Question;Discussion;Questions;12-1.;What are the important;administrative considerations in the capital budgeting process?;12-3.;What;are the weaknesses of the payback method?;12-5.;What;does the term mutually exclusive investments mean?;12-6.;How;does the modified internal rate of return include concepts from both the;traditional internal rate of return and the net present value methods?;12-7.;If a corporation has;projects that will earn more than the cost of capital, should it ration;capital?;12-8.;What;is the net present value profile? What three points should be determined to;graph the profile?;12-9.;How;does an asset's ADR (asset depreciation range) relate to its MACRS category?;Problems;1. Assume a corporation has earnings before;depreciation and taxes of $90,000, depreciation of $40,000, and that it is in a;30 percent tax bracket. Compute its cash flow using the format below.;Earnings before depreciation and taxes;Depreciation;Earnings before taxes;Taxes @ 30%;Earnings after taxes;Depreciation;Cash flow;2. a. In problem 1, how much would cash flow be if there were only $10,000;in depreciation? All other factors are the same.;b. How much cash flow is lost due to the reduced depreciation between problems;1 and 2a?;3. Assume a firm has earnings before;depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent;tax bracket.;a. Compute its cash flow.;b. Assume it has $200,000 in depreciation.;Recompute its cash flow.;c. How large a cash flow benefit did the;depreciation provide?;4. Bob Cole, the president of a New York;Stock Exchange-listed firm, is very short term oriented and interested in the;immediate consequences of his decisions. Assume a project that will provide an;increase of $3 million in cash flow because of favorable tax consequences, but;carries a three-cent decline in earning per share because of a write-off;against first quarter earnings. What decision might Mr. Cole make?;5. Assume a $100,000 investment and the;following cash flows for two alternatives.;Year;Investment;A;Investment B;1;$30,000;$40,000;2;50,000;30,000;3;20,000;15,000;4;60,000;15,000;5;?;50,000;Which;of the two alternatives would you select under the payback method?;6. Assume a $40,000 investment and the;following cash flows for two alternatives.;Year;Investment X;Investment Y;1;$ 6,000;$15,000;2;8,000;20,000;3;9,000;10,000;4;17,000;?;5;20,000;?;Which;of the alternatives would you select under the payback method?;7. Referring back to problem 6, if the inflow;in the fifth year for Investment X were $20,000,000 instead of $20,000, would;your answer change under the payback method?;8. The Short-Line Railroad is considering a;$100,000 investment in either of two companies. The cash flows are as follows;Year;Electric Co.;Water Works;1..................;$70,000;$15,000;2..................;15,000;15,000;3..................;15,000;70,000;4-10.............;10,000;10,000;a. Using the payback method, what will the;decision be?;b. Explain why the answer in part a can be misleading.;9. X-treme Vitamin Company is considering two;investments, both of which cost $10,000. The cash flows are as follows;Year;Project A;Project B;1...................;$12,000;$10,000;2...................;8,000;6,000;3...................;6,000;16,000;a. Which of the two projects should be chosen;based on the payback method?;b. Which of the two projects should be chosen;based on the net present value method? Assume a cost of capital of 10 percent.;c. Should a firm normally have more;confidence in answer a or answer b?;10. You buy a new piece of equipment for;$16,980, and you receive a cash inflow of $3,000 per year for 12 years. What is;the internal rate of return?;11. Warner Business Products is considering the;purchase of a new machine at a cost of $11,070. The machine will provide $2,000;per year in cash flow for eight years. Warner?s cost of capital is 13 percent.;Using the internal rate of return method, evaluate this project and indicate;whether it should be undertaken.;12. Elgin Restaurant Supplies is analyzing the;purchase of manufacturing equipment that will cost $20,000. The annual cash;inflows for the next three years will be;Year;Cash Flow;1................;$10,000;2................;9,000;3................;6,500;a. Determine the internal rate of return;using interpolation.;b. With a cost of capital of 12 percent;should the machine be purchased?
Paper#45518 | Written in 18-Jul-2015Price : $27