Exam 15: Capital Budgeting

Griffith Corporation Griffith Corporation is considering an investment in a labor-saving machine.Information on this machine follows: Cost \ 30,000 Salvage value in five years \0 Estimatedlife 5years Annual depreciation \6 ,000 Anmual reduction in existing costs \8 ,000 Refer to Griffith Corporation.What is the payback period on this investment?

Ellis Retail Ellis Retail is considering an investment in a delivery truck.Ellis has found a used truck that he can purchase for $8,000.He estimates the truck would last six years and increase his store's net cash revenues by $2,000 per year.At the end of six years,the truck would have no salvage value and would be discarded.Ellis will depreciate the truck using the straight-line method. Refer to Ellis Retail.What is the payback period on the investment in the new truck?

If an analyst desires a conservative net present value estimate,he/she will assume that all cash inflows occur at

The rate of return specified as the lowest acceptable return on an investment is referred to as the ________________________________.

Weaver Corporation Weaver Corporation is considering an investment in a new product line.The investment would require an immediate outlay of $100,000 for equipment and an immediate investment of $200,000 in working capital.The investment is expected to generate a net cash inflow of $100,000 in year 1,$150,000 in year 2,and $200,000 in years 3 and 4.The equipment would be scrapped (for no salvage)at the end of the fourth year and the working capital would be liquidated.The equipment would be fully depreciated by the straight-line method over its four-year life. Refer to Weaver Corporation.If Weaver uses a discount rate of 16 percent,what is the NPV of the proposed product line investment? Present value tables or a financial calculator are required.

For a project such as plant investment,the return that should leave the market price of the firm's stock unchanged is known as the

A capital budgeting method that measures the time required for a project's cash inflows to equal the original investment is referred to as the _________________________.

The process of determining the amount of change that must occur in a variable before a different decision would be made is referred to as _________________________________.

Which of the following best represents a screening decision?

The Meyer Company has been operating a small lunch counter for the convenience of employees.The counter occupies space that is not needed for any other business purpose.The lunch counter has been managed by a part-time employee whose annual salary is $3,000.Yearly operations have consistently shown a loss as follows: $\begin{array}{llc}\text { Receipts } & & \$ 20,000 \\\text { Expensesfor food, supplies(in cash) }&\$19,000 \\\text { Salary } & \underline{3,000} &\underline{22,000}\\\text { Net Loss }&&\underline{\$(2,000)}\end{array}$ A company has offered to sell Meyer Company automatic vending machines for a total cost of $12,000.Sales terms are cash on delivery.The old equipment has zero disposal value. The predicted useful life of the equipment is 10 years,with zero scrap value.The equipment will easily serve the same volume that the lunch counter handled.A catering company will completely service and supply the machines.Prices and variety of food and drink will be the same as those that prevailed at the lunch counter.The catering company will pay 5 percent of gross receipts to the Meyer Company and will bear all costs of food,repairs,and so forth.The part-time employee will be discharged.Thus,Meyer Company's only cost will be the initial outlay for the machines. Consider only the two alternatives mentioned.Present value tables or a financial calculator are required. Required: Required: a. What is the annual income difference between alternatives? b. Compute the payback period. c. Compute: 1. The net present value if relevant cost of capital is 20 percent. 2. Internal rate of return. d. Management is very uncertain about the prospective revenue from the vending equipment. Suppose that the gross receipts amounted to $14,000 instead of $20,000. Repeat the computation in part c.1. e. What would be the minimum amount of annual gross receipts from the vending equipment that would justify making the investment? Show computations.

Griffith Corporation Griffith Corporation is considering an investment in a labor-saving machine.Information on this machine follows: Cost \ 30,000 Salvage value in five years \0 Estimatedlife 5years Annual depreciation \6 ,000 Anmual reduction in existing costs \8 ,000 Refer to Griffith Corporation.Assume for this question only that Griffith Corporation uses a discount rate of 16 percent to evaluate projects of this type.What is the project's net present value? Present value tables or a financial calculator are required.

A decision in which projects are ranked according to their impact on achieving company objectives is a screening decision.

A project under consideration by Radisson Corporation would require a working capital investment of $200,000.The working capital would be liquidated at the end of the project's 10-year life.If Radisson Corporation has an after-tax cost of capital of 10 percent and a marginal tax rate of 30 percent,what is the present value of the working capital cash flow expected to be received in year 10? Present value tables or a financial calculator are required.

For an ordinary annuity,the first cash flow occurs at the end of the period.

The weighted average cost of an organization's various sources of funds is referred to as ______________________________.

Patterson Publishers is considering an investment that would require an initial cash outlay of $400,000 and would have no salvage value.The project would generate annual cash inflows of $75,000.The firm's discount rate is 8 percent.How many years must the annual cash flows be generated for the project to generate a net present value of $0? Present value tables or a financial calculator are required.

A decision regarding whether a capital project is desirable based upon some previously established minimum criteria is referred to as a(n)___________________________________.

If a project's internal rate of return is greater than or equal to an organization's hurdle rate,the project is considered to be an unacceptable investment.

Which of the following statements is trueregarding capital budgeting methods?

Griffith Corporation Griffith Corporation is considering an investment in a labor-saving machine.Information on this machine follows: Cost \ 30,000 Salvage value in five years \0 Estimatedlife 5years Annual depreciation \6 ,000 Anmual reduction in existing costs \8 ,000 Refer to Griffith Corporation.What is the internal rate of return on this project (round to the nearest 1/2%)? Present value tables or a financial calculator are required.