Exam 12: Capital Budgeting Decisions

(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:

The simple rate of return focuses on cash flows rather than on accounting net operating income.

The net present value of the investment is:

(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:

The payback period for the investment is:

The cost of capital is the average rate of return that the company earns on its investments.

The simple rate of return for the new machine is closest to:

(Ignore income taxes in this problem.)Ducey Corporation is contemplating purchasing equipment that would increase sales revenues by $79,000 per year and cash operating expenses by $27,000 per year.The equipment would cost $150,000 and have a 6 year life with no salvage value.The annual depreciation would be $25,000. 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.)Chipps Corporation uses a discount rate of 9% in its capital budgeting.Management is considering an investment in telecommunications equipment with a useful life of 5 years.Excluding the salvage value of the equipment, the net present value of the investment in the equipment is -$530,985. Required: How large would the salvage value of the telecommunications equipment have to be to make the investment in the telecommunications equipment financially attractive?

The payback method is most appropriate for projects whose cash flows do not extend far into the future.

(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?

(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:

The payback period of this investment is closest to:

(Ignore income taxes in this problem.)The management of Crosson Corporation is investigating the purchase of a new satellite routing system with a useful life of 9 years.The company uses a discount rate of 17% in its capital budgeting.The net present value of the investment, excluding its intangible benefits, is -$173,055. Required: 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.)Croce, Inc., is investigating an investment in equipment that would have a useful life of 7 years.The company uses a discount rate of 8% in its capital budgeting.The net present value of the investment, excluding the salvage value, is -$515,967.To the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive?

(Ignore income taxes in this problem.)Bill Anders is considering investing in a franchise in a fast-food chain. He would have to purchase equipment costing $420,000 to equip the outlet and invest an additional $30,000 for inventories and other working capital needs.Other outlets in the fast-food chain have an annual net cash inflow of about $120,000.Mr.Anders would close the outlet in 5 years.He estimates that the equipment could be sold at that time for about 10% of its original cost and the working capital would be released for use elsewhere.Mr.Anders' required rate of return is 8%. Required: What is the investment's net present value? Is this an acceptable investment?

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:

(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)The management of Osborn Corporation is investigating an investment in equipment that would have a useful life of 8 years.The company uses a discount rate of 12% in its capital budgeting.The net present value of the investment, excluding the annual cash inflow, is -$401,414.To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?

Basey Corporation has provided the following data concerning an investment project that it is considering: The working capital would be released for use elsewhere at the end of the project.The net present value of the project is closest to: