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.
Asset $130 000
Working capital $32 000
Operations (per year for four years):
Cash receipts $150 000
Cash expenditures $88 000
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.
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.
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
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.
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?
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?
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
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?
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