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Capital investment decision making

1. A company makes an investment of $150,000 with a useful life of 10 years and expects to use this investment to generate $300,000 in sales with $280,000 in incremental operating costs. If the company operates in an environment with a 30
% tax rate, what are the expected after tax cash flows that the company will use to evaluate the capital investment decision?

a. $9.500
b. $10,500
c. $16,500
d. 18,500

2. Preston Co is evaluating its potential investment in a $240,000 piece of equipment with a 3 year life and no salvage value. The company's hurdle rate is 10 percent and it anticipates taht pre-tax cash flows in each of the 3 years will equal 20%, 40%, and 60%, respectively, of the investment's face value. The tax rate is 30%. Discounted pre-tax cash flows are $429,953, undiscounted after-tax cash flows are $273,600, and discounted after-tax cash flows are $221,414. The net present value of the investment is:

a. $189,952
b. 33,600
c. 18.586
d. (18,586)

3. Preston Co is evaluating its potential investment in a $225,660 piece of equipment with a 3 year life and no salvage value. The company anticipates that pre-tax cash flows in each of the 3 years will equal to 22%, 44%, and 66%, respectively, of the investment's face value. The tax rate is 28%. Pre-tax cash flows, discounted at 10 percent, are $427,697, undiscounted after-tax cash flows are $279.185, and after-tax cash flows, discounted at 10 percent, are $225,660. The internal rate of return is:

a. 10%
b. 22%
c. 23.7%
d. 44%

Solution Preview

1.
Sales = 300,000
Incremental cost = 280000
Depreciation =150000/10=15000
taxable income = 5000
Tax ...

Solution Summary

This post solves three multiple choice problem on capital investment decision making. It could be a good practice for a exam.

$2.19