11) Wet'n'Wild Water Company provides white water rafting experiences to outdoor enthusiasts. The

company is in the process of analysing the purchase of new inflatible rafts and jet boats.

Information on the proposal is provided below.

Initial investment:

Asset $130 000

Working capital $32 000

Operations (per year for four years):

Cash receipts $150 000

Cash expenditures $88 000

Disinvestment:

Salvage value of drill (existing) $10 000

Discount rate 20%

What is the net present value of the investment? Assume there is no recovery of working capital.

11)

A) $42 362 B) $8456 C) $86 336 D) $(2140)

 

12) The Launceston Corporation has an annual cash inflow from operations from its investment in a

capital asset of $11 000 each year for five years. The corporation's income tax rate is 25%. Calculate

the five years' total after-tax cash inflow from operations.

12)

A) $55 000 B) $41 250 C) $5000 D) $44 000

 

13) Which of the following are NOT included in the formal financial analysis of a capital budgeting

program?

13)

A) safety of employees B) quality of the output

C) cash flow D) Neither A nor B are included.

 

14) The minimum annual acceptable rate of return on an investment is the: 14)

A) hurdle rate B) net present value

C) internal rate of return D) accrual accounting rate of return

 

15) The Silver Shades Corporation sells a capital asset with an original cost of $115 000 and

accumulated depreciation of $62 500 for a salvage price of $18 000. Silver Shades's tax rate is 30%.

Calculate the after-tax cash inflow from the disposal of the capital asset.

15)

A) $18 000 B) $1035 C) $19 035 D) $28 350

 

16) Nullabor Park Department is considering a new capital investment. The following information is

available on the investment. The cost of the machine will be $144 192. The annual cost savings if the

new machine is acquired will be $40 000. The machine will have a five-year life, at which time the

terminal disposal value is expected to be zero. Nullabor Park is assuming no tax consequences.

Nullabor Park has a 10% required rate of return. What is the payback period on this investment?

16)

A) 3 years B) 3.6 years C) 4.2 years D) 5 years

 

17) The net initial investment for a piece of construction equipment is $1 000 000. Annual cash inflows

are expected to increase by $200 000 per year. The equipment has an eight-year useful life. What is

the payback period?

17)

A) 8 years B) 7 years C) 6 years D) 5 years

 

18) Which of the following results of the net present value method in capital budgeting is the LEAST

acceptable?

18)

A) $(10 000) B) $(18 000) C) $(7000) D) $0

 

Answer the following questions using the information below:

Footscray Hospital is considering purchasing a new x-ray machine. The existing machine is operable for five more years and

will have a zero disposal price. The machine may be sold for $45 000 now. The new machine will cost $325 000 and an

additional cash investment in working capital of $10 000 will be required. The new machine will reduce the average time

required to take x-rays and will allow additional business to be done at the hospital. The investment is expected to net $30

000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use. The new machine has a

five-year life, and zero disposal value. These cash flows will occur throughout the year but are recognised at the end of each

year. Ignore income taxes. The working capital investment will not be recovered at the end of the asset's life.

19) What is the net present value of the investment, assuming the required rate of return is 12%?

Would the hospital want to purchase the new machine?

19)

A) $(62 235); no B) $83 415; yes C) $62 235; yes D) $25 715; no

 

20) The stage of the capital budgeting process that chooses projects for implementation is the: 20)

A) management-control stage

B) identify the problem stage

C) evaluate each possible course of action stage

D) make decisions by choosing among alternatives stage

 

 

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