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Exam 12: Capital Budgeting Decisions

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Question 61

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(Ignore income taxes in this problem.)The management of Zachery Corporation is considering the purchase of a automated molding machine that would cost $203,255, would have a useful life of 5 years, and would have no salvage value.The automated molding machine would result in cash savings of $65,000 per year due to lower labor and other costs. Required: Determine the internal rate of return on the investment in the new automated molding machine.Show your work!

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Factor of the internal rate of...

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Question 62

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(Ignore income taxes in this problem.) Whitton Corporation uses a discount rate of 16%.The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years.The machine would have no salvage value.The net present value of this machine is closest to:

A) $22,460
B) $4,460
C) $(9,980)
D) $12,000

E) None of the above
F) B) and C)

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Question 63

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When a company is cash poor, a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return.

(Ignore income taxes in this problem.)Jim Bingham is considering starting a small catering business.He would invest $125,000 to purchase a delivery van and various equipment and another $60,000 for inventories and other working capital needs.Rent for the building used by the business will be $35,000 per year.In addition to the building rent, annual cash outflow for operating costs will amount to $40,000.The annual cash inflow from the business will amount to $120,000.Jim wants to operate the catering business for only six years.He estimates that the equipment could be sold at that time for 4% of its original cost.Jim uses a 16% discount rate.All cash flows, except for the initial investment, would occur at the ends of the years.The investment in working capital would be returned at the end of the six years. Required: Compute the net present value of this investment.

Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting.This lack of information will prevent Amster from calculating a project's:

A project has an initial investment of $100,000 and a project profitability index of 0.15.The discount rate is 12%.The net present value of the project is closest to:

(Ignore income taxes in this problem.) Cannula Vending Corporation is expanding operations and needs to purchase additional vending machines.There are currently two companies, Viscera, Inc.and Gullet International, that produce and sell machines that will do the job.Information related to the specifications of each company's machine are as follows: Cannula's discount rate is 18%.Cannula uses the straight-line method of depreciation.Using net present value analysis, which company's machine should Cannula purchase and what is the approximate difference between the net present values of the competing company's machines?

(Ignore income taxes in this problem.)Cooney Inc.has provided the following data concerning a proposed investment project: The company uses a discount rate of 17%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.)The management of Nixon Corporation is investigating purchasing equipment that would cost $518,000 and have a 7 year life with no salvage value.The equipment would allow an expansion of capacity that would increase sales revenues by $364,000 per year and cash operating expenses by $211,000 per year. 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.)Consider the following three investment opportunities: Project I would require an immediate cash outlay of $40,000 and would result in cash savings of $9,000 each year for 5 years. Project II would require cash outlays of $7,000 per year and would provide a cash inflow of $40,000 at the end of 5 years. Project III would require a cash outlay of $36,000 now and would provide a cash inflow of $60,000 at the end of 5 years. Required: The discount rate is 10%.Use the net present value method to determine which, if any, of the three projects is acceptable.

The internal rate of return of the investment is closest to:

(Ignore income taxes in this problem.) Heap Corporation is considering an investment in a project that will have a two year life.The project will provide a 10% internal rate of return, and is expected to have a $40,000 cash inflow the first year and a $50,000 cash inflow in the second year.What investment is required in the project?

The net present value of the new system alternative is closest to:

(Ignore income taxes in this problem.)Ursus, Inc., is considering a project that would have a ten-year life and would require a $1,000,000 investment in equipment.At the end of ten years, the project would terminate and the equipment would have no salvage value.The project would provide net operating income each year as follows: All of the above items, except for depreciation, represent cash flows.The company's required rate of return is 12%. Required: a.Compute the project's net present value. b.Compute the project's internal rate of return to the nearest whole percent. c.Compute the project's payback period. d.Compute the project's simple rate of return.

(Ignore income taxes in this problem.) Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $450,000 and would have a ten-year useful life.Unfortunately, the new machine would have no salvage value.The new machine would cost $20,000 per year to operate and maintain, but would save $100,000 per year in labor and other costs.The old machine can be sold now for scrap for $50,000.The simple rate of return on the new machine is closest to:

(Ignore income taxes in this problem) Boe Corporation is investigating buying a small used aircraft for the use of its executives.The aircraft would have a useful life of 9 years.The company uses a discount rate of 10% in its capital budgeting.The net present value of the investment, excluding the salvage value of the aircraft, is -$439,527.Management is having difficulty estimating the salvage value of the aircraft.To the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?

If the salvage value of equipment at the end of a project is highly uncertain, the salvage value should be ignored in capital budgeting decisions..

The net present value of this investment would be:

(Ignore income taxes in this problem.) The management of Solar Corporation is considering the following three investment projects: Rank the projects according to the profitability index, from most profitable to least profitable.

When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project.