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Exam 11: Capital Budgeting

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Question 31

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The internal rate of return and the net present value methods usually result in the same investment decisions.

A) True
B) False

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Question 32

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The book value of an asset that is being replaced is a relevant cash flow in the net present value method.

A) True
B) False

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Question 33

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________ is a capital budgeting model that ignores the time value of money and focuses on the profitability of an investment project.

A follow-up evaluation of capital-budgeting decisions is called a post-audit.

In capital budgeting decisions,the riskiness of a project may be shown by ________.

Monster Company is required to pay taxes of 25% on income up to $20,000 and 30% on any income in excess of $20,000.The company has pretax income of $80,000.What is the average tax rate for Monster Company?

A plant asset with a book value of $50,000 is sold for $40,000.The applicable tax rate is 50%.What is the tax effect of the loss on sale?

Dixie Company is considering the purchase of equipment for $360,000.The equipment will have a ten year life with no terminal salvage value.Straight-line depreciation will be used for tax purposes.It is expected that the equipment will generate annual sales of $180,000 and annual production costs,exclusive of depreciation,of $120,000.The tax rate is 40%.What is the net annual after-tax cash flow from the equipment?

One purpose of a post-audit is to provide information for improving future predictions of cash flows.

The use of accelerated depreciation for tax purposes will generally produce a present value of tax savings from depreciation expense that is ________.

Accepting a project with a ________ NPV makes the firm worse off financially because the cost of the investment exceeds the ________.

If the IRR on a project is greater than the required rate of return,then the net present value of the project is ________.

In the NPV method,errors in forecasting terminal disposal values are usually not crucial because the present value of these cash flows is small.

Zebron Company is considering the following investment: $\begin{array}{ll}\text { Initial capital investment } & \$ 200,000 \\\text { Estimated useful life } & 3 \text { years } \\\text { Estimated disposal value in } 3 \text { years } & \$ 1,000 \\\text { Estimated annual savings in cash operating costs(end of year) } & \$ 100,000 \\\text { Minimum desired rate of return } & 10 \% \\\text { Present value of ordinary annuity of one, } 3 \text { periods at } 10 \% & 2.4869 \\\text { Present value of one, } 3 \text { periods at } 10 \% & 0.7513\end{array}$ Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A plant asset with a book value of $320,000 is sold for $400,000.The tax rate is 20%.What is the tax effect of the gain on sale?

The time it will take to recoup in the form of cash inflows the initial dollars invested in an investment project is called the ________.

As the minimum required rate of return increases for an investment project,the net present value of the project ________.

Lonestar Company pays taxes of 25% on their first $25,000 of taxable income and 30% on any taxable income in excess of $25,000.The company's current taxable income is $30,000.What is the marginal tax rate?

A disadvantage of the accounting rate of return model is ________.

When undertaking a capital budgeting problem with taxes,the total cash effect of depreciation expense on a long-term asset is equal to ________.