5) The total project approach to capital budgeting
A) calculates the present value of all cash inflows and outflows under each alternative separately.
B) calculates the net present value for the incremental cash flows.
C) calculates the net present value of cash flows which differ between alternatives.
D) uses gross cash flows to determine net present values.
E) produces the same answer as the IRR method.
6) The differential approach is often considered superior to the total project approach to capital budgeting
A) because it is easier to select the components for the model.
B) because it uses only net cash flows instead of gross cash flows.
C) for all large investment decisions.
D) because it is faster if analyzing fewer than three alternatives.
E) because it can more easily accommodate multiple investment opportunities.
7) Both the total-project approach and the differential approach present a net present value that
A) will always be the same amount.
B) will rarely be the same amount.
C) will only be the same when net present value is positive.
D) will only be the same when net present value is negative.
E) will only be the same when nominal cash flows are considered.
Answer the following question(s) using the information below.
Jonesville Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $45,000. The new machine will cost $325,000 and an additional cash investment in working capital of $10,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $30,000 in additional cash inflows during the year of acquisition and $115,000 each additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Jonesville Hospital is not subject to tax. The working capital investment will not be recovered at the end of the asset’s life.
8) What is the net present value of the investment, assuming the required rate of return is 12%? Would the hospital want to purchase the new machine?
A) $(48,670); no
B) $25,715; no
C) $48,670; yes
D) $83,415; yes
E) $3,670; yes
9) What is the net present value of the investment, assuming the required rate of return is 20%? Would the hospital want to purchase the new machine?
A) $6,955; yes
B) $(16,955); no
C) $(16,955); yes
D) $25,350; yes
E) $3,045; yes
Answer the following question(s) using the information below.
Miller Ltd. has been considering the purchase of a new machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $35,000. The new machine will cost $180,000 and an additional cash investment in working capital of $25,000 will be required. The new machine will reduce the average amount of time required on the production line and will decrease labour costs. The investment is expected to net $80,000 in additional cash inflows during the year of acquisition and $120,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. The working capital investment will not be recovered at the end of the asset’s life. The equipment would qualify as a class 8 asset and the company will continue to have assets in the pool. Miller’s tax rate is 28%.
10) What is the net present value of the investment assuming a discount rate of 13%?
A) $31,707
B) $48,288
C) $35,706
D) $52,287
E) $101,131
11) What is the net present value of the investment, assuming the required rate of return is 24%? Would the company want to purchase the new machine?
A) $52,167
B) $55,041
C) ($5,372)
D) $18,989
E) ($2,948)
12) Jasper Company Ltd. has a payback goal of three years on new equipment acquisitions. Jasper is evaluating new equipment that costs $450,000, will have a CCA rate of 20%, an estimated useful life of 8 years, and a zero terminal disposal price. The company’s marginal tax rate is 40%.
Required:
Calculate the amount of after-tax savings in annual cash operating costs that must be generated by the new equipment in order to meet the company’s payback goal.
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