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Exam 13: Capital Budgeting Decisions

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Question 21

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(Ignore income taxes in this problem.) Almendarez Corporation is considering the purchase of a machine that would cost $320,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $51,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $72,000. The company requires a minimum pretax return of 18% on all investment projects. -The net present value of the proposed project is closest to:

A) $(29,522)
B) $(45,536)
C) $5,464
D) $(94,042)

E) A) and B)
F) A) and C)

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Question 22

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(Ignore income taxes in this problem.) Dowlen,Inc.,is considering the purchase of a machine that would cost $150,000 and would last for 6 years.At the end of 6 years,the machine would have a salvage value of $23,000.The machine would reduce labor and other costs by $36,000 per year.Additional working capital of $6,000 would be needed immediately.All of this working capital would be recovered at the end of the life of the machine.The company requires a minimum pretax return of 12% on all investment projects.The net present value of the proposed project is closest to:

A) $9,657
B) $(2,004)
C) $6,699
D) $13,223

E) A) and C)
F) All of the above

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Question 23

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Goergen Corporation is considering a capital budgeting project that would require an initial investment of $700,000.The investment would generate annual cash inflows of $267,000 for the life of the project,which is 4 years.The company's discount rate is 10%.The net present value of the project is closest to:

(Ignore income taxes in this problem.) The management of Leitheiser Corporation is considering a project that would require an initial investment of $51,000.No other cash outflows would be required.The present value of the cash inflows would be $57,630.The profitability index of the project is closest to:

(Ignore income taxes in this problem.)The management of Schenk Corporation is investigating automating a process by replacing old equipment by a new machine.The old equipment would be sold for scrap now for $13,000.The new machine would cost $648,000,would have a 9 year useful life,and would have no salvage value.By automating the process,the company would save $186,000 per year in cash operating costs. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

(Ignore income taxes in this problem.)The management of Kinion Corporation is considering the purchase of a machine that would cost $170,000,would last for 4 years,and would have no salvage value.The machine would reduce labor and other costs by $60,000 per year.The company requires a minimum pretax return of 12% on all investment projects. Required: Determine the net present value of the project.Show your work!

In calculating the "investment required" for the project profitability index,the amount invested should not be reduced by any salvage recovered from the sale of old equipment.

Information on four investment proposals is given below: Rank the proposals in terms of preference from highest to lowest according to the project profitability index:

(Ignore income taxes in this problem.) Lambert Manufacturing has $100,000 to invest in either Project A or Project B. The following data are available on these projects: Both projects will have a useful life of 6 years and the total cost approach to net present value analysis. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's required rate of return is 14%. -The net present value of Project A is:

(Ignore income taxes in this problem) The management of Osborn Corporation is investigating an investment in equipment that would have a useful life of 8 years.The company uses a discount rate of 12% in its capital budgeting.The net present value of the investment,excluding the annual cash inflow,is -$401,414.To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?

(Ignore income taxes in this problem.) Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -The net present value of the alternative of purchasing the new system is closest to:

Respass Corporation has provided the following data concerning an investment project that it is considering: The net present value of the project is closest to:

(Ignore income taxes in this problem.) An investment project requires an initial investment of $100,000.The project is expected to generate net cash inflows of $28,000 per year for the next five years.These cash inflows occur evenly throughout the year.Assuming a 12% discount rate,the project's payback period is:

(Ignore income taxes in this problem.) Becker Billing Systems, Inc., has an antiquated high-capacity printer that needs to be upgraded. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: The company uses a 10% discount rate and the total-cost approach to capital budgeting analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of ten years. -The net present value of the overhaul alternative is closest to:

(Ignore income taxes in this problem.) Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. -The net present value of Project A is closest to:

(Ignore income taxes in this problem.) Ataxia Fitness Center is considering an investment in some additional weight training equipment.The equipment has an estimated useful life of 10 years with no salvage value at the end of the 10 years.Ataxia's internal rate of return on this equipment is 8%.Ataxia's discount rate is also 8%.The payback period on this equipment is closest to:

A shorter payback period does not necessarily mean that one investment is more desirable than another.

(Ignore income taxes in this problem.) Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. -The net present value of Project B is closest to:

(Ignore income taxes in this problem.)Devon Corporation uses a discount rate of 8% in its capital budgeting.Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -$496,541.This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. Required: a.Ignoring any salvage value,how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive? b.Ignoring any cash flows from intangible benefits,how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

(Ignore income taxes in this problem.)Ostermeyer Corporation is considering a project that would require an initial investment of $247,000 and would last for 7 years.The incremental annual revenues and expenses for each of the 7 years would be as follows: At the end of the project,the scrap value of the project's assets would be $16,000. Required: Determine the payback period of the project.Show your work!