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Define capital budgeting. Give two examples of long-term investment decisions that require capital budgeting.
How is depreciation expense treated when the discounted cash flow methods are used? Why?
Identify four capital budgeting methods, and explain why some are considered better than others.
Under what circumstances might a project with a negative net present value be accepted?
Identify several qualitative factors, other than quality and time considerations, that may affect strategic and capital investment decisions.
Distinguish between the screening and ranking functions of capital budgeting.
The investment requires an initial outlay of $55,000 and annual payments of $12,000 made at the end of the year for five years.
At the end of the four years, the company expects the investment to have a salvage value of $20,000. What is the present value of cash inflows.
The investment is expected to have a useful life of 10 years, and the company uses straight-line depreciation with zero salvage value.
The company has determined that the cost of its debt capital is 8% and the cost of its equity capital is 20% from stock and 15% from retained earnings.
The company uses an 8% discount rate. Which alternative should the company purchase?
The company is considering whether to invest in a project with an initial cost of $538,000 that will provide annual net cash inflows of $82,500 for 10 years.
Compute the net amount of annual cash inflow required to break even.
Compute the number of years of useful life required for this investment to break even.
The new machinery will cost the company $200,000 and has an expected salvage value of $20,000 after nine years.
What is the maximum Super-Fix should pay to purchase a building at the new location, assuming that the company needs to earn 12%?
Using the payback method, determine which project the manager should choose.
The initial purchase cost would be $80,000. What is the unadjusted rate of return?
Compute the net present value. From a quantitative standpoint, should the machine be purchased?
The cost of capital is 10%. Which alternative should Sleep-Eazy Mattress Company choose? Why?
A real estate investment requires an initial outlay of $200,000 in cash. The investment will return a single sum cash payment of $438,490 after five years.
Should the retired person accept the exchange offered by the insurance company?
The payback period on the more expensive model is estimated to be 3.5 years and on the less expensive model 2.5 years.
Before Mr. Conrad makes his final decision, what other factors might he consider?
What would account for IRR's appeal? What are the drawbacks to using only the IRR method to rank projects?