#g !"#get etin ing g tech techni ni$" $"e% e% ignores the ti&e 'al"e of &one() a. !. c. #.
a(!ac* e+io# net +e%ent 'al"e inte+nal +ate of +et"+n +ofita!ilit( in#e,
AN-WER 0.
net +e%ent 'al"e inte+nal inte+nal +ate of +et"+n a(!ac* e+io# +ofita!ilit( in#e,
AN-WER
c
EA-/
In co& co&a a+i +ing ng two two +o +oec ect% t% the the 55555 55555555 55555 555 5 i% ofte often n "%e# "%e# to to e'al" e'al"at atee the the +ela +elati ti'e 'e +i%*ine%% of the +oect%. a. !. c. #.
a(!ac* e+io# net +e%ent 'al"e inte+nal +ate of +et"+n #i%co"nt +ate
AN-WER 4.
EA-/
Whic Which h of of the the foll follow owin ing g cai caita tall !"#g !"#geti eting ng techni techni$"e $"e%% &a( &a( otenti otential all( l( igno+ igno+ee a+t a+t of a +oect2% +oect2% +ele'ant +ele'ant ca%h flow%) flow%) a. !. c. #.
3.
a
a
EA-/
Whic Which h of the the fol follo lowi wing ng cait caital al !"#g !"#get etin ing g tech techni ni$" $"e% e% #oe% #oe% not +o"tinel( +el( on the a%%"&tion that all ca%h flow% occ"+ at the en# of the e+io#) a. !. c. #.
inte+nal +ate of +et"+n net +e%ent 'al"e +ofita!ilit( in#e, a(!ac* e+io#
AN-WER
#
EA-/
1461
1460
7.
Chate+ 14
A%%"&e A%%" &e that that a +oec +oectt con%i con%i%t% %t% of an an ini initi tial al ca%h ca%h o"tla( o"tla( of 8199 8199999 999 fol follow lowe# e# !( !( e$"al e$"al ann"al ca%h infl inflow% ow% of 849999 fo+ 4 (ea+%. In the fo+&"la fo+&"la : ; 8199999<849999 8 199999<849999 : +e+e%ent% the a. !. c. #.
a(!ac* e+io# fo+ the +oect. +ofita!ilit +ofita!ilit( ( in#e, in#e, of the +oect. inte+ nte+na nall +ate ate of of +et" +et"++n fo+ the +o +oec ect. t. +oect2% #i%co"nt +ate.
AN-WER =.
E A -/
net +e%ent 'al"e. a(!ac* e+io#. e+io#. inte+nal +ate of +et"+n. +ofita!ilit( in#e,.
AN-WER
!
E A -/
The a( a(!ac !ac* * ðo ðo# # a%%"& a%%"&e% e% that that all all ca%h ca%h inf inflo low% w% a+e +ein' +ein'e% e%te# te# to to (iel (iel# # a +et" +et"+n +n e$"al e$"al to a. !. c. #.
the #i%co"nt +ate. the h"+#le +ate. the in inte+nal +ate of of +et"+n. ?e+o.
AN-WER @.
a
All All othe+ othe+ facto+ facto+%% e$"al e$"al a la+ la+ge ge n"& n"&!e+ !e+ i% +efe+ +efe++e# +e# to to a %&all %&alle+ e+ n"& n"&!e+ !e+ fo+ fo+ all all cai caita tall +oect e'al"ation &ea%"+e% &ea%"+e% except a. !. c. #.
>.
Caital B"#geting
#
E A -/
The a(!ac* ðo# &ea%"+e% a. !. c. #.
how how $"i $"ic* c*l( l( in'e%t 'e%t& &ent ent #ol #ollla+% a+% & &a( a( !e +eco +eco'e 'e+e +e#. #. the ca%h flow f+o& an in'e%t&ent. in'e%t&ent. the eco econo no& &ic li life of an an in in'e%t&ent. the +of +ofiita!i a!ilit( of an in'e%t 'e%t& &ent ent.
AN-WER
a
E A -/
1460
7.
Chate+ 14
A%%"&e A%%" &e that that a +oec +oectt con%i con%i%t% %t% of an an ini initi tial al ca%h ca%h o"tla( o"tla( of 8199 8199999 999 fol follow lowe# e# !( !( e$"al e$"al ann"al ca%h infl inflow% ow% of 849999 fo+ 4 (ea+%. In the fo+&"la fo+&"la : ; 8199999<849999 8 199999<849999 : +e+e%ent% the a. !. c. #.
a(!ac* e+io# fo+ the +oect. +ofita!ilit +ofita!ilit( ( in#e, in#e, of the +oect. inte+ nte+na nall +ate ate of of +et" +et"++n fo+ the +o +oec ect. t. +oect2% #i%co"nt +ate.
AN-WER =.
E A -/
net +e%ent 'al"e. a(!ac* e+io#. e+io#. inte+nal +ate of +et"+n. +ofita!ilit( in#e,.
AN-WER
!
E A -/
The a( a(!ac !ac* * ðo ðo# # a%%"& a%%"&e% e% that that all all ca%h ca%h inf inflo low% w% a+e +ein' +ein'e% e%te# te# to to (iel (iel# # a +et" +et"+n +n e$"al e$"al to a. !. c. #.
the #i%co"nt +ate. the h"+#le +ate. the in inte+nal +ate of of +et"+n. ?e+o.
AN-WER @.
a
All All othe+ othe+ facto+ facto+%% e$"al e$"al a la+ la+ge ge n"& n"&!e+ !e+ i% +efe+ +efe++e# +e# to to a %&all %&alle+ e+ n"& n"&!e+ !e+ fo+ fo+ all all cai caita tall +oect e'al"ation &ea%"+e% &ea%"+e% except a. !. c. #.
>.
Caital B"#geting
#
E A -/
The a(!ac* ðo# &ea%"+e% a. !. c. #.
how how $"i $"ic* c*l( l( in'e%t 'e%t& &ent ent #ol #ollla+% a+% & &a( a( !e +eco +eco'e 'e+e +e#. #. the ca%h flow f+o& an in'e%t&ent. in'e%t&ent. the eco econo no& &ic li life of an an in in'e%t&ent. the +of +ofiita!i a!ilit( of an in'e%t 'e%t& &ent ent.
AN-WER
a
E A -/
Chate+ 14
.
Caital B"#geting
If in'e in'e%t %t&e &ent nt A ha% a a(! a(!ac* ac* e+io# e+io# of of th+ee th+ee (ea+ (ea+%% an# an# in' in'e% e%t& t&ent ent B ha% ha% a a( a(!ac !ac* * e+io# e+io# of fo"+ (ea+% then a. !. c. #.
A i% &o+e + +ofita!le than B. A i% le%% le%% +ofita!le +ofita!le than B. A an# B a+e e$ e$"all( +ofita!le. the +el +elati ati'e 'e +of +ofit ita!i a!ili lit( t( of A an# B canno cannott !e #ete #ete+& +&in ine# e# f+o& f+o& the inf info+ o+&at &ation ion gi'en.
AN-WER 19. 19.
EA-/
leng length th of of ti& ti&ee o'e+ o'e+ whi which ch the the in'e in'e%t %t&e &ent nt wi will +o'i +o'i#e #e ca% ca%h h inf inflo low% w%.. length of ti&e ti&e o'e+ which which the initia initiall in'e%t& in'e%t&ent ent i% +eco'e+e#. +eco'e+e#. %ho+t %ho+te% e%tt leng length th of ti& ti&ee o'e+ o'e+ whi which ch an in'e in'e%t %t&e &ent nt &a( &a( !e #e+ #e+ec ecia iate te#. #. %ho+te %ho +te%t %t len length gth of ti&e ti&e o'e+ which which the net +e%en +e%entt 'al 'al"e "e will will !e o% o%it iti' i'e. e.
AN-WER
!
EA-/
Which Which of the the follow following ing caital caital !"#geting !"#geting techni$" techni$"e% e% ha% ha% !een !een c+iti c+itici? ci?e# e# !eca"% !eca"%ee it fail% fail% to con%i#e+ in'e%t&ent +ofita!ilit() a. !. c. #.
a(!ac* ðo# acco"nting +ate of +et"+n net +e%ent 'al"e ðo# inte+nal +ate of +et"+n
AN-WER 10.
#
The a(!ac* e+io# i% the a. !. c. #.
11.
1463
a
EA-/
The ti& ti&ee 'al" 'al"ee of &one &one( ( i% i% e,l e,lic icit itl( l( +ecogn +ecogni? i?e# e# th+o" th+o"gh gh the the +oce% +oce%%% of a. !. c. #.
inte+olating. #i%co"nting. #i%co"nting. ann"iti?ing. !"#geting.
AN-WER
!
EA-/
1464
13.
Chate+ 14
The ti&e ti&e 'al"e 'al"e of &one( &one( i% con%i#e+ con%i#e+e# e# in in long+an long+ange ge in'e in'e%t& %t&ent ent #eci%io #eci%ion% n% !( a. !. c. #.
a%% a%%"&ing e$"al $"al ann"a n"al ca% ca%h fl flow att atte+ e+n% n%.. in'e%ting in'e%ting onl( onl( in in %ho+tte+& +oect%. a%% a%%igni gning g+ea g+eate te++ 'al" 'al"ee to to &o+e &o+e i&&e#i e#iate ate ca%h ca%h flow% low%.. igno igno+i +ing ng #e+e #e+eci ciat atio ion n an# an# ta, ta, i& i&llicat icatio ion% n% of the the in' in'e% e%t& t&en ent. t.
AN-WER 14.
E A -/
ðo etho# # of of fi financ nanciing the the +o +oe ect ct "n#e "n#e++ con con%i %i#e #e+a +ati tion on ti&ing ti&ing of ca%h flow% +elating +elating to the +oect i&act of the the +o +oe ect ct on inco& co&e ta, ta,e% e% to !e !e ai ai# # a&o"nt o"nt%% o off ca% ca%h h fl flow% +e +elati ating to the the +o +oect ect
AN-WER
a
E A -/
A% to a cai caita tall in'e in'e%t %t&e &ent nt net ca%h ca%h inf inflo low w i% i% e$"al e$"al to the the a. !. c. #.
co%t co%t %a'i %a'ing ng%% +e%" +e%"lt ltin ing g f+o& f+o& the the in'e%t 'e%t& &ent. ent. %"& of all all f"t"+e f"t"+e +e'en"e% f+o& the in'e%t&ent. in'e%t&ent. net net in inc+ea c+ea%e %e in ca% ca%h +ec +ecei eit t%% o'e o'e++ ca% ca%h h a( a(& &ent% ent%.. net net in inc+ea c+ea%e %e in ca% ca%h a( a(& &ent ent% o'e o'e++ ca% ca%h h +ec +ecei eit t%. %.
AN-WER 1=.
c
When When "%in "%ing g one of the #i%co #i%co"nte# "nte# ca%h flow flow ðo# ðo#%% to e'al" e'al"ate ate the the #e%i+a #e%i+a!i !ili lit( t( of a caital !"#geting +oect which of the following facto+% i% gene+all( not i&o+tant) a. !. c. #.
17.
Caital B"#geting
c
E A -/
In a #i% #i%co"n co"nte# te# ca% ca%h h flo flow w anal anal(% (%i% i% whi which ch of the the foll follow owin ing g wo"l wo"l# # not !e con%i%tent with with a#"%ting a +oect2% ca%h flow% to acco"nt fo+ highe+thanno+&al +i%*) a. !. c. #.
inc+e nc+ea% a%iing the the e, e,ec ecte te# # a&o a&o"n "ntt fo+ fo+ ca% ca%h o"tf o"tflo low% w% inc+ea%ing inc+ea%ing the the #i%co"nting e+io# fo+ e,ecte# ca%h inflow inflow%% inc+e nc+ea% a%iing the the #i%c #i%co" o"nt nt +ate +ate fo+ fo+ ca%h ca%h o"tf o"tflo low% w% #ec+ #ec+ea ea%i %ing ng the the a&o a&o"n "ntt fo+ fo+ e,e e,ect cte# e# ca%h ca%h infl nflow% ow%
AN-WER
c
EDIU
Chate+ 14
1>.
Caital B"#geting
When a +oect ha% "ne'en +oecte# ca%h inflow% o'e+ it% life an anal(%t &a( !e fo+ce# to "%e 5555555555555555555 to fin# the +oect2% inte+nal +ate of +et"+n. a. !. c. #.
a %c+eening #eci%ion a t+ialan#e++o+ a+oach a o%t in'e%t&ent a"#it a ti&e line
AN-WER 1@.
EA-/
+i&e +ate. #i%co"nt +ate. c"toff +ate. inte+nal +ate of +et"+n.
AN-WER
!
EA-/
A fi+&2% #i%co"nt +ate i% t(icall( !a%e# on a. !. c. #.
the inte+e%t +ate% +elate# to the fi+&2% !on#%. a +oect2% inte+nal +ate of +et"+n. it% co%t of caital. the co+o+ate Aa !on# (iel#.
AN-WER 09.
!
The inte+e%t +ate "%e# to fin# the +e%ent 'al"e of a f"t"+e ca%h flow i% the a. !. c. #.
1.
1467
c
EA-/
In caital !"#geting a fi+&2% co%t of caital i% f+e$"entl( "%e# a% the a. !. c. #.
inte+nal +ate of +et"+n. acco"nting +ate of +et"+n. #i%co"nt +ate. +ofita!ilit( in#e,.
AN-WER
c
EA-/
146=
01.
Chate+ 14
The net +e%ent 'al"e ðo# a%%"&e% that all ca%h inflow% can !e i&&e#iatel( +ein'e%te# at the a. !. c. #.
co%t of caital. #i%co"nt +ate. inte+nal +ate of +et"+n. +ate on the co+o+ation2% %ho+tte+& #e!t.
AN-WER 00.
EA-/
a #ec+ea%e in the &a+ginal ta, +ate a #ec+ea%e in the #i%co"nt +ate a #ec+ea%e in the +ate of #e+eciation an inc+ea%e in the life e,ectanc( of the #e+ecia!le a%%et
AN-WER
!
EDIU
To +eflect g+eate+ "nce+taint( g+eate+ +i%* a!o"t a f"t"+e ca%h inflow an anal(%t co"l# a. !. c. #.
inc+ea%e the #i%co"nt +ate fo+ the ca%h flow. #ec+ea%e the #i%co"nting e+io# fo+ the ca%h flow. inc+ea%e the e,ecte# 'al"e of the f"t"+e ca%h flow !efo+e it i% #i%co"nte#. e,ten# the acceta!le length fo+ the a(!ac* e+io#.
AN-WER 04.
!
Which of the following change% wo"l# not #ec+ea%e the +e%ent 'al"e of the f"t"+e #e+eciation #e#"ction% on a %ecific #e+ecia!le a%%et) a. !. c. #.
03.
Caital B"#geting
a
EA-/
A change in the #i%co"nt +ate "%e# to e'al"ate a %ecific +oect will affect the +oect2% a. !. c. #.
life. a(!ac* e+io#. net +e%ent 'al"e. total ca%h flow%.
AN-WER
c
EA-/
Chate+ 14
07.
Caital B"#geting
Fo+ a +oect %"ch a% lant in'e%t&ent the +et"+n that %ho"l# lea'e the &a+*et +ice of the fi+&2% %toc* "nchange# i% *nown a% the a. !. c. #.
co%t of caital. net +e%ent 'al"e. a(!ac* +ate. inte+nal +ate of +et"+n.
AN-WER 0=.
EDIU
inte+e%t e,en%e i% #e#"cti!le fo+ ta, "+o%e%. +incial a(&ent% on #e!t a+e #e#"cti!le fo+ ta, "+o%e%. the co%t of caital i% a #e#"cti!le e,en%e fo+ ta, "+o%e%. #i'i#en# a(&ent% to %toc*hol#e+% a+e #e#"cti!le fo+ ta, "+o%e%.
AN-WER
a
EA-/
The !a%i% fo+ &ea%"+ing the co%t of caital #e+i'e# f+o& !on#% an# +efe++e# %toc* +e%ecti'el( i% the a. !. c. #.
+eta, +ate of inte+e%t fo+ !on#% an# %tate# ann"al #i'i#en# +ate le%% the e,ecte# ea+ning% e+ %ha+e fo+ +efe++e# %toc*. +eta, +ate of inte+e%t fo+ !on#% an# %tate# ann"al #i'i#en# +ate fo+ +efe++e# %toc*. afte+ta, +ate of inte+e%t fo+ !on#% an# %tate# ann"al #i'i#en# +ate le%% the e,ecte# ea+ning% e+ %ha+e fo+ +efe++e# %toc*. afte+ta, +ate of inte+e%t fo+ !on#% an# %tate# ann"al #i'i#en# +ate fo+ +efe++e# %toc*.
AN-WER 0@.
a
The +eta, co%t of caital i% highe+ than the afte+ta, co%t of caital !eca"%e a. !. c. #.
0>.
146>
#
EDIU
The co&!ine# weighte# a'e+age inte+e%t +ate that a fi+& inc"+% on it% longte+& #e!t +efe++e# %toc* an# co&&on %toc* i% the a. !. c. #.
co%t of caital. #i%co"nt +ate. c"toff +ate. inte+nal +ate of +et"+n.
AN-WER
a
EA-/
146@
0.
Chate+ 14
The weighte# a'e+age co%t of caital that i% "%e# to e'al"ate a %ecific +oect %ho"l# !e !a%e# on the a. !. c. #.
&i, of caital co&onent% that wa% "%e# to finance a +oect f+o& la%t (ea+. o'e+all caital %t+"ct"+e of the co+o+ation. co%t of caital fo+ othe+ co+o+ation% with %i&ila+ in'e%t&ent%. &i, of caital co&onent% fo+ all caital ac$"i+e# in the &o%t +ecent fi%cal (ea+.
AN-WER 39.
EA-/
calla!le. a+ticiating. c"&"lati'e. con'e+ti!le.
AN-WER
#
EDIU
The weighte# a'e+age co%t of caital a+oach to #eci%ion &a*ing i% not #i+ectl( affecte# !( the a. !. c. #.
'al"e of the co&&on %toc*. c"++ent !"#get fo+ caital e,an%ion. co%t of #e!t o"t%tan#ing. +oo%e# &i, of #e!t e$"it( an# e,i%ting f"n#% "%e# to i&le&ent the +oect.
AN-WER 30.
!
De!t in the caital %t+"ct"+e co"l# !e t+eate# a% if it we+e co&&on e$"it( in co&"ting the weighte# a'e+age co%t of caital if the #e!t we+e a. !. c. #.
31.
Caital B"#geting
!
EA-/
The 5555555555555555555 i% the highe%t +ate of +et"+n that can !e ea+ne# f+o& the &o%t att+acti'e alte+nati'e caital +oect a'aila!le to the fi+&. a. !. c. #.
acco"nting +ate of +et"+n inte+nal +ate of +et"+n h"+#le +ate oo+t"nit( co%t of caital
AN-WER
#
EDIU
Chate+ 14
33.
Caital B"#geting
If an anal(%t #e%i+e% a con%e+'ati'e net +e%ent 'al"e e%ti&ate %he will a%%"&e that all ca%h inflow% occ"+ at a. !. c. #.
&i# (ea+. the !eginning of the (ea+. (ea+ en#. i++eg"la+ inte+'al%.
AN-WER 34.
EA-/
It wo"l# inc+ea%e the net +e%ent 'al"e of the +oo%al. It wo"l# #ec+ea%e the net +e%ent 'al"e of the +oo%al. It wo"l# not affect the net +e%ent 'al"e of the +oo%al. Potentiall( it co"l# inc+ea%e o+ #ec+ea%e the net +e%ent 'al"e of the new lathe.
AN-WER
a
EA-/
The net +e%ent 'al"e ðo# of e'al"ating +oo%e# in'e%t&ent% a. !. c. #.
&ea%"+e% a +oect2% inte+nal +ate of +et"+n. igno+e% ca%h flow% !e(on# the a(!ac* e+io#. alie% onl( to &"t"all( e,cl"%i'e in'e%t&ent +oo%al%. #i%co"nt% ca%h flow% at a &ini&"& #e%i+e# +ate of +et"+n.
AN-WER 3=.
c
The %al'age 'al"e of an ol# lathe i% ?e+o. If in%tea# the %al'age 'al"e of the ol# lathe wa% 809999 what wo"l# !e the i&act on the net +e%ent 'al"e of the +oo%al to "+cha%e a new lathe) a. !. c. #.
37.
146
#
EA-/
Which of the following %tate&ent% i% true +ega+#ing caital !"#geting ðo#%) a. !.
c. #.
The Fi%he+ +ate can ne'e+ e,cee# a co&an(2% co%t of caital. The inte+nal +ate of +et"+n &ea%"+e "%e# fo+ caital +oect e'al"ation ha% &o+e con%e+'ati'e a%%"&tion% than the net +e%ent 'al"e ðo# e%eciall( fo+ +oect% that gene+ate a o%iti'e net +e%ent 'al"e. The net +e%ent 'al"e ðo# of +oect e'al"ation will alwa(% +o'i#e the %a&e +an*ing of +oect% a% the +ofita!ilit( in#e, ðo#. The net +e%ent 'al"e ðo# a%%"&e% that all ca%h inflow% can !e +ein'e%te# at the +oect2% co%t of caital.
AN-WER
#
EA-/
14619
3>.
Chate+ 14
Caital B"#geting
A co&an( i% e'al"ating th+ee o%%i!le in'e%t&ent%. Info+&ation +elating to the co&an( an# the in'e%t&ent% follow Fi%he+ +ate fo+ the th+ee +oect% Co%t of caital
> @
Ba%e# on thi% info+&ation we *now that a. !. c. #.
all th+ee +oect% a+e acceta!le. none of the +oect% a+e acceta!le. the caital !"#geting e'al"ation techni$"e% +ofita!ilit( in#e, net +e%ent 'al"e an# inte+nal +ate of +et"+n will +o'i#e a con%i%tent +an*ing of the +oect%. the net +e%ent 'al"e ðo# will +o'i#e a +an*ing of the +oect% that i% %"e+io+ to the +an*ing o!taine# "%ing the inte+nal +ate of +et"+n ðo#.
AN-WER 3@.
e$"al ?e+o. e$"al 1. e$"al 1. !e "n#efine#.
AN-WER
!
EA-/
If the +ofita!ilit( in#e, fo+ a +oect e,cee#% 1 then the +oect2% a. !. c. #.
net +e%ent 'al"e i% o%iti'e. inte+nal +ate of +et"+n i% le%% than the +oect2% #i%co"nt +ate. a(!ac* e+io# i% le%% than 7 (ea+%. acco"nting +ate of +et"+n i% g+eate+ than the +oect2% inte+nal +ate of +et"+n.
AN-WER 49.
EDIU
If a +oect gene+ate% a net +e%ent 'al"e of ?e+o the +ofita!ilit( in#e, fo+ the +oect will a. !. c. #.
3.
c
a
EA-/
If a +oect2% +ofita!ilit( in#e, i% le%% than 1 the +oect2% a. !. c. #.
#i%co"nt +ate i% a!o'e it% co%t of caital. inte+nal +ate of +et"+n i% le%% than ?e+o. a(!ac* e+io# i% infinite. net +e%ent 'al"e i% negati'e.
AN-WER
#
EA-/
Chate+ 14
41.
Caital B"#geting
The +ofita!ilit( in#e, i% a. !. c. #.
the +atio of net ca%h flow% to the o+iginal in'e%t&ent. the +atio of the +e%ent 'al"e of ca%h flow% to the o+iginal in'e%t&ent. a caital !"#geting e'al"ation techni$"e that #oe%n2t "%e #i%co"nte# 'al"e%. a &an#ato+( techni$"e when caital +ationing i% "%e#.
AN-WER 40.
EA-/
inte+nal +ate of +et"+n a(!ac* e+io# +ofita!ilit( in#e, acco"nting +ate of +et"+n
AN-WER
c
EDIU
If the total ca%h inflow% a%%ociate# with a +oect e,cee# the total ca%h o"tflow% a%%ociate# with the +oect the +oect2% a. !. c. #.
net +e%ent 'al"e i% g+eate+ than ?e+o. inte+nal +ate of +et"+n i% g+eate+ than ?e+o. +ofita!ilit( in#e, i% g+eate+ than 1. a(!ac* e+io# i% acceta!le.
AN-WER 44.
!
Which ðo# of e'al"ating caital +oect% a%%"&e% that ca%h inflow% can !e +ein'e%te# at the #i%co"nt +ate) a. !. c. #.
43.
14611
!
EA-/
The net +e%ent 'al"e an# inte+nal +ate of +et"+n ðo#% of #eci%ion &a*ing in caital !"#geting a+e %"e+io+ to the a(!ac* ðo# in that the( a. !. c. #.
a+e ea%ie+ to i&le&ent. con%i#e+ the ti&e 'al"e of &one(. +e$"i+e le%% in"t. +eflect the effect% of %en%iti'it( anal(%i%.
AN-WER
!
EA-/
14610
47.
Chate+ 14
If an in'e%t&ent ha% a o%iti'e net +e%ent 'al"e the a. !. c. #.
inte+nal +ate of +et"+n i% highe+ than the #i%co"nt +ate. #i%co"nt +ate i% highe+ than the h"+#le +ate of +et"+n. inte+nal +ate of +et"+n i% lowe+ than the #i%co"nt +ate of +et"+n. h"+#le +ate of +et"+n i% highe+ than the #i%co"nt +ate.
AN-WER 4=.
EA-/
co%t of caital. #i%co"nt +ate. c"toff +ate. inte+nal +ate of +et"+n.
AN-WER
#
EA-/
Fo+ a +ofita!le co&an( an inc+ea%e in the +ate of #e+eciation on a %ecific +oect co"l# a. !. c. #.
inc+ea%e the +oect2% +ofita!ilit( in#e,. inc+ea%e the +oect2% a(!ac* e+io#. #ec+ea%e the +oect2% net +e%ent 'al"e. inc+ea%e the +oect2% inte+nal +ate of +et"+n.
AN-WER 4@.
a
The +ate of inte+e%t that +o#"ce% a ?e+o net +e%ent 'al"e when a +oect2% #i%co"nte# ca%h oe+ating a#'antage i% nette# again%t it% #i%co"nte# net in'e%t&ent i% the a. !. c. #.
4>.
Caital B"#geting
#
EDIU
Which of the following caital e,en#it"+e lanning an# cont+ol techni$"e% ha% !een c+itici?e# !eca"%e it &ight &i%ta*enl( i&l( that ea+ning% a+e +ein'e%te# at the +ate of +et"+n ea+ne# !( the in'e%t&ent) a. !. c. #.
a(!ac* ðo# acco"nting +ate of +et"+n net +e%ent 'al"e ðo# inte+nal +ate of +et"+n
AN-WER
#
EA-/
Chate+ 14
4.
Caital B"#geting
If the #i%co"nt +ate that i% "%e# to e'al"ate a +oect i% e$"al to the +oect2% inte+nal +ate of +et"+n the +oect2% 5555555555555 i% ?e+o. a. !. c. #.
+ofita!ilit( in#e, inte+nal +ate of +et"+n +e%ent 'al"e of the in'e%t&ent net +e%ent 'al"e
AN-WER 79.
EA-/
#ec+ea%e%. inc+ea%e%. %ta(% the %a&e. can &o'e " o+ #own #een#ing on whethe+ the fi+&2% co%t of caital i% high o+ low.
AN-WER
!
EDIU
When a +ofita!le co+o+ation %ell% an a%%et at a lo%% the afte+ta, ca%h flow on the %ale will a. !. c. #.
e,cee# the +eta, ca%h flow on the %ale. !e le%% than the +eta, ca%h flow on the %ale. !e the %a&e a% the +eta, ca%h flow on the %ale. inc+ea%e the co+o+ation2% o'e+all ta, lia!ilit(.
AN-WER 70.
#
A% the &a+ginal ta, +ate goe% " the !enefit f+o& the #e+eciation ta, %hiel# a. !. c. #.
71.
14613
a
EDIU
In a t(ical con%e+'ati'e a%%"&tion% afte+ta, #i%co"nte# ca%h flow anal(%i% #e+eciation e,en%e i% a%%"&e# to acc+"e at a. !. c. #.
the !eginning of the e+io#. the &i##le of the e+io#. the en# of the e+io#. i++eg"la+ inte+'al% o'e+ the life of the in'e%t&ent.
AN-WER
c
EA-/
14614
73.
Chate+ 14
The +eta, an# afte+ta, ca%h flow% wo"l# !e the %a&e fo+ all of the following ite&% except a. !. c. #.
the li$"i#ation of wo+*ing caital at the en# of a +oect2% life. the initial o"tla( co%t of an in'e%t&ent. the %ale of an a%%et at it% !oo* 'al"e. a ca%h a(&ent fo+ %ala+ie% an# wage%.
AN-WER 74.
EA-/
ta,#e#"cti!le ca%h flow%. nonta,#e#"cti!le ca%h flow%. acco"nting acc+"al%. all of the a!o'e.
AN-WER
#
EDIU
A +oect2% afte+ta, net +e%ent 'al"e i% inc+ea%e# !( all of the following except a. !. c. #.
+e'en"e acc+"al%. ca%h inflow%. #e+eciation #e#"ction%. e,en%e acc+"al%.
AN-WER 7=.
#
The afte+ta, net +e%ent 'al"e of a +oect i% affecte# !( a. !. c. #.
77.
Caital B"#geting
a
EA-/
"ltil(ing the #e+eciation #e#"ction !( the ta, +ate (iel#% a &ea%"+e of the #e+eciation ta, a. !. c. #.
%hiel#. !enefit. a(a!le. lo%%.
AN-WER
!
EA-/
Chate+ 14
7>.
Caital B"#geting
Ann"al afte+ta, co+o+ate net inco&e can !e con'e+te# to ann"al afte+ta, ca%h flow !( a. !. c. #.
a##ing !ac* the #e+eciation a&o"nt. #e#"cting the #e+eciation a&o"nt. a##ing !ac* the $"antit( t #e+eciation #e#"ction whe+e t i% the co+o+ate ta, +ate. #e#"cting the $"antit( 16 t #e+eciation #e#"ctionJ whe+e t i% the co+o+ate ta, +ate.
AN-WER 7@.
EA-/
net ca%h flow. inco&e a% &ea%"+e# !( acco"nting +"le%. net ca%h flow l"% #e+eciation. inco&e a% &ea%"+e# !( ta, +"le%.
AN-WER
#
EA-/
Which of the following !e%t +e+e%ent% a %c+eening #eci%ion) a. !. c. #.
#ete+&ining which +oect ha% the highe%t net +e%ent 'al"e #ete+&ining if a +oect2% inte+nal +ate of +et"+n e,cee#% the fi+&2% co%t of caital #ete+&ining which +oect% a+e &"t"all( e,cl"%i'e #ete+&ining which a+e the !e%t +oect%
AN-WER =9.
a
Inco&e ta,e% a+e le'ie# on a. !. c. #.
7.
14617
!
EA-/
Below a+e ai+% of +oect%. Which ai+ !e%t +e+e%ent% in#een#ent +oect%) a. !. c. #.
!"( co&"te+K !"( %oftwa+e ac*age !"( co&"te+ 1K !"( co&"te+ 0 !"( co&"te+K !"( co&"te+ %ec"+it( %(%te& !"( co&"te+K +ea'e a+*ing lot
AN-WER
#
EA-/
1461=
=1.
Chate+ 14
Which of the following a+e ta, #e#"cti!le "n#e+ U.-. ta, law) a. !. c. #.
inte+e%t a(&ent% to !on#hol#e+% +efe++e# %toc* #i'i#en#% co&&on %toc* #i'i#en#% all of the a!o'e
AN-WER =0.
EA-/
an a+o+iate +e%on%e to "nce+taint( in ca%h flow +oection%. "%ef"l in &ea%"+ing the 'a+iance of the Fi%he+ +ate. t(icall( con#"cte# in the o%t in'e%t&ent a"#it. "%ef"l to co&a+e +oect% +e$"i+ing 'a%tl( #iffe+ent le'el% of initial in'e%t&ent.
AN-WER
a
EDIU
If &anage&ent "#ge% one +oect in a &"t"all( incl"%i'e %et to !e acceta!le fo+ in'e%t&ent a. !. c. #.
all the othe+ +oect% in the %et a+e +eecte#. onl( one othe+ +oect in the %et can !e accete#. all othe+ +oect% in the %et a+e al%o accete#. onl( one +oect in the %et will !e +eecte#.
AN-WER =4.
a
-en%iti'it( anal(%i% i% a. !. c. #.
=3.
Caital B"#geting
c
EA-/
All othe+ facto+% e$"al which of the following wo"l# affect a +oect2% inte+nal +ate of +et"+n net +e%ent 'al"e an# a(!ac* e+io#) a. !. c. #.
an inc+ea%e in the #i%co"nt +ate a #ec+ea%e in the life of the +oect an inc+ea%e in the initial co%t of the +oect all of the a!o'e
AN-WER
c
EA-/
Chate+ 14
=7.
Caital B"#geting
1461>
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. Tige+ Inc. !o"ght a iece of &achine+( with the following #ata U%ef"l life /ea+l( net ca%h inflow -al'age 'al"e Inte+nal +ate of +et"+n Co%t of caital
= (ea+% 847999 6 9 6 1@ 14
The initial co%t of the &achine+( wa% a. !. c. #.
817>30. 81>40. 81=7@10. i&o%%i!le to #ete+&ine f+o& the info+&ation gi'en.
AN-WER ==.
EDIU
Aen#i, ic+o%oft Co. i% con%i#e+ing the "+cha%e of a 8199999 &achine that i% e,ecte# to +e%"lt in a #ec+ea%e of 817999 e+ (ea+ in ca%h e,en%e%. Thi% &achine which ha% no +e%i#"al 'al"e ha% an e%ti&ate# "%ef"l life of 19 (ea+% an# will !e #e+eciate# on a %t+aightline !a%i%. Fo+ thi% &achine the acco"nting +ate of +et"+n wo"l# !e a. !. c. #.
19 e+cent. 17 e+cent. 39 e+cent. 37 e+cent.
AN-WER =>.
a
c
EDIU
An in'e%t&ent +oect i% e,ecte# to (iel# 819999 in ann"al +e'en"e% ha% 80999 in fi,e# co%t% e+ (ea+ an# +e$"i+e% an initial in'e%t&ent of 87999. Gi'en a co%t of goo#% %ol# of =9 e+cent of %ale% what i% the a(!ac* e+io# in (ea+%) a. !. c. #.
0.79 7.99 0.99 1.07
AN-WER
a
EDIU
1461@
=@.
Chate+ 14
A +oect ha% an initial co%t of 8199999 an# gene+ate% a +e%ent 'al"e of net ca%h inflow% of 8109999. What i% the +oect2% +ofita!ilit( in#e,) a. !. c. #.
.09 1.09 .@9 7.99
AN-WER =.
!
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. C Co+. face% a &a+ginal ta, +ate of 37 e+cent. Mne +oect that i% c"++entl( "n#e+ e'al"ation ha% a ca%h flow in the fo"+th (ea+ of it% life that ha% a +e%ent 'al"e of 819999 afte+ta,. C Co+. a%%"&e% that all ca%h flow% occ"+ at the en# of the (ea+ an# the co&an( "%e% 11 e+cent a% it% #i%co"nt +ate. What i% the +eta, a&o"nt of the ca%h flow in (ea+ 4) Ro"n# to the nea+e%t #olla+. a. !. c. #.
8171@1 80337= 8@=@ 8433>7
AN-WER >9.
Caital B"#geting
!
DIFFICULT
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. The -al'age Co. i% con%i#e+ing the "+cha%e of a new oceangoing 'e%%el that co"l# otentiall( +e#"ce la!o+ co%t% of it% oe+ation !( a con%i#e+a!le &a+gin. The new %hi wo"l# co%t 8799999 an# wo"l# !e f"ll( #e+eciate# !( the %t+aightline ðo# o'e+ 19 (ea+%. At the en# of 19 (ea+% the %hi will ha'e no 'al"e an# will !e %"n* in %o&e al+ea#( oll"te# ha+!o+. The -al'age Co.2% co%t of caital i% 10 e+cent an# it% &a+ginal ta, +ate i% 49 e+cent. What i% the +e%ent 'al"e of the #e+eciation ta, !enefit of the new %hi) Ro"n# to the nea+e%t #olla+. a. !. c. #.
8113994 80@0719 81=79= 8099999
AN-WER
a
DIFFICULT
Chate+ 14
>1.
Caital B"#geting
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. -al'age Co. i% con%i#e+ing the "+cha%e of a new oceangoing 'e%%el that co"l# otentiall( +e#"ce la!o+ co%t% of it% oe+ation !( a con%i#e+a!le &a+gin. The new %hi wo"l# co%t 8799999 an# wo"l# !e f"ll( #e+eciate# !( the %t+aightline ðo# o'e+ 19 (ea+%. At the en# of 19 (ea+% the %hi will ha'e no 'al"e an# will !e %"n* in %o&e al+ea#( oll"te# ha+!o+. The -al'age Co.2% co%t of caital i% 10 e+cent an# it% &a+ginal ta, +ate i% 49 e+cent. If the %hi +o#"ce% e$"al ann"al la!o+ co%t %a'ing% o'e+ it% 19(ea+ life how &"ch #o the ann"al %a'ing% in la!o+ co%t% nee# to !e to gene+ate a net +e%ent 'al"e of 89 on the +oect) Ro"n# to the nea+e%t #olla+. a. !. c. #.
8=@40 8114174 8@@40 814>4@>
AN-WER >0.
1461
c
DIFFICULT
Pe!!le Co. +ecentl( %ol# a "%e# &achine fo+ 849999. The &achine ha# a !oo* 'al"e of 8=9999 at the ti&e of the %ale. What i% the afte+ta, ca%h flow f+o& the %ale a%%"&ing the co&an(2% &a+ginal ta, +ate i% 09 e+cent) a. !. c. #.
849999 8=9999 844999 830999
AN-WER
c
EDIU
14609
Chate+ 14
Caital B"#geting
U%e the following info+&ation fo+ $"e%tion% >3 an# >4. Fo+#e& Co. i% con%i#e+ing an in'e%t&ent in a &achine that wo"l# +e#"ce ann"al la!o+ co%t% !( 839999. The &achine ha% an e,ecte# life of 19 (ea+% with no %al'age 'al"e. The &achine wo"l# !e #e+eciate# acco+#ing to the %t+aightline ðo# o'e+ it% "%ef"l life. The co&an(2% &a+ginal ta, +ate i% 39 e+cent. >3.
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. A%%"&e that the co&an( will in'e%t in the &achine if it gene+ate% an inte+nal +ate of +et"+n of 1= e+cent. What i% the &a,i&"& a&o"nt the co&an( can a( fo+ the &achine an# %till &eet the inte+nal +ate of +et"+n c+ite+ion) a. !. c. #.
81@9999 8019999 81@>799 8144=
AN-WER >4.
#
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. A%%"&e the co&an( a(% 8079999 fo+ the &achine. What i% the e,ecte# inte+nal +ate of +et"+n on the &achine) a. !. c. #.
!etween @ an# e+cent !etween 3 an# 4 e+cent !etween 1> an# 1@ e+cent le%% than 1 e+cent
AN-WER
!
EDIU
Chate+ 14
Caital B"#geting
14601
U%e the following info+&ation fo+ $"e%tion% >7 an# >=. The net afte+ta, ca%h flow% a%%ociate# with two +oect% "n#e+ con%i#e+ation !( No'elle Co. follow P+oect 1 8399999 @9999
Initial in'e%t&ent Ca%h flow% (ea+% 167 >7.
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. What i% the Fi%he+ +ate fo+ the%e two +oect%) a. !. c. #.
le%% than 1 e+cent !etween > an# @ e+cent !etween 4 an# 7 e+cent !etween = an# > e+cent
AN-WER >=.
!
DIFFICULT
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. A%%"&e that the co&an( can otentiall( accet !oth +oect% one +oect o+ neithe+ +oect. Which +oect% wo"l# the co&an( accet if it e%ti&ate% it% weighte# a'e+age co%t of caital i% e+cent) a. !. c. #.
!oth +oect% P+oect 1 P+oect 0 neithe+ +oect
AN-WER >>.
P+oect 0 8199999 39999
a
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. A +oect "n#e+ con%i#e+ation !( the White Co+. wo"l# +e$"i+e a wo+*ing caital in'e%t&ent of 8099999. The wo+*ing caital wo"l# !e li$"i#ate# at the en# of the +oect2% 19(ea+ life. If White Co+. ha% an afte+ta, co%t of caital of 19 e+cent an# a &a+ginal ta, +ate of 39 e+cent what i% the +e%ent 'al"e of the wo+*ing caital ca%h flow e,ecte# to !e +ecei'e# in (ea+ 19) a. !. c. #.
83=@=@ 8>>199 873>9 803139
AN-WER
!
EDIU
14600
>@.
Chate+ 14
Caital B"#geting
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. B Co&an( i% con%i#e+ing two alte+nati'e wa(% to #e+eciate a +oo%e# in'e%t&ent. The in'e%t&ent ha% an initial co%t of 8199999 an# an e,ecte# fi'e(ea+ life. The two alte+nati'e #e+eciation %che#"le% follow
/ea+ 1 #e+eciation /ea+ 0 #e+eciation /ea+ 3 #e+eciation /ea+ 4 #e+eciation /ea+ 7 #e+eciation
etho# 1 809999 809999 809999 809999 809999
etho# 0 849999 839999 809999 819999 89
A%%"&ing that the co&an( face% a &a+ginal ta, +ate of 49 e+cent an# ha% a co%t of caital of 19 e+cent what i% the #iffe+ence !etween the two ðo#% in the +e%ent 'al"e of the #e+eciation ta, !enefit) a. !. c. #.
8>1= 89 80@>@ 8=340
AN-WER
c
DIFFICULT
U%e the following info+&ation fo+ $"e%tion% > an# @9. Bl"e% B+o%. Inc. i% con%i#e+ing an in'e%t&ent in a co&"te+ that i% caa!le of +o#"cing 'a+io"% i&age% that a+e "%ef"l in the +o#"ction of co&&e+cial a+t. The co&"te+ wo"l# co%t 809999 an# ha'e an e,ecte# life of eight (ea+%. The co&"te+ i% e,ecte# to gene+ate a##itional ann"al net ca%h +eceit% !efo+eta, of 8=999 e+ (ea+. The co&"te+ will !e #e+eciate# acco+#ing to the %t+aightline ðo# an# the fi+&2% &a+ginal ta, +ate i% 07 e+cent. >.
What i% the afte+ta, a(!ac* e+io# fo+ the co&"te+ +oect) a. !. c. #.
>.=0 (ea+% 3.9 (ea+% 4.44 (ea+% 3.11 (ea+%
AN-WER
!
EDIU
Chate+ 14
@9.
Caital B"#geting
14603
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. What i% the afte+ta, net +e%ent 'al"e of the +oo%e# +oect "%ing a 1= e+cent #i%co"nt +ate) a. !. c. #.
800=1 8474 8=9=0 84>>
AN-WER
a
EDIU
U%e the following info+&ation fo+ $"e%tion% @16@3. Heft( In'e%t&ent Co. i% con%i#e+ing an in'e%t&ent in a la!o+%a'ing &achine. Info+&ation on thi% &achine follow% Co%t -al'age 'al"e in fi'e (ea+% E%ti&ate# life Ann"al #e+eciation Ann"al +e#"ction in e,i%ting co%t% @1.
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. What i% the inte+nal +ate of +et"+n on thi% +oect +o"n# to the nea+e%t 1<0) a. !. c. #.
3>.7 07.9 19.7 13.7
AN-WER @0.
839999 89 7 (ea+% 8=999 8@999
c
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. A%%"&e fo+ thi% $"e%tion onl( that Heft( Co. "%e% a #i%co"nt +ate of 1= e+cent to e'al"ate +oect% of thi% t(e. What i% the +oect2% net +e%ent 'al"e) a. !. c. #.
8=0@3 83@9= 803471 800999
AN-WER
!
EDIU
14604
@3.
Chate+ 14
Caital B"#geting
What i% the a(!ac* e+io# on thi% in'e%t&ent) a. !. c. #.
4 (ea+% 0.14 (ea+% 3.>7 (ea+% 7 (ea+%
AN-WER
c
EDIU
U%e the following info+&ation fo+ $"e%tion% @4 an# @7. L I+onwo+*% i% con%i#e+ing a +oo%al to %ell an e,i%ting lathe an# "+cha%e a new co&"te+ oe+ate# lathe. Info+&ation on the e,i%ting lathe an# the co&"te+oe+ate# lathe follow
Co%t Acc"&"late# #e+eciation -al'age 'al"e now -al'age 'al"e in 4 (ea+% Ann"al #e+eciation Ann"al ca%h oe+ating co%t% Re&aining "%ef"l life @4.
Co&"te+oe+ate# lathe 8399999 9 =9999 >7999 79999 4 (ea+%
What i% the a(!ac* e+io# fo+ the co&"te+oe+ate# lathe) a. !. c. #.
1.@> (ea+% 0.99 (ea+% 3.73 (ea+% 3.0 (ea+%
AN-WER @7.
E,i%ting lathe 8199999 =9999 09999 9 19999 099999 4 (ea+%
a
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. If the co&an( "%e% 19 e+cent a% it% #i%co"nt +ate what i% the net +e%ent 'al"e of the +oo%e# new lathe "+cha%e) a. !. c. #.
803=4=7 807=4=7 8174@7 839400
AN-WER
a
EDIU
Chate+ 14
Caital B"#geting
14607
U%e the following info+&ation fo+ $"e%tion% @= an# @>. The Allen#ale Co. ha% +ecentl( e'al"ate# a +oo%al to in'e%t in co%t+e#"cing +o#"ction technolog(. Acco+#ing to the e'al"ation the +oect wo"l# +e$"i+e an initial in'e%t&ent of 81>1== an# wo"l# +o'i#e e$"al ann"al co%t %a'ing% fo+ fi'e (ea+%. Ba%e# on a 19 e+cent #i%co"nt +ate the +oect gene+ate% a net +e%ent 'al"e of 81>@@. The +oect i% not e,ecte# to ha'e an( %al'age 'al"e at the en# of it% fi'e(ea+ life. @=.
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. What a+e the e,ecte# ann"al co%t %a'ing% of the +oect) a. !. c. #.
83799 84999 84799 87999
AN-WER @>.
#
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. What i% the +oect2% e,ecte# inte+nal +ate of +et"+n) a. !. c. #.
19 11 13 14
AN-WER
#
EDIU
U%e the following info+&ation fo+ $"e%tion% @@69. R Co. i% in'ol'e# in the e'al"ation of a new co&"te+integ+ate# &an"fact"+ing %(%te&. The %(%te& ha% a +oecte# initial co%t of 81999999. It ha% an e,ecte# life of %i, (ea+% with no %al'age 'al"e an# i% e,ecte# to gene+ate ann"al co%t %a'ing% of 8079999. Ba%e# on R Co.2% anal(%i% the +oect ha% a net +e%ent 'al"e of 87>=07. @@.
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. What #i%co"nt +ate #i# the co&an( "%e to co&"te the net +e%ent 'al"e) a. !. c. #.
19 11 10 13
AN-WER
!
EDIU
1460=
@.
Chate+ 14
What i% the +oect2% +ofita!ilit( in#e,) a. !. c. #.
1.97@ .97@ .47 1.999
AN-WER 9.
EDIU
!etween 10.7 an# 13.9 e+cent !etween 11.9 an# 11.7 e+cent !etween 11.7 an# 10.9 e+cent !etween 13.9 an# 13.7 e+cent
AN-WER
a
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. Ann +ecentl( in'e%te# in a +oect that +o&i%e# an inte+nal +ate of +et"+n of 17 e+cent. If the +oect ha% an e,ecte# ann"al ca%h inflow of 810999 fo+ %i, (ea+% with no %al'age 'al"e how &"ch #i# Ann a( fo+ the +oect) a. !. c. #.
837999 847414 8>0999 831>9@
AN-WER 0.
a
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. What i% the +oect2% inte+nal +ate of +et"+n) a. !. c. #.
1.
Caital B"#geting
!
EDIU
Lo"i% +ecentl( in'e%te# in a +oect that ha% an e,ecte# ann"al ca%h inflow of 8>999 fo+ 19 (ea+% an# an e,ecte# a(!ac* e+io# of 3.= (ea+%. How &"ch #i# Lo"i% in'e%t in the +oect) a. !. c. #.
81444 83=999 807099 849999
AN-WER
c
EDIU
Chate+ 14
3.
Caital B"#geting
1460>
The cNall( Co. i% con%i#e+ing an in'e%t&ent in a +oect that gene+ate% a +ofita!ilit( in#e, of 1.3. The +e%ent 'al"e of the ca%h inflow% on the +oect i% 844999. What i% the net +e%ent 'al"e of thi% +oect) a. !. c. #.
819174 813099 87>099 833@4=
AN-WER
a
EDIU
THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN THE APPENDICE OF THE CHAPTER!
4.
If + i% the #i%co"nt +ate the fo+&"la 1<1 O +J +efe+% to the a. !. c. #.
f"t"+e 'al"e inte+e%t facto+ a%%ociate# with + fo+ one e+io#. +e%ent 'al"e of %o&e f"t"+e ca%h flow. +e%ent 'al"e inte+e%t facto+ a%%ociate# with + fo+ one e+io#. f"t"+e 'al"e inte+e%t facto+ fo+ an ann"it( with a #"+ation of + e+io#%.
AN-WER 7.
EA-/
F"t"+e 'al"e i% the a. !. c. #.
%"& of #olla+%in #i%co"nte# to ti&e ?e+o. %"& of #olla+%o"t #i%co"nte# to ti&e ?e+o. #iffe+ence of #olla+%in an# #olla+%o"t. 'al"e of #olla+%in &in"% #olla+%o"t fo+ f"t"+e e+io#% a#"%te# fo+ an( inte+e%t co&o"n#ing facto+.
AN-WER =.
c
#
EDIU
All othe+ thing% !eing e$"al a% the ti&e e+io# fo+ +ecei'ing an ann"it( lengthen% a. !. c. #.
the +elate# +e%ent 'al"e facto+% inc+ea%e. the +elate# +e%ent 'al"e facto+% #ec+ea%e. the +elate# +e%ent 'al"e facto+% +e&ain con%tant. it i% i&o%%i!le to tell what haen% to +e%ent 'al"e facto+% f+o& the info+&ation gi'en.
AN-WER
a
EA-/
1460@
>.
Chate+ 14
Which of the following in#icate% that the fi+%t ca%h flow i% at the en# of a e+io#)
a. !. c. #.
M+#ina+( ann"it( (e% (e% no no
AN-WER @.
EA-/
f"t"+e 'al"e of : in one e+io#. f"t"+e 'al"e inte+e%t facto+ a%%ociate# with +. +e%ent 'al"e of :. +e%ent 'al"e inte+e%t facto+ a%%ociate# with +.
AN-WER
a
EA-/
The caital !"#geting techni$"e *nown a% acco"nting +ate of +et"+n "%e%
a. !. c. #.
%al'age 'al"e no no (e% (e%
AN-WER 199.
a
Ann"it( #"e no (e% (e% no
A%%"&e that : +e+e%ent% a %"& of &one( that Bill ha% a'aila!le to in'e%t in a +oect that will (iel# a +et"+n of +. In the fo+&"la / ; :1 O + / +e+e%ent% the a. !. c. #.
.
Caital B"#geting
#
ti&e 'al"e of &one( no (e% (e% no EA-/
In co&"ting the acco"nting +ate of +et"+n the 5555555555 le'el of in'e%t&ent %ho"l# !e "%e# a% the #eno&inato+. a. !. c. #.
a'e+age initial +e%i#"al c"&"lati'e
AN-WER
a
EA-/
Chate+ 14
Caital B"#geting
1460
U%e the following info+&ation fo+ $"e%tion% 191 an# 190. i&&(2% Retail i% con%i#e+ing an in'e%t&ent in a #eli'e+( t+"c*. i&&( ha% fo"n# a "%e# t+"c* that he can "+cha%e fo+ 8@999. He e%ti&ate% the t+"c* wo"l# la%t %i, (ea+% an# inc+ea%e hi% %to+e2% net ca%h +e'en"e% !( 80999 e+ (ea+. At the en# of %i, (ea+% the t+"c* wo"l# ha'e no %al'age 'al"e an# wo"l# !e #i%ca+#e#. i&&( will #e+eciate the t+"c* "%ing the %t+aightline ðo#. 191.
What i% the acco"nting +ate of +et"+n on the t+"c* in'e%t&ent !a%e# on a'e+age +ofit an# a'e+age in'e%t&ent) a. !. c. #.
07.9 79.9 1=.> @.3
AN-WER 190.
EDIU
What i% the a(!ac* e+io# on the in'e%t&ent in the new t+"c*) a. !. c. #.
10 (ea+% = (ea+% 4 (ea+% 0 (ea+%
AN-WER 193.
a
c
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. De!! !o++ow% 879999 f+o& he+ !an* on an"a+( 1 0991. -he i% to +ea( the loan in e$"al ann"al in%tall&ent% o'e+ 39 (ea+%. How &"ch i% he+ ann"al +ea(&ent if the !an* cha+ge% 19 e+cent inte+e%t) a. !. c. #.
81==> 84099 80@=7 87394
AN-WER
#
EDIU
14639
194.
Chate+ 14
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. Bill Haw*in% ha% "%t t"+ne# =7. He ha% 8199999 to in'e%t in a +eti+e&ent ann"it(. Mne in'e%t&ent co&an( ha% offe+e# to a( Bill 819999 e+ (ea+ fo+ 17 (ea+% a(&ent% to !egin in one (ea+ in e,change fo+ an i&&e#iate 8199999 a(&ent. If Bill accet% the offe+ f+o& the in'e%t&ent co&an( what i% hi% e,ecte# +et"+n on the 8199999 in'e%t&ent a%%"&e a +et"+n that i% co&o"n#e# ann"all() a. !. c. #.
!etween 7 an# = e+cent !etween = an# > e+cent !etween > an# @ e+cent !etween @ an# e+cent
AN-WER 197.
a
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. C+a&#en A+&o+e# Ca+ Co. i% con%i#e+ing the ac$"i%ition of a new a+&o+e# t+"c*. The t+"c* i% e,ecte# to co%t 8399999. The co&an(2% #i%co"nt +ate i% 10 e+cent. The fi+& ha% #ete+&ine# that the t+"c* gene+ate% a o%iti'e net +e%ent 'al"e of 81>900. Howe'e+ the fi+& i% "nce+tain a% to whethe+ it% ha% #ete+&ine# a +ea%ona!le e%ti&ate of the %al'age 'al"e of the t+"c*. In co&"ting the net +e%ent 'al"e the co&an( a%%"&e# that the t+"c* wo"l# !e %al'age# at the en# of the fifth (ea+ fo+ 8=9999. What e,ecte# %al'age 'al"e fo+ the t+"c* wo"l# ca"%e the in'e%t&ent to gene+ate a net +e%ent 'al"e of 89) Igno+e ta,e%. a. !. c. #.
839999 89 8770>@ 840>@
AN-WER 19=.
Caital B"#geting
a
EDIU
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. Boo*e+ -teel Inc. i% con%i#e+ing an in'e%t&ent that wo"l# +e$"i+e an initial ca%h o"tla( of 8499999 an# wo"l# ha'e no %al'age 'al"e. The +oect wo"l# gene+ate ann"al ca%h inflow% of 8>7999. The fi+&2% #i%co"nt +ate i% @ e+cent. How &an( (ea+% &"%t the ann"al ca%h flow% !e gene+ate# fo+ the +oect to gene+ate a net +e%ent 'al"e of 89) a. !. c. #.
!etween 7 an# = (ea+% !etween = an# > (ea+% !etween > an# @ (ea+% !etween @ an# (ea+%
AN-WER
c
EDIU
Chate+ 14
19>.
Caital B"#geting
A caital !"#get i% "%e# !( &anage&ent to #ete+&ine
a. !. c. #.
in what to in'e%t no no (e% (e%
AN-WER 19@.
14631
#
how &"ch to in'e%t no (e% no (e%
EA-/
The weighte# a'e+age co%t of caital +e+e%ent% the a. !. c. #.
co%t of !on#% +efe++e# %toc* an# co&&on %toc* #i'i#e# !( the th+ee %o"+ce%. e$"i'alent "nit% of caital "%e# !( the o+gani?ation. o'e+all co%t of caital f+o& all o+gani?ation financing %o"+ce%. o'e+all co%t of #i'i#en#% l"% inte+e%t ai# !( the o+gani?ation.
AN-WER
c
EA-/
HORT ANWER"PRO#LEM
1.
In a net +e%ent 'al"e anal(%i% how can an anal(%t e,licitl( an# fo+&all( con%i#e+ the infl"ence of +i%* on the +e%ent 'al"e of ce+tain ca%h flow%) AN-WER An anal(%t co"l# #o at lea%t th+ee #iffe+ent thing% to e,licitl( acco"nt fo+ +i%*. The anal(%t co"l# 1 a#"%t the #i%co"nt +ate to +eflect the +i%* of the ca%h flow 0 a#"%t the #i%co"nting e+io# of the ca%h flow o+ 3 a#"%t the e,ecte# a&o"nt of the ca%h flow " o+ #own to +eflect the +i%*. EDIU
0.
What facto+% infl"ence the +e%ent 'al"e of the #e+eciation ta, !enefit) AN-WER The #e+eciation ta, !enefit i% +i&a+il( affecte# !( th+ee facto+% the #e+eciation +ate o+ ðo# the ta, +ate an# the #i%co"nt +ate. EDIU
14630
3.
Chate+ 14
Caital B"#geting
Wh( i% it i&o+tant fo+ &anage+% to !e a!le to +an* +oect%) AN-WER anage+% nee# to !e a!le to +an* +oect% fo+ two +i&a+( +ea%on%. Fi+%t &anage+% nee# to !e a!le to %elect the !e%t +oect f+o& a %et of +oect% that a+e #i+ectl( co&eting with each othe+ a+tic"la+l( in the ca%e of &"t"all( e,cl"%i'e +oect%. -econ# e'en when +oect% a+e not #i+ectl( co&eting with each othe+ &anage+% &a( ha'e a li&ite# %"l( of caital that ha% to !e allocate# to the &o%t wo+th( of the +oect%. EDIU
4.
If it i% a%%"&e# that &anage+% act to &a,i&i?e the 'al"e of the fi+& what can al%o !e a%%"&e# a!o"t the e,i%ting &i, of caital co&onent% +elati'e to the %et of all 'ia!le alte+nati'e &i,e% of caital co&onent%) AN-WER It can !e a%%"&e# that the e,i%ting &i, of caital co&onent% i% the one that &ini&i?e% the co%t of caital which the+efo+e &a,i&i?e% the 'al"e of the fi+&. EDIU
7.
Doe% a +oect that gene+ate% a o%iti'e inte+nal +ate of +et"+n al%o ha'e a o%iti'e net +e%ent 'al"e) E,lain. AN-WER No. A o%iti'e IRR #oe% not nece%%a+il( &ean that a +oect will al%o ha'e a o%iti'e NPQ. Mnl( if the IRR i% g+eate+ than the #i%co"nt +ate that i% "%e# in the NPQ calc"lation will the NPQ !e o%iti'e. EDIU
=.
Wh( i% the +ofita!ilit( in#e, a !ette+ !a%i% than net +e%ent 'al"e to co&a+e +oect% that +e$"i+e #iffe+ent le'el% of in'e%t&ent) AN-WER The +ofita!ilit( in#e, +elate% the &agnit"#e of the net +e%ent 'al"e to the &agnit"#e of the initial in'e%t&ent. Th"% the PI gi'e% %o&e in#ication of +elati'e +ofita!ilit(. The NPQ it%elf +o'i#e% no #i+ect in#ication of the le'el of in'e%t&ent that i% +e$"i+e# to gene+ate the NPQ an# the+efo+e +o'i#e% no in#ication of +elati'e +ofita!ilit(. EDIU
Chate+ 14
>.
Caital B"#geting
14633
Aen#i, What i% the &ao+ a#'antage of the acco"nting +ate of +et"+n +elati'e to the othe+ techni$"e% that can !e "%e# to e'al"ate caital +oect%) AN-WER The acco"nting +ate of +et"+n ha% two &ao+ a#'antage% +elati'e to the othe+ caital !"#geting techni$"e%. Fi+%t it &a( !e &o+e co&ati!le a% an in'e%t&ent c+ite+ion with c+ite+ia that a+e "%e# to e'al"ate &anage+ial an# %eg&ent e+fo+&ance a+tic"la+l( fo+ in'e%t&ent cente+% that a+e e'al"ate# on an RMI o+ RI !a%i%. -econ# the acco"nting +ate of +et"+n can !e gene+ate# f+o& acco"nting #ata an# i% the+efo+e ea%( to t+ac* o'e+ the life of the in'e%t&ent. EDIU
@.
Wh( i% it i&o+tant fo+ o+gani?ation% to con#"ct o%t in'e%t&ent a"#it% of caital +oect%) AN-WER The o%t in'e%t&ent a"#it +o'i#e% &anage&ent with an oo+t"nit( to e'al"ate the act"al e+fo+&ance of the in'e%t&ent +elati'e to e,ecte# e+fo+&ance. If o%%i!le &anage&ent can ta*e co++ecti'e action when act"al e+fo+&ance i% oo+ +elati'e to the e,ecte# e+fo+&ance. anage&ent can al%o "%e the o%t in'e%t&ent a"#it to e'al"ate the e+fo+&ance of tho%e who +o'i#e# the o+iginal info+&ation a!o"t the in'e%t&ent an# tho%e who a+e in cha+ge of the in'e%t&ent. In a##ition &anage&ent &a( "%e the info+&ation f+o& the o%t in'e%t&ent a"#it to i&+o'e the e'al"ation +oce%% of f"t"+e caital +oect%. EDIU
.
How a+e caital !"#geting &o#el% affecte# !( otential in'e%t&ent% in a"to&ate# e$"i&ent in'e%t&ent #eci%ion%) AN-WER Di%co"nt +ate% fo+ +e%ent 'al"e calc"lation% often fa+ e,cee# a fi+&2% co%t of caital. A"to&ate# &achine+( i% 'e+( co%tl( an# &a( !e at a #i%a#'antage in #i%co"nte# ca%h flow ðo#%. "alitati'e facto+% a%%ociate# with a"to&ate# e$"i&ent &a( not +ecei'e an( weight o+ 'al"e in c"++ent caital !"#geting ðo#%. A"to&ate# e$"i&ent i% often inte++elate# with othe+ in'e%t&ent% an# %ho"l# !e !"n#le# to +eflect thi% %(ne+gi%&. Finall( the+e i% the oo+t"nit( co%t of not a"to&ating when co&etito+% a"to&ate an# (o"+ fi+& #oe%n2t. EDIU
14634
19.
Chate+ 14
Caital B"#geting
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. anage+% of the onathan Co. +eali?e that the +e%ent 'al"e of the #e+eciation ta, !enefit i% affecte# !( the #i%co"nt +ate the ta, +ate an# the #e+eciation +ate. The( ha'e +ecentl( "+cha%e# a &achine fo+ 8199999 an# the( a+e t+(ing to #eci#e which #e+eciation ðo# to "%e. The+e a+e onl( two alte+nati'e% a'aila!le an# the( &"%t &a*e an i++e'oca!le %election of one ðo# o+ the othe+ +ight now. The( ha'e no "nce+taint( a!o"t the co&an(2% #i%co"nt +ate it i% 19 e+cent !"t the( a+e highl( "nce+tain a!o"t the #i+ection of f"t"+e ta, +ate%. The co&an(2% "nce+taint( %te&% f+o& the fact that the e,i%ting ta, +ate i% 39 e+cent !"t cong+e%% i% +e%entl( #e!ating ta, legi%lation that wo"l# #+a&aticall( inc+ea%e the +ate. If the legi%lation i% a%%e# it wo"l# go into affect in two (ea+% afte+ the onathan Co. ha% clai&e# two (ea+% of #e+eciation. How high wo"l# ta, +ate% nee# to !e in two (ea+% fo+ the onathan Co. to !e in#iffe+ent !etween #e+eciation etho# 0 an# #e+eciation etho# 1 !elow) /ea+ 1 /ea+ 0 /ea+ 3 /ea+ 4 /ea+ 7
etho# 1 839999 849999 819999 819999 819999
etho# 0 819999 817999 807999 807999 807999
Diffe+ence 809999 807999 817999 817999 817999
AN-WER No &atte+ what haen% the ta, +ate fo+ the ne,t two (ea+% i% 39 e+cent. U%ing the #iffe+ence% in #e+eciation a&o"nt% one can #ete+&ine the #iffe+ence in +e%ent 'al"e% !etween the two ðo#% at the en# of (ea+ 0 when the ta, +ate i% e,ecte# to change. P+e%ent 'al"e calc"lation% fo+ (ea+% 1 an# 0 /ea+ 1 809999 .39 .91 ; /ea+ 0 807999 .39 .@0=7 ; Total +e%ent 'al"e #iffe+ence at en#
8 7477 8 =1 8 11=74
-o afte+ the fi+%t two (ea+% etho# 1 ha% gene+ate# 811=74 &o+e +e%ent 'al"e than etho# 0. Thi% %i&l( &ean% that at the oint of in#iffe+ence etho# 0 wo"l# !e +e$"i+e# to gene+ate 811=74 &o+e +e%ent 'al"e than etho# 1 in the la%t th+ee (ea+%. Fo+ the la%t th+ee (ea+% of the +oect2% life the #iffe+ence in #e+eciation a&o"nt% i% 817999. Thi% 817999 a&o"nt can !e "%e# in the following e$"ation to %ol'e fo+ the ta, +ate that (iel#% a +e%ent 'al"e of 811=74 811=74 ; 817999 ta, +ate .>713 O .=@39 O .=09 811=74 ; 839@0@ ta, +ate Ta, +ate ; 811=74<839@0@ Ta, +ate ; 3>.@ Th"% an inc+ea%e in the ta, +ate to a!o"t 3>.@ e+cent wo"l# ca"%e &anage&ent to !e in#iffe+ent !etween the two #e+eciation ðo#%. DIFFICULT
Chate+ 14
Caital B"#geting
14637
U%e the following info+&ation fo+ $"e%tion 11. :L Co+. i% con%i#e+ing an in'e%t&ent that will +e$"i+e an initial ca%h o"tla( of 8099999 to "+cha%e non#e+ecia!le a%%et%. The +oect +o&i%e% to +et"+n 8=9999 e+ (ea+ afte+ta, fo+ eight (ea+% with no %al'age 'al"e. The co&an(2% co%t of caital i% 11 e+cent. 11.
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. The co&an( i% "nce+tain a!o"t it% e%ti&ate of the life e,ectanc( of the +oect. How &an( (ea+% &"%t the +oect gene+ate the 8=9999 e+ (ea+ +et"+n fo+ the co&an( to at lea%t !e in#iffe+ent a!o"t it% accetance) Do not con%i#e+ the o%%i!ilit( of a+tial (ea+ +et"+n%. AN-WER Di'i#ing 8099999<8=9999 gi'e% the ann"it( #i%co"nt facto+ 3.3333 fo+ 11 e+cent a%%ociate# with the &ini&al +e$"i+e# ti&e fo+ thi% +oect to !e %"cce%%f"l. Acco+#ing to the ta!le% in Aen#i, A the +oect will ha'e a o%iti'e net +e%ent 'al"e if the ca%h flow% la%t th+o"gh (ea+ 7. EDIU
U%e the following info+&ation fo+ $"e%tion% 10614. T+e!le Co. i% con%i#e+ing an in'e%t&ent in a new +o#"ct line. The in'e%t&ent wo"l# +e$"i+e an i&&e#iate o"tla( of 8199999 fo+ e$"i&ent an# an i&&e#iate in'e%t&ent of 8099999 in wo+*ing caital. The in'e%t&ent i% e,ecte# to gene+ate a net ca%h inflow of 8199999 in (ea+ 1 8179999 in (ea+ 0 an# 8099999 in (ea+% 3 an# 4. The e$"i&ent wo"l# !e %c+ae# fo+ no %al'age at the en# of the fo"+th (ea+ an# the wo+*ing caital wo"l# !e li$"i#ate#. The e$"i&ent wo"l# !e f"ll( #e+eciate# !( the %t+aightline ðo# o'e+ it% fo"+(ea+ life. 10.
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. If T+e!le "%e% a #i%co"nt +ate of 1= e+cent what i% the NPQ of the +oo%e# +o#"ct line in'e%t&ent) AN-WER Ca%h flow In'e%t&ent Wo+*ing ca. Ca%h inflow Ca%h inflow Ca%h inflow Ca%h inflow Wo+*ing ca. Net +e%ent 'al"e EDIU
/ea+ 9 9 1 0 3 4 4
A&o"nt 8199999 8099999 199999 179999 099999 099999 099999
Di%co"nt facto+ 1.99 1.99 .@=01 .>430 .=49> .7703 .7703
P+e%ent 'al"e 8199999 099999 @=019 1114@9 10@149 1194=9 1194=9 804=>79
1463=
13.
Chate+ 14
Caital B"#geting
What i% the a(!ac* e+io# fo+ the in'e%t&ent) AN-WER Afte+ the fi+%t two (ea+% 8079999 of the o+iginal 8399999 in'e%t&ent wo"l# !e +eco"e#. It wo"l# ta*e one$"a+te+ of the thi+# (ea+ 879999<8099999 to +eco" the la%t 879999. Th"% the a(!ac* e+io# i% 0.07 (ea+%. EDIU
14.
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. ane ha% an oo+t"nit( to in'e%t in a +oect that will (iel# fo"+ ann"al a(&ent% of 810999 with no %al'age. The fi+%t a(&ent will !e +ecei'e# in e,actl( one (ea+. Mn low+i%* +oect% of thi% t(e ane +e$"i+e% a +et"+n of = e+cent. Ba%e# on thi% +e$"i+e&ent the +oect gene+ate% a +ofita!ilit( in#e, of 1.9373. a. !.
How &"ch i% ane +e$"i+e# to in'e%t in thi% +oect) What i% the inte+nal +ate of +et"+n on ane2% +oect)
AN-WER a. The +e%ent 'al"e of the 810999 ann"it( i% fo"n# !( &"ltil(ing 810999 !( the ann"it( #i%co"nt facto+ a%%ociate# with = e+cent inte+e%t fo+ fo"+ (ea+% 810999 3.4=71 ; 841
[email protected]. F+o& the info+&ation on the +ofita!ilit( in#e, it i% *nown that the +e%ent 'al"e of the ca%h inflow% i% 1.9373 ti&e% the initial in'e%t&ent. Th"% the initial in'e%t&ent i%841
[email protected]<1.9373 ; 849999. !.
B( #i'i#ing 849999 !( the ann"al ca%h inflow of 810999 it i% #ete+&ine# that the #i%co"nt facto+ a%%ociate# with the IRR i% 3.3333. Thi% #i%co"nt facto+ i% a%%ociate# with an inte+e%t +ate that lie% !etween > an# @ e+cent. U%ing inte+olation the IRR i% co&"te# to !e a+o,i&atel( >.>0 e+cent.
EDIU
Chate+ 14
17.
Caital B"#geting
1463>
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. Woo# P+o#"ction% i% con%i#e+ing the "+cha%e of a new &o'ie ca&e+a which will !e "%e# fo+ &ao+ &otion ict"+e%. The new ca&e+a will co%t 839999 ha'e an eight(ea+ life an# c+eate co%t %a'ing% of 87999 e+ (ea+. The new ca&e+a will +e$"i+e 8>99 of &aintenance each (ea+. Woo# P+o#"ction% "%e% a #i%co"nt +ate of e+cent. a. !.
Co&"te the net +e%ent 'al"e of the new ca&e+a. Dete+&ine the a(!ac* e+io#.
AN-WER a. Co%t %a'ing% e+ (ea+ aintenance e+ (ea+ Net ca%h flow% e+ (ea+
87999 >99 84399
Ca%h Di%co"nt facto+ 839999 1.9999 4399 7.734@ Net +e%ent 'al"e of in'e%t&ent !.
P+e%ent 'al"e 839999.99 03>.=4 8 =099.3=
Pa(!ac* e$"al% 839999<84399 ; =.>= (ea+%
EDIU
1463@
1=.
Chate+ 14
Caital B"#geting
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. :/S Co. i% inte+e%te# in "+cha%ing a %tateofthea+t wi#get &achine fo+ it% &an"fact"+ing lant. The new &achine ha% !een #e%igne# to !a%icall( eli&inate all e++o+% an# #efect% in the wi#get&a*ing +o#"ction +oce%%. The new &achine will co%t 8179999 an# ha'e a %al'age 'al"e of 8>9999 at the en# of it% %e'en(ea+ "%ef"l life. :/S ha% #ete+&ine# that ca%h inflow% fo+ (ea+% 1 th+o"gh > will !e a% follow% 830999K 87>999K 817999K 80@999K 81=999K 819999 an# 817999 +e%ecti'el(. aintenance will !e +e$"i+e# in (ea+% 3 an# = at 819999 an# 8>999 +e%ecti'el(. :/S "%e% a #i%co"nt +ate of 11 e+cent an# want% +oect% to ha'e a a(!ac* e+io# of no longe+ than fi'e (ea+%. a.
Co&"te the net +e%ent 'al"e of the new &achine.
!.
Co&"te the fi+&2% +ofita!ilit( in#e,.
c.
Co&"te the a(!ac* e+io#.
#.
E'al"ate thi% in'e%t&ent +oo%al fo+ :/S Co.
Chate+ 14
Caital B"#geting
AN-WER a. /ea+ Ca%h flow 1 8179999 1 30999 0 7>999 3 7999 4 0@999 7 1=999 = 3999 > 17999 > >9999 Net +e%ent 'al"e
1463
Di%co"nt facto+ 1.9999 .99 .@11= .>310 .=7@> .737 .734= .4@1> .4@1>
P+e%ent 'al"e 8179999.99 0@@0@.@9 4=0=1.09 3=7=.99 1@443.=9 4=.99 1=93.@9 >007.79 33>1.99 8 >==.19
!.
P+ofita!ilit( in#e, e$"al% +e%ent 'al"e of ca%h flow% #i'i#e# !( in'e%t&ent 814033.9<8179999 ; .7
c.
Pa(!ac* e+io# i% =.11 (ea+% co&"te# a% follow% /ea+ 1 0 3 4 7 = >
Ca%h Flow 830999 7>999 7999 0@999 1=999 3999 @7999
C"&"lati'e Ca%h Flow 8 30999 @999 4999 100999 13@999 141999 00=999
8179999 6 8141999 ; 8999<8@7999 ; .11 #.
The +oect i% $"antitati'el( "nacceta!le !eca"%e it ha% a negati'e NPQ a le%% thanone PI an# a a(!ac* e+io# of o'e+ %i, (ea+%. Howe'e+ the NPQ an# PI a+e e,t+e&el( clo%e to !eing acceta!le. Beca"%e the new &achine will +o'i#e :/S ?e+o#efect +o#"ction the in'e%t&ent &a( !e #e%i+a!le if a##itional $"alitati'e facto+% a+e con%i#e+e# %"ch a% i&+o'e# co&etiti'e o%ition c"%to&e+ %ati%faction goo#will gene+ate# i&+o'e# +o#"ct $"alit( an# +elia!ilit( an# a #e%i+e to !e in the fo+ef+ont of &an"fact"+ing caa!ilit(. :/S &a( want to atte&t to $"antif( the%e !enefit% an# +ee'al"ate the &achine2% acceta!ilit( a% an in'e%t&ent.
DIFFICULT
14649
1>.
Chate+ 14
Caital B"#geting
P+e%ent 'al"e ta!le% nee#e# to an%we+ thi% $"e%tion. The R"th Co&an( ha% !een oe+ating a %&all l"nch co"nte+ fo+ the con'enience of e&lo(ee%. The co"nte+ occ"ie% %ace that i% not nee#e# fo+ an( othe+ !"%ine%% "+o%e. The l"nch co"nte+ ha% !een &anage# !( a a+tti&e e&lo(ee who%e ann"al %ala+( i% 83999. /ea+l( oe+ation% ha'e con%i%tentl( %hown a lo%% a% follow% Receit% E,en%e% fo+ foo# %"lie% in ca%h -ala+( Net Lo%%
809999 81999 3999
00999 80999
A co&an( ha% offe+e# to %ell R"th a"to&atic 'en#ing &achine% fo+ a total co%t of 810999. -ale% te+&% a+e ca%h on #eli'e+(. The ol# e$"i&ent ha% ?e+o #i%o%al 'al"e. The +e#icte# "%ef"l life of the e$"i&ent i% 19 (ea+% with ?e+o %c+a 'al"e. The e$"i&ent will ea%il( %e+'e the %a&e 'ol"&e that the l"nch co"nte+ han#le#. S cate+ing co&an( will co&letel( %e+'ice an# %"l( the &achine%. P+ice% an# 'a+iet( of foo# an# #+in* will !e the %a&e a% tho%e that +e'aile# at the l"nch co"nte+. The cate+ing co&an( will a( 7 e+cent of g+o%% +eceit% to the R"th Co&an( an# will !ea+ all co%t% of foo# +eai+% an# %o fo+th. The a+tti&e e&lo(ee will !e #i%cha+ge#. Th"% R"th2% onl( co%t will !e the initial o"tla( fo+ the &achine%. Con%i#e+ onl( the two alte+nati'e% &entione#. Re$uire%& a. What i% the ann"al inco&e #iffe+ence !etween alte+nati'e%)
!.
Co&"te the a(!ac* e+io#.
c.
Co&"te 1. The net +e%ent 'al"e if +ele'ant co%t of caital i% 09 e+cent. 0. Inte+nal +ate of +et"+n.
#.
anage&ent i% 'e+( "nce+tain a!o"t the +o%ecti'e +e'en"e f+o& the 'en#ing e$"i&ent. -"o%e that the g+o%% +eceit% a&o"nte# to 814999 in%tea# of 809999. Reeat the co&"tation in a+t c.1. What wo"l# !e the &ini&"& a&o"nt of ann"al g+o%% +eceit% f+o& the 'en#ing e$"i&ent that wo"l# "%tif( &a*ing the in'e%t&ent) -how co&"tation%.
e.
Chate+ 14
Caital B"#geting
AN-WER a.
Ml# lo%% 80999 New +eceit% 809999 7 ; 8 1999 De+. 810999<19 (+%. ; 1099 New Lo%% 8 099
!.
Change in ann"al ca%h inflow i% 83999 Pa(!ac* ; 810999<83999 ; 4 (+%.
c.
1.
PQ of inflow 83999 4.107 ; 8107>>.79 PQ of o"tflow 810999 1.9 ; 10999.99 NPQ 8 7>>.79
0.
IRR i% a+o,i&atel( 03
#.
Change in inflow ; 80>99 PQ inflow 80>99 4.107 ; 81131.>7 PQ o"tflow 810999 1.9 ; 10999.99 NPQ 8
[email protected]
e.
810999<4.107 ; 80@=0.07 Receit% ; 80@=0.07 6 80999<.97 ; 81>047
EDIU
14641
14640
1@.
Chate+ 14
Caital B"#geting
The -"n Co+. i% conte&lating the ac$"i%ition of an a"to&atic ca+ wa%h. The following info+&ation i% +ele'ant The co%t of the ca+ wa%h i% 81=9999 The anticiate# +e'en"e f+o& the ca+ wa%h i% 8199999 e+ ann"&. The "%ef"l life of the ca+ wa%h i% 19 (ea+%. Ann"al oe+ating co%t% a+e e,ecte# to !e -ala+ie% 839999 Utilitie% =99 Wate+ "%age 4499 -"lie% =999 Reai+%<&aintenance 19999 The fi+& "%e% %t+aightline #e+eciation. The %al'age 'al"e fo+ the ca+ wa%h i% ?e+o. The co&an(2% c"toff oint% a+e a% follow% Pa(!ac* 3 (ea+% Acco"nting +ate of +et"+n 1@ Inte+nal +ate of +et"+n 1@ Igno+e inco&e ta,e%. Re$uire%& a. Co&"te the ann"al ca%h inflow.
!.
Co&"te the net +e%ent 'al"e.
c.
Co&"te inte+nal +ate of +et"+n.
#.
Co&"te the a(!ac* e+io#.
e.
Co&"te the +ofita!ilit( in#e,.
f.
-ho"l# the ca+ wa%h !e "+cha%e#)
Chate+ 14
Caital B"#geting
14643
AN-WER a.
Re'en"e 6 ca%h e,en%e% Ann"al inflow
!.
PQ inflow 849999 4.441 ; PQ o"tflow 81=9999 1.9 ; NPQ ;
c.
IRR facto+ ; 81=9999<849999 ; 4.9 which i% a+o,i&atel( 03
#.
Pa(!ac* ; 81=9999<849999 ; 4 (+%.
e.
81>>=4<81=9999 ; 1.103707
f. g
Ca+ wa%h e,cee#% &ini&"& on -RR an# IRR !"t not a(!ac*. Loo*% goo# to &e.
EDIU
8199999 =9999 8 49999 81>>=4 1=9999 8 1>=4
