\[\text { Reference: 10-01 }\] Shields Company has gathered the following data on a proposed investment project: \[\begin{array} { | l | l | } \hline \text { Investment required in equipment } & \$ 400,000 \\ \hline \text { Annual cash inflows } & \$ 80,000 \\ \hline \text { Salvage value } & \$ \quad 0 \\ \hline \text { Life of the investment } & 10 \text { years } \\ \hline \text { Discount rate } & 10 \% \\ \hline \end{array}\] -Which one of the following statements about the payback method of capital budgeting i? correct?

A) The payback method considers cash flows after the payback has been reached. B) The payback method uses discounted cash flow techniques. C) The payback method does not consider the time value of money. D) The payback method will lead to the same decision as other methods of capital budgeting. A) The payback method considers cash flows after the payback has been reached. B) The payback method uses discounted cash flow techniques. C) The payback method does not consider the time value of money. D) The payback method will lead to the same decision as other methods of capital budgeting.

Reference: 10-01 Shields Company has gathered the following data on a proposed investment project: \[\begin{array} { | l | l | } \hline \text { Investment required in equipment } & \$ 400,000 \\ \hline \text { Annual cash inflows } & \$ 80,000 \\ \hline \text { Salvage value } & \$ \quad 0 \\ \hline \text { Life of the investment } & 10 \text { years } \\ \hline \text { Discount rate } & 10 \% \\ \hline \end{array}\] -The net present value on this investment is closest to:

A) $76,750. B) $400,000. C) $91,600. D) $80,000. A) $76,750. B) $400,000. C) $91,600. D) $80,000.

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 order to receive $12,000 at the end of three years and $10,000 at the end of five years, how much must be invested now if you can earn 14% rate of return?

A) $13,290. B) $32,054. C) $8,100. D) $12,978. A) $13,290. B) $32,054. C) $8,100. D) $12,978.

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 considering the impact of inflation in capital budgeting net present value calculations, which of the following should be adjusted for anticipated inflation?

A) cash flows of future years. B) cost of capital. C) cash outflow at project start date. D) A & B. A) cash flows of future years. B) cost of capital. C) cash outflow at project start date. D) A & B.

\[\text { Reference: } 10 - 11\] Purvell Company has just acquired a new machine. Data on the machine follow: \[\begin{array} { | l | l | } \hline \text { Purchase cost } & \$ 50,000 \\ \hline \text { Annual cost savings } & \$ 15,000 \\ \hline \text { Life of the machine } & 8 \text { years } \\ \hline \end{array}\] The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year. -The simple rate of return would be closest to?

A) 17.5%. B) 30.0%. C) 18.75%. D) 12.5%. A) 17.5%. B) 30.0%. C) 18.75%. D) 12.5%.

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. -Given the following data: \[\begin{array} { | l | l | } \hline \text { Present investment required } & \$ 12,000 \\ \hline \text { Net present value } & \$ 430 \\ \hline \text { Annual cost savings } & \$ ? \\ \hline \text { Discount rate } & 12 \% \\ \hline \text { Life of the project } & 10 \text { years } \\ \hline \end{array}\] Based on the data given, the annual cost savings would be:

A) $2,123.89. B) $2,200.00. C) $1,630.00. D) $2,553.89. A) $2,123.89. B) $2,200.00. C) $1,630.00. D) $2,553.89.

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%. -Suppose an investment has cash inflows of R dollars at the end of each year for two years. The present value of these cash inflows using a 12% discount rate will be:

A) sometimes greater than under a 10% discount rate and sometimes less; it depends on R. B) less than under a 10% discount rate. C) equal to that under a 10% discount rate. D) greater than under a 10% discount rate. A) sometimes greater than under a 10% discount rate and sometimes less; it depends on R. B) less than under a 10% discount rate. C) equal to that under a 10% discount rate. D) greater than under a 10% discount rate.

Exam 10: Capital Budgeting Decisions

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The payback method of making capital budgeting decisions gives full consideration to the time value of money.

(True/False)

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Question 21

Reference: 10-12 Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. -The following data pertain to an investment: Cost of the investment \ 18,955 Life of the project 5 years Annual cost savings \ 5,000 Estimated salvage value \ 1,000 Discount rate 10\% The net present value of the proposed investment is:

(Multiple Choice)

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Question 22

$\text { Reference: 10-01 }$ Shields Company has gathered the following data on a proposed investment project: Investment required in equipment \ 400,000 Annual cash inflows \ 80,000 Salvage value \ 0 Life of the investment 10 years Discount rate 10\% -Which one of the following statements about the payback method of capital budgeting i? correct?

(Multiple Choice)

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Question 23

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -A major limitation of the payback method is that it cannot be used in situations where future budgeted cash flows are uneven.

(True/False)

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Question 24

Reference: 10-12 Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. -The payback method measures:

(Multiple Choice)

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Question 25

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -When using internal rate of return to evaluate investment projects, if the internal rate of return is less than the required rate of return, the project should be accepted.

(True/False)

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Question 26

Reference: 10-01 Shields Company has gathered the following data on a proposed investment project: Investment required in equipment \ 400,000 Annual cash inflows \ 80,000 Salvage value \ 0 Life of the investment 10 years Discount rate 10\% -The net present value on this investment is closest to:

(Multiple Choice)

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Question 27

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: Machine A Machine B Purchase cost new \ 300,000 \ 300,000 Overhaul costs needed year 4 \ 10,000 20,000 Annual cash operating costs \ 130,000 \ 120,000 Salvage value at the end of 8 years \ 20,000 \ 30,000 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 order to receive $12,000 at the end of three years and $10,000 at the end of five years, how much must be invested now if you can earn 14% rate of return?

(Multiple Choice)

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Question 28

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The Jason Company is considering the purchase of a machine that will increase revenues by $32,000 each year. Cash outflows for operating this machine will be $6,000 each year. The cost of the machine is $65,000. It is expected to have a useful life of five years with no salvage value. For this machine, the simple rate of return is:

(Multiple Choice)

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Question 29

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: Machine A Machine B Purchase cost new \ 300,000 \ 300,000 Overhaul costs needed year 4 \ 10,000 20,000 Annual cash operating costs \ 130,000 \ 120,000 Salvage value at the end of 8 years \ 20,000 \ 30,000 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 considering the impact of inflation in capital budgeting net present value calculations, which of the following should be adjusted for anticipated inflation?

(Multiple Choice)

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Question 30

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The preference rule for ranking projects by the profitability index is: the higher the profitability index, the more desirable the project.

(True/False)

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Question 31

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: Project X Project Y Cost of equipment needed now \ 80,000 - Working capital requirement - \ 80,000 Annual cash operating inflows \ 23,000 \ 18,000 Salvage value in 5 years \ 6,000 - 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 Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment. Year Cash Inflows 1 \ 120,000 2 60,000 3 40,000 4 40,000 5 40,000 Total \ 300,000 Assuming that the cash inflows occur evenly over each year, the payback period for the investment is:

(Multiple Choice)

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Question 32

$\text { Reference: } 10 - 11$ Purvell Company has just acquired a new machine. Data on the machine follow: Purchase cost \ 50,000 Annual cost savings \ 15,000 Life of the machine 8 years The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year. -The simple rate of return would be closest to?

(Multiple Choice)

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Question 33

Reference: 10-14 Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: Truck A Truck B Purchase cost new \ 50,000 \ 70,000 Major repairs end of year 2 \ 10,000 8,000 Annual cash operating costs \ 20,000 \ 18,000 Salvage value at the end of 3 years \ 15,000 \ 20,000 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 following data pertain to an investment in equipment: Investment in the project \ 10,000 Net annual cash inflows \ 2,400 Working capital required \ 5,000 Salvage value of the equipment \ 1,000 Life of the project 8 years At the completion of the project, the working capital will be released for use elsewhere. What is the net present value of the project, using a discount rate of 10%?

(Multiple Choice)

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Question 34

Reference: 10-12 Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. -Once the internal rate of return on a project is known, it is compared to which of th? following?

(Multiple Choice)

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Question 35

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: Machine A Machine B Purchase cost new \ 300,000 \ 300,000 Overhaul costs needed year 4 \ 10,000 20,000 Annual cash operating costs \ 130,000 \ 120,000 Salvage value at the end of 8 years \ 20,000 \ 30,000 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. -Given the following data: Present investment required \ 12,000 Net present value \ 430 Annual cost savings \ ? Discount rate 12\% Life of the project 10 years Based on the data given, the annual cost savings would be:

(Multiple Choice)

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Question 36

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -Information on four investment proposals is given below: Proposal Investment Net Present Value 1 \ 50,000 \ 30,000 2 \ 60,000 \ 24,000 3 \ 30,000 \ 15,000 4 \ 45,000 \ 9,000 In what order do the proposals in terms of preference according to the profitability index?

(Multiple Choice)

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Question 37

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: Year Estimated annual net cash inflow 1 \ 60,000 2 30,000 3 20,000 4 20,000 5 20,000 -The net present value is closest to?

(Multiple Choice)

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Question 38

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: Project A Project B Cost of equipment needed now \ 120,000 \ 70,000 Working capital investment needed now - \ 50,000 Annual net operating cash inflows \ 50,000 \ 45,000 Salvage value of equipment in 6 years \ 15,000 - 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%. -Suppose an investment has cash inflows of R dollars at the end of each year for two years. The present value of these cash inflows using a 12% discount rate will be:

(Multiple Choice)

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Question 39

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -White Company's required rate of return on capital budgeting projects is 12%. The company is considering an investment opportunity which would yield a cash flow of $10,000 in five years. What is the most that the company should be willing to invest in this project?

(Multiple Choice)

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Question 40

Showing 21 - 40 of 100

Reference: 10-01 Shields Company has gathered the following data on a proposed investment project: Investment required in equipment \ 400,000 Annual cash inflows \ 80,000 Salvage value \ 0 Life of the investment 10 years Discount rate 10\% -The net present value on this investment is closest to:

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