Exam 13: Capital Budgeting Decisions

(Ignore income taxes in this problem.)An expansion at Fey,Inc.,would increase sales revenues by $150,000 per year and cash operating expenses by $47,000 per year.The initial investment would be for equipment that would cost $328,000 and have a 8 year life with no salvage value.The annual depreciation on the equipment would be $41,000.The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.)Parks Corporation is considering an investment proposal in which a working capital investment of $10,000 would be required.The investment would provide cash inflows of $2,000 per year for six years.The working capital would be released for use elsewhere when the project is completed.If the company's discount rate is 10%,the investment's net present value is closest to:

(Ignore income taxes in this problem.)The management of Plotnik Corporation is investigating purchasing equipment that would increase sales revenues by $269,000 per year and cash operating expenses by $156,000 per year.The equipment would cost $294,000 and have a 6 year life with no salvage value.The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.) Joetz Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. -The internal rate of return of the investment is closest to:

(Ignore income taxes in this problem.)Bau Long-Haul,Inc.,is considering the purchase of a tractor-trailer that would cost $281,656,would have a useful life of 7 years,and would have no salvage value.The tractor-trailer would be used in the company's hauling business,resulting in additional net cash inflows of $76,000 per year.The internal rate of return on the investment in the tractor-trailer is closest to:

A project requires an initial investment of $200,000 and has a project profitability index of 0.250.The present value of the future cash inflows from this investment is:

(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:

(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.)Ryner Corporation is considering three investment projects: S,T,and U.Project S would require an investment of $20,000,Project T of $69,000,and Project U of $83,000.No other cash outflows would be involved.The present value of the cash inflows would be $23,200 for Project S,$77,970 for Project T,and $94,620 for Project U.Rank the projects according to the profitability index,from most profitable to least profitable.

In the payback method,depreciation is added back to net operating income when computing the annual net cash flow.

(Ignore income taxes in this problem.)Jark Corporation has invested in a machine that cost $60,000,that has a useful life of six years,and that has no salvage value at the end of its useful life.The machine is being depreciated by the straight-line method,based on its useful life.It will have a payback period of four years.Given these data,the simple rate of return on the machine is closest to:

(Ignore income taxes in this problem.)Crowl Corporation is investigating automating a process by purchasing a machine for $792,000 that would have a 9 year useful life and no salvage value.By automating the process,the company would save $132,000 per year in cash operating costs.The new machine would replace some old equipment that would be sold for scrap now,yielding $21,000.The annual depreciation on the new machine would be $88,000.The simple rate of return on the investment is closest to:

An increase in the expected salvage value at the end of a capital budgeting project will increase the internal rate of return for that project.

When the net cash inflow is the same every year for a project after the initial investment,the internal rate of return of a project can be determined by dividing the initial investment required in the project by the annual net cash inflow.This computation yields a factor that can be looked up in a table of present values of annuities to find the internal rate of return.

(Ignore income taxes in this problem.) Purvell Corporation has just acquired a new machine with the following characteristics: The company uses straight-line depreciation and a $5,000 salvage value. Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage at the end of the project. -The payback period is closest to:

sales and expenses are projected: Assume cash flows occur uniformly throughout a year except for the initial investment. -The payback period on the new machine is closest to:

(Ignore income taxes in this problem.)Charlie Corporation is considering buying a new donut maker.This machine will replace an old donut maker that still has a useful life of 6 years.The new machine will cost $3,600 a year to operate,as opposed to the old machine,which costs $3,800 per year to operate.Also,because of increased capacity,an additional 20,000 donuts a year can be produced.The company makes a contribution margin of $0.10 per donut.The old machine can be sold for $7,000 and the new machine costs $30,000.The incremental annual net cash inflows provided by the new machine would be:

Some investment projects require that a company increase its working capital.Under the net present value method,the investment and eventual recovery of working capital should be treated as:

(Ignore income taxes in this problem.) Vandezande Inc. is considering the acquisition of a new machine that costs $370,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are: Assume cash flows occur uniformly throughout a year except for the initial investment. -If the discount rate is 10%,the net present value of the investment is closest to:

(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!