Exam 13: Capital Budgeting Decisions

(Ignore income taxes in this problem.) Paragas, Inc., is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 19% on all investment projects. -The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:

(Ignore income taxes in this problem.)Nevland Corporation is considering the purchase of a machine that would cost $130,000 and would last for 6 years.At the end of 6 years,the machine would have a salvage value of $18,000.By reducing labor and other operating costs,the machine would provide annual cost savings of $44,000.The company requires a minimum pretax return of 19% on all investment projects.The net present value of the proposed project is closest to:

(Ignore income taxes in this problem.)The management of Ro Corporation is investigating automating a process.Old equipment,with a current salvage value of $11,000,would be replaced by a new machine.The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value.By automating the process,the company would save $69,000 per year in cash operating costs.The simple rate of return on the investment is closest to:

Ignoring the annual benefit,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?

(Ignore income taxes in this problem.)In an effort to reduce costs,Pontic Manufacturing Corporation is considering an investment in equipment that will reduce defects.This equipment will cost $420,000,will have an estimated useful life of 10 years,and will have an estimated salvage value of $50,000 at the end of 10 years.The company's discount rate is 22%.What amount of cost savings will this equipment have to generate per year in each of the 10 years in order for it to be an acceptable project?

If the internal rate of return is less than the required rate of return for a project,then the net present value of that project is positive.

(Ignore income taxes in this problem.)Anthony operates a part time auto repair service.He estimates that a new diagnostic computer system will result in increased cash inflows of $1,500 in Year 1,$2,100 in Year 2,and $3,200 in Year 3.If Anthony's required rate of return is 10%,then the most he would be willing to pay for the new diagnostic computer system would be:

(Ignore income taxes in this problem.)Maxcy Limos,Inc.,is considering the purchase of a limousine that would cost $187,335,would have a useful life of 9 years,and would have no salvage value.The limousine would bring in cash inflows of $45,000 per year in excess of its cash operating costs. Required: Determine the internal rate of return on the investment in the new limousine.Show your work!

When the internal rate of return method is used to rank investment proposals,the higher the internal rate of return,the more desirable the investment.

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

(Ignore income taxes in this problem.)Crockin Corporation is considering a machine that will save $9,000 a year in cash operating costs each year for the next six years.At the end of six years it would have no salvage value.If this machine costs $33,165 now,the machine's internal rate of return is closest to:

(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:

Discounted cash flow techniques automatically take into account recovery of the initial investment.

(Ignore income taxes in this problem.)Orbit Airlines is considering the purchase of a new $275,000 maintenance hangar.The new hangar has an estimated useful life of 5 years with an expected salvage value of $50,000.The new hangar is expected to generate cost savings of $90,000 per year in each of the 5 years.A $20,000 increase in working capital will also be needed for this new hangar.The working capital will be released at the end of the 5 years.Orbit's discount rate is 18%.What is the net present value of the new hangar?

Perkins Corporation is considering several investment proposals,as shown below: If the project profitability index is used,the ranking of the projects from most to least profitable would be:

The simple rate of return is computed by dividing the annual net operating income generated by a project by the initial investment in the project.

(Ignore income taxes in this problem.)Bradley Corporation's required rate of return is 14%.The company has an opportunity to be the exclusive distributor of a very popular consumer item.No new equipment would be needed,but the company would have to use one-fourth of the space in a warehouse it owns.The warehouse cost $200,000 new.The warehouse is currently half-empty and there are no other plans to use the empty space.In addition,the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line.The company would have the distributorship for only 5 years.The distributorship would generate a $17,000 annual net cash inflow. Required: What is the net present value of the project?

(Ignore income taxes in this problem.) Treads Corporation is considering the purchase of a new machine to replace an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to buy the new machine, the old machine can be sold for $60,000. The old machine would have no salvage value in five years. The new machine would be purchased for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, the company would benefit from annual cash savings of $300,000. Treads Corporation uses a discount rate of 12%. -The net present value of the project is closest to:

(Ignore income taxes in this problem.)The management of Harling Corporation is considering the purchase of a machine that would cost $90,504 and would have a useful life of 5 years.The machine would have no salvage value.The machine would reduce labor and other operating costs by $27,000 per year. Required: Determine the internal rate of return on the investment in the new machine.Show your work!

The profitability index of investment project X is closest to: