Capital budgeting

LP7 Assignment –Capital Budgeting August 5, 2016

Problem 3

Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent tax bracket.

a. Compute its cash flow.

b. Assume it has $200,000 in depreciation. Recompute its cash flow.

c. How large a cash flow benefit did the depreciation provide?


Problem 6

Assume a $250,000 investment and the following cash flows for two products:


Year Product X Product Y

1…….. 90,000 50,000

2…….. 90,000 80,000

3…….. 60,000 60,000

4…….. 20,000 70,000


Which alternatives would you select under the payback method?


Problem 11

You buy a new piece of equipment for $16,230, and you receive a cash inflow

of $2,500 per year for 12 years. What is the internal rate of return?


Problem 18

You are asked to evaluate the following two projects for the Norton

Corporation. Using the net present value method combined with the profitabil- ity index approach described in footnote 2 of this chapter, which project would you select? Use a discount rate of 14 percent.

(The chart for this question is the screenshot below)

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