Exam 11: Long-Term Capital Investmentdecisions

Hi-Town Nursery is considering the purchase of a new greenhouse.The greenhouse will have an initial cost of $20 000 and an estimated salvage value of $3000 at the end of its useful life.The nursery expects annual net operating cash inflows to increase $5000 each year for 10 years.The cost of capital is 12 per cent. Required: Compute the net present value of the new greenhouse.(Ignore income taxes)

Trenton Inc.is considering an equipment purchase that has a cost of $15 000.The equipment is expected to have a salvage value of $2000 at the end of three years.In addition,the equipment is expected to generate cash flows over the next three years as follows: Year Annual cash flow 1 \ 8000 2 \ 6000 3 \ 3000 If Trenton's cost of capital is equal to 14 per cent,the net present value of the equipment is: (ignore income taxes)

Bayleaf Inc.is considering the purchase of a machine that costs $250 000.The machine is expected to generate revenues of $85 000 per year for five years.The machine would be depreciated using the straight-line method over a five-year life and have no salvage value.The company considers the impact of income taxes in all of its capital investment decisions.The company has a 40 per cent income tax rate and desires an after-tax rate of return of 12 per cent on its investment. Required: Compute the net present value of the machine.

C & K Inc.purchased a delivery van costing $65 000.Annual operating cash inflows are expected to be $18 000 each year for six years.At the end of the asset's life,the salvage value is expected to be $5000.Assuming C & K's cost of capital is 15 per cent,what is the asset's net present value? (ignore income taxes)

Meredith Products Inc.is considering a new equipment purchase.The estimated cost of the equipment is $80 000.The equipment is expected to generate annual operating cash inflows for the next three years as follows: Year Annual cash flow 1 \4 0000 2 \3 0000 3 \2 0000 The equipment is expected to have a salvage value at the end of its useful life of $15 000.The company uses a discount rate of 14 per cent. Required: Compute the net present value of the equipment.(Ignore income taxes)

Bluefield Inc.is considering a project that will require an initial investment of $20 000 and is expected to generate future cash flows of $5000 for years 1 through 3 and $2500 for years 4 through 6.The project's payback period is:

Which of the following statements is true regarding the concept of the time value of money?

Vincent Products is considering a project that will require an initial investment of $45 000 and is expected to generate future cash flows of $6000 each year for the next 15 years. Required: Calculate the payback period in years.

Putnam Manufacturing is considering a project that will require an initial investment of $52 000 and is expected to generate future cash flows of $10 000 for years 1 through 3,$8000 for years 4 and 5,$2000 for years 6 through 10. Required: Calculate the project's payback period in years.

Capital investment decisions often involve all of the following except:

Valeria Products is considering the purchase of a new machine costing $500 000.The machine is expected to reduce annual operating costs by $90 000 and will be depreciated using the straight-line method (with no half-year convention)over 10 years with no salvage value at the end of its useful life.Assuming a 40 per cent income tax rate,the machine's payback period is:

When using the NPV method for a particular investment decision,if the present value of all cash inflows is greater than the present value of all cash outflows,then:

Lee Enterprises accepts capital investment projects with a payback period of five years or less.Under this condition,which of the following projects would be acceptable? Project \#1 Project \#2 Annual cash flows \ 25000 \ 40000 Initial investment 125000 160000

Bluebird Inc.requires all capital investments to generate an internal rate of return of 14 per cent.Bluebird is currently considering an investment that is expected to generate annual cash inflows of $12 000 for 5 years.The cost of the investment should not exceed:

The Mayfield Company is considering a project that will require an initial investment of $24 000 and is expected to generate future cash flows of $3000 each year for the next 10 years. Required: Calculate the payback period in years.

Clinton Inc.is considering the purchase of a new equipment costing $200 000.The equipment is expected to reduce annual operating costs by $70 000 and will be depreciated using the straight-line method (with no half-year convention)over five years with no salvage value at the end of its useful life.Assuming a 40 per cent income tax rate,the equipment's payback period is:

Pauline's Products Inc.is considering investing in a new piece of equipment that costs $75 000.The equipment is expected to generate revenues of $25 000 per year for five years.The equipment would be depreciated using the straight-line method over its five-year life and have a salvage value of $8000.The company considers the impact of income taxes in all of its capital investment decisions.The company has a 35 per cent income tax rate and desires an after-tax rate of return of 12 per cent on its investment.The net present value of the equipment is:

Vess Inc.is considering the following two projects: Project \#1 Project \#2 Initial investment \ 20000 \ 60000 PV of cash inflows 26000 66000 Which of the following statements is true when comparing each of these projects?

Hazir Products accepts capital investment projects with a payback period of four years or less.Under this condition,which of the following projects would be acceptable? Project \#1 Project \#2 Annual cash flows \ 4000 \ 12000 Initial investment 20000 36000

Palmetto Products is considering the purchase of a new industrial machine.The estimated cost of the machine is $50 000.The machine is expected to generate annual cash inflows for the next four years as follows: Year Annual cash flow 1 \ 25000 2 \ 20000 3 \ 20000 4 \ 15000 The machine is not expected to have a residual value at the end of its useful life.If Palmetto uses a discount rate of 16 per cent,what is the expected net present value of the machine? (ignore taxes)