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Exam 12: The Capital Budgeting Decision

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Question 51

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If a firm is experiencing no capital rationing, it should accept all investment proposals

A) as long as it has available funds.
B) that return an amount equal to or greater than the cost of capital.
C) that return an amount greater than the cost of equity.
D) that are available, regardless of return.

E) B) and C)
F) None of the above

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Question 52

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The internal rate of return assumes that funds are reinvested at the

A) cost of capital.
B) yield on the investment.
C) minimal acceptable rate to the corporation.
D) yield to maturity.

E) A) and D)
F) B) and C)

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Question 53

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Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $18,000 but the book value is $32,000. The firm's combined tax rate is 30%. What is the net cash outflow for the new machine after considering the sale of the old machine? Disregard the effect of depreciation of the new machine if acquired.

In a general sense, "cash flow" can be said to equal

You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return?

The modified internal rate of return (MIRR) is used to

With the exception of real estate investments, MACRS depreciation is beneficial to corporations because it

An asset fitting into the 7-year MACRS category was purchased two years ago for $72,000. The book value of this asset is now ________.

The modified internal rate of return method assumes that inflows are reinvested at 80% of the internal rate of return.

How would the salvage value be treated in a net present value calculation?

A good capital budgeting program requires that a number of steps be taken in the decision-making process. The first step is the explanation of data.

At higher tax rates, depreciation is

If an asset is sold for a price above its book value, the difference is considered taxable income to the firm.

The profitability index is calculated by dividing the project's net present value by the present value of the projected cash outflows.

In a replacement decision, if an old asset sells below its book value

A firm may adopt capital rationing because

If projects are mutually exclusive

When net present value and internal rate of return analysis provide inconsistent rankings of projects, the financial manager should generally move forward with the project that has the highest internal rate of return.

The Dammon Corp. has the following investment opportunities: $\begin{array}{cccrr}\text { Machine A } && \text { Machine B } && \text { Machine C } \\(\$ 10,000 \operatorname{cost}) &&(\$ 22,500 \operatorname{cost}) &&(\$ 35,500 \operatorname{cost}) \\\text { Inflows }&&\text { Inflows }&&\text { Inflows }\\\text { year 1 } & \$ 6,000 & \text { year } 1 & \$ 12,000 & \text { year 1 } &\%-0-\\\text { year 2 } & 3,000 & \text { year 2 } & 7,500 & \text { year 2 }&30,000 \\\text { year 3 } & 3,000 & \text { year 3 } & 1,500 & \text { year 3 } &5,000\\\text { year 4 } & -0- & \text { year 4 } & 1,500 & \text { year 4 }&20,000\end{array}$ Under the payback method and assuming these machines are mutually exclusive, which machine(s) would Dammon Corp. choose?

As the cost of capital increases