Question : 8) A project has a net initial investment of $500,000 : 1186176

8) A project has a net initial investment of $500,000 and the cash flows cover five years. The project involves replacing an old machine with a new machine at the same time. Which of the following is true based on the above assumptions, in NPV analysis?

A) The book value of the old machine is relevant.

B) Recurring operating cash flows cannot be positive and negative.

C) Incremental working capital investment is irrelevant.

D) Any cash received from the disposal of the old machine would be a relevant cash flow for end of year 1.

E) Errors in forecasting the terminal disposal price of the new machine are seldom critical on long-duration projects.

9) Depreciation charges

A) are not relevant in capital budgeting decisions, because they are not discounted.

B) are not relevant because they are not cash flows.

C) are considered an element of cash flows, and are thus relevant.

D) affect the ending balance of operating income, and are thus relevant.

E) are relevant because they relate to capital items.

10) The terminal disposal price of a replacement machine

A) generally increases cash inflow in the year of disposal.

B) is the total of the salvage values of the old machine and the new machine.

C) is the salvage value of the old machine.

D) is the NPV value of the new machine salvage value.

E) is the NPV of the salvage value of the old machine.

11) A company is considering purchasing a new machine, at a cost of $50,000. This amount will be written off over 5 years at $10,000 per year. The company will have to increase its accounts receivable by $4,000 in the first year. The disposal value of the machine being replaced is $1,500.

What is the initial working capital investment required?

A) $54,000

B) $52,500

C) $36,000

D) $4,000

E) $2,500

12) Which of the following is true concerning capital budgeting analysis?

A) The IRR and AARR consider the time value of money.

B) The Payback method and the AARR both consider profitability.

C) NPV and IRR consider accruals.

D) The Payback method and the AARR both consider profitability, and NPV and IRR do not consider accruals.

E) NPV and IRR do not consider accruals, and the IRR considers the time value, but AARR does not.

13) A company is considering purchasing new equipment. The equipment will allow the company to expand into a new product line. The equipment will be installed in the company’s existing facility. Which of the following cash flows would NOT be relevant to the decision to acquire the new equipment?

A) factory rent allocated to the new product line

B) labour costs to operate the equipment

C) revenues from expanded production

D) annual maintenance cost on the new equipment

E) the salary of the manager hired to oversee the new product line

14) Toys and Junk Company is evaluating a capital expenditure proposal that requires an initial investment of $16,004 and has predicted cash inflows of $4,000 per year for 15 years. It will have no salvage value.

Required:

a.Using a required rate of return rate of 14 percent, determine the net present value of the investment proposal.

b.Determine the proposal’s internal rate of return.

15) Mercury Ltd. is considering purchasing laser equipment for $72,000. The machine will require additional working capital of $8,000. Its anticipated seven-year life will generate additional revenue of $31,000 annually with operating costs, excluding depreciation, of $14,000. At the end of seven years it will have a salvage value of $17,760 and return $8,000 in working capital.

Required:

a.If the company has a required rate of return of 12 percent, what is the net present value of the proposed investment?

b.What is the internal rate of return?