Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\ \hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\ \hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\ \hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\ \hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\ \hline \end{array}\] Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -What is the amount of the difference in the net present values of the costs of these alternatives closest to?

A) $46,520. B) $51,190. C) $64,850. D) $58,020. A) $46,520. B) $51,190. C) $64,850. D) $58,020. B

\[\text { Reference: } 10 - 02\] Oriental Company has gathered the following data on a proposed investment project: \[\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\ \hline \text { Annual net cash flows } & \$ 50,000 \\ \hline \text { Life of the equipment } & 10 \text { years } \\ \hline \text { Salvage value } & \$ 20 \\ \hline \text { Discount rate } & 10 \% \\ \hline \end{array}\] The company uses straight-line depreciation on all equipment. -Sam Weller is thinking of investing $70,000 to start a bookstore. Sam plans to withdraw $15,000 from the business at the end of each year for the next five years. At the end of the fifth year, Sam plans to sell the business for $110,000 cash. At a 12% discount rate, what is the net present value of the investment?

A) $62,370. B) $46,445. C) $54,075. D) $70,000. A) $62,370. B) $46,445. C) $54,075. D) $70,000. B

Reference: 10-14 Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | l | r | } \hline & \text { Truck A } & \text { Truck B } \\ \hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\ \hline \text { Major repairs end of year 2 } & \$ 10,000 & 8,000 \\ \hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\ \hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\ \hline \end{array}\] Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years. -The payback period would be closest to?

A) 3.0 years. B) 3.33 years. C) 8.0 years. D) 2.9 years. A) 3.0 years. B) 3.33 years. C) 8.0 years. D) 2.9 years.

\[\text { Reference: } 10 - 05\] The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: \[\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\ \hline \text { Cost of equipment needed now } & \$ 80,000 & - \\ \hline \text { Working capital requirement } & - & \$ 80,000 \\ \hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\ \hline \text { Salvage value in 5 years } & \$ 6,000 & - \\ \hline \end{array}\] Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. -A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year. The payback period for this machine in years is closest to:

A) 40 years. B) 10.7 years. C) 0.27 years. D) 3.75 years. A) 40 years. B) 10.7 years. C) 0.27 years. D) 3.75 years.

Reference: 10-05 The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: \[\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\ \hline \text { Cost of equipment needed now } & \$ 80,000 & - \\ \hline \text { Working capital requirement } & - & \$ 80,000 \\ \hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\ \hline \text { Salvage value in 5 years } & \$ 6,000 & - \\ \hline \end{array}\] Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. -The net present value of project X is:

A) ($11,708). B) $6,317. C) $2,915. D) $5,283. A) ($11,708). B) $6,317. C) $2,915. D) $5,283.

Reference: 10-03 Apex Corp. is planning to buy production machinery costing $100,000. This machinery's expected useful life is five years, with no residual value. Apex uses a discount rate of 10% and has calculated the following data pertaining to the purchase and operation of this machinery: \[\begin{array} { | c | c | } \hline \text { Year } & { \begin{array} { c } \text { Estimated } \\ \text { annual net } \\ \text { cash inflow } \end{array} } \\ \hline 1 & \$ 60,000 \\ \hline 2 & 30,000 \\ \hline 3 & 20,000 \\ \hline 4 & 20,000 \\ \hline 5 & 20,000 \\ \hline \end{array}\] -Benz Company is considering the purchase of a machine that costs $100,000 and has a useful life of 18 years with no salvage value.:

A) $14,600. B) $13,760. C) $42,413. D) it is impossible to determine from the data given. A) $14,600. B) $13,760. C) $42,413. D) it is impossible to determine from the data given.

\[\text { Reference: } 10 - 09\] Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: \[\begin{array} { | l | l | l | } \hline & \text { Project } A & \text { Project } B \\ \hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\ \hline \text { Working capital investment needed now } & - & \$ 50,000 \\ \hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\ \hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\ \hline \end{array}\] 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?

A) $82,241. B) $67,610. C) $81,290. D) $74,450. A) $82,241. B) $67,610. C) $81,290. D) $74,450.

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | l | l | } \hline & \text { Machine } A & \text { Machine } B \\ \hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\ \hline \text { Overhaul costs needed year } 4 & \$ 10,000 & 20,000 \\ \hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\ \hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\ \hline \end{array}\] Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -Assuming that a business has a project with anticipated positive net annual operating cash flows, assuming all other factors remain the same, the inclusion of income taxes in the capital budgeting analysis will:

A) increase the net present value. B) decrease the net present value. C) have no impact on the net present value. D) not be determinable. A) increase the net present value. B) decrease the net present value. C) have no impact on the net present value. D) not be determinable.

\[\text { Reference: } 10 - 08\] 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: \[\begin{array} { | l | l | c | } \hline & \begin{array} { l } \text { Present } \\ \text { System } \end{array} & \begin{array} { l } \text { Proposed New } \\ \text { System } \end{array} \\ \hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\ \hline \text { Accumulated depreciation } & \$ 240,000 & - \\ \hline \text { Overhaul costs needed now } & \$ 230,000 & - \\ \hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\ \hline \text { Salvage value now } & \$ 160,000 & - \\ \hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\ \hline \text { Working capital required } & - & \$ 200,000 \\ \hline \end{array}\] 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 working capital required will be released in full at the end of the 8 years to be available for other purposes. -The net present value of the alternative of overhauling the present system is:

A) ($1,119,316). B) $801,284. C) ($1,194,036). D) ($1,279,316). A) ($1,119,316). B) $801,284. C) ($1,194,036). D) ($1,279,316).

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\ \hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\ \hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\ \hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\ \hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\ \hline \end{array}\] Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -In comparing these two alternatives, which is the correct evaluation

A) Machine B should be purchased as the net present value of the costs of this alternative is the highest. B) Machine B should be purchased as the net present value of the costs of this alternative is the lowest. C) Machine A should be purchased as the net present value of the costs of this alternative is the lowest. D) Machine A should be purchased as the net present value of the costs of this alternative is the highest. A) Machine B should be purchased as the net present value of the costs of this alternative is the highest. B) Machine B should be purchased as the net present value of the costs of this alternative is the lowest. C) Machine A should be purchased as the net present value of the costs of this alternative is the lowest. D) Machine A should be purchased as the net present value of the costs of this alternative is the highest.