51) The stage of the capital budgeting process in which a firm obtains funding for the project is the: 51)

A) make decisions by choosing among alternatives stage

B) collect relevant information stage

C) evaluate each possible course of action stage

D) implement the decision, evaluate performance, and learn stage


52) The payback method of capital budgeting approach to the investment decision highlights: 52)

A) the liquidity of the investment

B) having as lengthy payback time as possible

C) the tax savings of the depreciation amounts

D) cash flow over the life of the investment


53) The stage of the capital budgeting process that distinguishes which types of capital expenditure

projects are necessary to accomplish organisation objectives is the:


A) implement the decision stage

B) make decisions by choosing among alternatives stage

C) collect information stage

D) identify the problem stage


54) Depreciation is usually not considered an operating cash flow in capital budgeting because: 54)

A) depreciation usually has no effect on the disposal price of the machine

B) depreciation usually does not result in an increase in working capital

C) deducting depreciation from operating cash flows would be counting the lump-sum amount


D) depreciation is usually a constant amount each year over the life of the capital investment


55) In the analysis of a capital budgeting proposal, for which of the following items are there no

after-tax consequences?


A) cash flow from operations

B) reduction of working capital balances at the end of the useful life of the capital asset

C) gain or loss on the disposal of the asset

D) None of these answers are correct.


56) Bendigo Gold Extrusions Corporation wants to purchase a new machine for its factory operations

at a cost of $770 000. The investment is expected to generate $290 000 in annual cash flows for a

period of four years. The required rate of return is 14%. The old machine can be sold for $50 000.

The machine is expected to have zero value at the end of the four-year period. What is the net

present value of the investment? Would the company want to purchase the new machine? Ignore

income taxes.


A) $124 770; yes B) $126 750; no C) $844 770; yes D) $69 550; no


57) An important advantage of the net present value method of capital budgeting over the internal

rate-of-return method is:


A) the net present values of individual projects can be added to determine the effects of

accepting a combination of projects

B) the net present value method is expressed as a percentage

C) There is no advantage.

D) Both A and B are correct.


58) The Alpha Beta Corporation sells a capital asset with an original cost of $85 000 and accumulated

depreciation of $54 500 for $25 000. Alpha Beta's tax rate is 40%. Calculate the after-tax cash inflow

from the disposal of the capital asset.


A) $31 500 B) $2200 C) $27 200 D) ($2200)


Answer the following questions using the information below:

Cronulla Cleaners is considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for

three more years and will have a zero disposal price. The machine may be sold for $50 000 now. The new machine will cost

$200 000 and an additional cash investment in working capital of $50 000 will be required. The new machine will reduce the

average time required to wash clothing and will decrease labour costs. The investment is expected to net $45 000 in

additional cash inflows during the year of acquisition and $135 000 each additional year of use. The new machine has a

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

each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end

of the asset's life.

59) What is the net present value of the investment, assuming the required rate of return is 24%?

Would the company want to purchase the new machine?


A) $5240; yes B) $(5240); no C) $32 800; no D) $(32 800); yes


60) Discounted cash flow methods for capital budgeting focus on: 60)

A) cash outflows B) operating profit

C) cash inflows D) Both A and C are correct.



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