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Exam 11: Capital Budgeting

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Question 71

Multiple Choice

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Match the words with the term -opportunity investment

A) capitalized
B) legislative
C) impermanent
D) receipts
E) strategy

F) A) and C)
G) None of the above

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Question 72

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Opportunity investments are strategic in nature and usually have far-reaching financial implications.

A) True
B) False

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Question 73

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An expense investment is NOT a tax-deductible cost.

Match the words with the term. -number of years

Match the words with the term. -risk conditions

Several of the characteristics of ___________________________ investments are that they respond to a need, the risk are negligible and are often done to maintain operating efficiencies.

____________________ analysis is a capital budgeting technique that involves the identification of profitability variations as a result of one or more changes in a project's base case to certain key elements of a capital project.

An entrepreneur wants to modernize his plant. The initial cost in non-current assets is estimated $700,000. The modernization would improve the company's yearly profit for the year by $20,000 during the next 20 years. The cost accountant estimated the annual depreciation to be $60,000 and the cost of capital for raising funds to be 10%. -The yearly cash inflow is _______________________.

One of the arguments in favour of the net present value is that it tells exactly the "return" on a capital project.

Several entrepreneurs are contemplating investing in a retail business. The cost of the initial investment in non-current assets is estimated at $2 million. Included in the business plan was the following projected statement of income: During the first year of operations, inventories and trade receivables are estimated to be $500,000 and $300,000 respectively and trade and other payables are estimated at $200,000. During the second year of operations, inventories are expected to increase by additional $100,000, and trade receivables by an additional $50,000. Trades and other payables are expected to reach $250,000. Although the company's cost of capital is expected to be 12%, management would like to secure a 20% return. The project's life span is expected to be 20 years at which time they hope to sell their non-current assets including goodwill for $13 million and secure 50% of their working capital. -Net working capital during the first year of operations is ____________________.

In capital budgeting, the investment in net working capital shows the difference between the sum of inventories, trade receivable, less trade and other payables.

Which of the following is a feature of an expense investment?

Several entrepreneurs are contemplating investing in a retail business. The cost of the initial investment in non-current assets is estimated at $2 million. Included in the business plan was the following projected statement of income: During the first year of operations, inventories and trade receivables are estimated to be $500,000 and $300,000 respectively and trade and other payables are estimated at $200,000. During the second year of operations, inventories are expected to increase by additional $100,000, and trade receivables by an additional $50,000. Trades and other payables are expected to reach $250,000. Although the company's cost of capital is expected to be 12%, management would like to secure a 20% return. The project's life span is expected to be 20 years at which time they hope to sell their non-current assets including goodwill for $13 million and secure 50% of their working capital. -The internal rate of return is ________________________.

An entrepreneur wants to modernize his plant. The initial cost in non-current assets is estimated $700,000. The modernization would improve the company's yearly profit for the year by $20,000 during the next 20 years. The cost accountant estimated the annual depreciation to be $60,000 and the cost of capital for raising funds to be 10%. -The minimum amount of investment in non-current assets in order to get a positive net present value is approximately ________________________.

Match the words with the term. -25%

In capital budgeting, the number of years that a capital project or investment opportunity will last is often referred to as the ________________________________ life.

The net present value technique measures the difference between the sum of all cash inflow and the cash outflow discounted at a predetermined interest rate.

One argument that favours the internal rate of return is that the yardstick considers ___________________________ instead of profit for the year.

What is the ultimate reason for injecting funds into capital projects?

Taylor Business is considering an investment of $ 210,000 in a capital project and $ 200,000 in working capital during the first year of operation. The yearly cash inflow for the project is as follows: Years 1 to 3 $ 50,000 Years 4 to 7 $ 70,000 Years 8 to 12 $ 80,000 At the end of the project, the company will sell the assets for $100,000 of its value and recover the 60% of its working capital. The company's weighted average cost of capital is 10%. -The payback period is ________________________.