finance data bank

171. Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.

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172. For Proposal 1, the cash flow pattern for the expansion project is ________. (See Table 8.4.)

A) a mixed stream and conventional.

B) a mixed stream and non-conventional.

C) an annuity and conventional.

D) an annuity and non-conventional.

173. For Proposal 1, the initial outlay equals ________. (See Table 8.4.)

A) $1,380,000

B) $1,440,000

C) $1,500,000

D) $1,620,000

174. For Proposal 1, the depreciation expense for year 1 is ________. (See Table 8.4.)

A) $110,400

B) $115,200

C) $150,000

D) $300,000

175. For Proposal 1, the annual incremental after-tax cash flow from operations for year 1

178. For Proposal 2, the tax effect on the sale of the existing asset results in ________. (See Table 8.4.)

A) $12,000 tax liability.

B) $14,560 tax liability.

C) $25,280 tax liability.

D) $16,600 tax liability.

179. For Proposal 2, the initial outlay equals ________. (See Table 8.4.)

A) $120,720 cash outflow.

B) $164,560 cash outflow.

C) $150,000 cash outflow.

D) $167,520 cash outflow.

180. For Proposal 2, the incremental depreciation expense for year 2 is ________. (See Table 8.4.)

A) $16,800

B) $26,400

C) $38,400

D) $60,000

181. For Proposal 2, the annual incremental after-tax cash flow from operations for year 2 is ________. (See Table 8.4.)

A) $18,000

B) $24,000

C) $66,000

D) $84,000

182. For Proposal 3, the cash flow pattern for the replacement project is ________. (See Table 8.4.)

A) a mixed stream and conventional.

B) a mixed stream and non-conventional.

C) an annuity and conventional.

D) an annuity and non-conventional.

183. For Proposal 3, the book value of the existing asset is ________. (See Table 8.4.)

A) $21,000

B) $43,000

C) $52,000

D) $80,000

184. For Proposal 3, the tax effect on the sale of the existing asset results in ________. (See Table 8.4.)

A) $8,000 tax liability.

B) $16,000 tax liability.

C) $20,000 tax liability.

D) $23,200 tax liability.

185. Which of the following capital budgeting techniques ignores the time value of money?

A) simulations.

B) sensitivity analysis.

C) decision trees.

D) multiple regression analysis.

187. ________ measure(s) the risk of a capital budgeting project by estimating the NPVs associated with the optimistic A) Payback.

B) Net present value.

C) Internal rate of return.

D) Two of the above

186. Diagrams that permit the mapping of the various investment decision alternatives and payoffs as well as their

probabilities of occurrence are called

, most likely, and pessimistic cash flow estimates.

A) Simulations

B) Risk-adjusted discount rates

C) Sensitivity analysis

D) Multiple regression analysis

188. The advantage of using simulation in the capital budgeting process is

A) ease of calculation.

B) the availability of a continuum of risk-return trade-offs which may be used as the basis for decision-making.

C) dependability of predetermined probability distributions.

D) that it generates a continuum of risk-return trade-offs rather than a single-point estimate.

189. Many firms use the payback method as a guideline in capital investment decisions. Reasons they do so include all of the following EXCEPT

A) it gives an implicit consideration to the timing of cash flows.

B) it recognizes cash flows which occur after the payback period.

C) it is a measure of risk exposure.

D) it is easy to calculate.

190. Payback is considered an unsophisticated capital budgeting because it

A) gives explicit consideration to the timing of cash flows and therefore the time value of money.

B) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate.

C) gives explicit consideration to the timing of cash flows and therefore the time value of money.

D) none of the above.