Exam 13: Capital Budgeting Decisions

When a company is cash poor,a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return.

(Ignore income taxes in this problem.)Golab Roofing is considering the purchase of a crane that would cost $69,846,would have a useful life of 6 years,and would have no salvage value.The use of the crane would result in labor savings of $21,000 per year.The internal rate of return on the investment in the crane is closest to:

Ignoring any salvage value,to the nearest whole dollar how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

(Ignore income taxes in this problem.)Strausberg Inc.is considering investing in a project that would require an initial investment of $270,000.The life of the project would be 4 years.The annual net cash inflows from the project would be $81,000.The salvage value of the assets at the end of the project would be $27,000.The company uses a discount rate of 10%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.)Fossa Road Paving Corporation is considering an investment in a curb-forming machine.The machine will cost $240,000,will last 10 years,and will have a $40,000 salvage value at the end of 10 years.The machine is expected to generate net cash inflows of $60,000 per year in each of the 10 years.Fossa's discount rate is 18%.The net present value of the proposed investment is closest to:

The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash outflows with the present value of its cash inflows.

(Ignore income taxes in this problem.)Wary Corporation is considering the purchase of a machine that would cost $240,000 and would last for 9 years.At the end of 5 years,the machine would have a salvage value of $29,000.The machine would reduce labor and other costs by $63,000 per year.The company requires a minimum pretax return of 10% on all investment projects. Required: Determine the net present value of the project.Show your work!

The minimum required rate of return is the discount rate that makes the net present value of the project equal to zero.

(Ignore income taxes in this problem.)Jarvey Corporation is studying a project that would have a ten-year life and would require a $450,000 investment in equipment which has no salvage value.The project would provide net operating income each year as follows for the life of the project: The company's required rate of return is 12%.The payback period for this project is closest to:

If investment funds are limited,the net present value of one project should not be compared directly to the net present value of another project unless the initial investments in these projects are equal.

(Ignore income taxes in this problem.)Heap Corporation is considering an investment in a project that will have a two year life.The project will provide a 10% internal rate of return,and is expected to have a $40,000 cash inflow the first year and a $50,000 cash inflow in the second year.What investment is required in the project?

Ignoring any cash flows from intangible benefits,to the nearest whole dollar how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

(Ignore income taxes in this problem.)The management of Solar 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.) Morrel University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhauled now or replaced with a new shuttle bus. The following data have been gathered concerning these two alternatives: The University could continue to use the present bus for the next seven years. Whether the present bus is used or a new bus is purchased, the bus would be traded in for another bus at the end of seven years. The University uses a discount rate of 12% and the total cost approach to net present value analysis. -If the present bus is repaired,the present value of the annual cash operating costs associated with this alternative is closest to:

(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 simple rate of return would be closest to:

In calculating the payback period where new equipment is replacing old equipment,any salvage value to be received on disposal of the old equipment should be deducted from the cost of the new equipment.

(Ignore income taxes in this problem.)Ramson Corporation is considering purchasing a machine that would cost $756,000 and have a useful life of 8 years.The machine would reduce cash operating costs by $132,632 per year.The machine would have a salvage value of $151,200 at the end of the project. Required: a.Compute the payback period for the machine. b.Compute the simple rate of return for the machine.

Neither the net present value method nor the internal rate of return method can be used as a screening tool in capital budgeting decisions.

(Ignore income taxes in this problem.)Laws Corporation is considering the purchase of a machine costing $16,000.Estimated cash savings from using the new machine are $4,120 per year.The machine will have no salvage value at the end of its useful life of six years and the required rate of return for Laws Corporation is 12%.The machine's internal rate of return is closest to:

(Ignore income taxes in this problem.)A company with $500,000 in operating assets is considering the purchase of a machine that costs $60,000 and which is expected to reduce operating costs by $15,000 each year.These reductions in cost occur evenly throughout the year.The payback period for this machine in years is closest to: