Exam 7: Capital Budgeting Decisions

An investment project with a project profitability index of -0.05 has an internal rate of return that is less than the discount rate.

In preference decision situations, a project with a lower net present value may be preferable to a project with a higher net present value.

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

When considering a number of investment projects, the project that has the shortest payback period does not necessarily have the highest net present value.

(Ignore income taxes in this problem. )The management of Enamorado Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines.The aircraft would have a useful life of 5 years.The company uses a discount rate of 17% in its capital budgeting.The net present value of the investment, excluding the intangible benefits, is -$160, 462.To the nearest whole dollar how large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive?

One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached.

The net present value and internal rate of return methods of capital budgeting are superior to the payback method because they:

In capital budgeting computations, discounted cash flow methods:

(Ignore income taxes in this problem. )Burba Inc.is considering investing in a project that would require an initial investment of $200, 000.The life of the project would be 5 years.The annual net cash inflows from the project would be $60, 000.The salvage value of the assets at the end of the project would be $30, 000.The company uses a discount rate of 17%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem. )The management of Favreau Corporation is considering the purchase of a machine that would cost $310, 464 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 $84, 000 per year.The internal rate of return on the investment in the new machine is closest to:

(Ignore income taxes in this problem. )Given the following data: The life of the equipment must be:

(Ignore income taxes in this problem. )Veys Limos, Inc. , is considering the purchase of a limousine that would cost $155, 776, would have a useful life of 7 years, and would have no salvage value.The limousine would bring in cash inflows of $32, 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!

(Ignore income taxes in this problem. )The management of Urbine Corporation is considering the purchase of a machine that would cost $350, 000, would last for 6 years, and would have no salvage value.The machine would reduce labor and other costs by $79, 000 per year.The company requires a minimum pretax return of 14% on all investment projects.The net present value of the proposed project is closest to:

(Ignore income taxes in this problem. )Allen Corporation's required rate of return is 14%.The company is considering the purchase of a new machine that will save $10, 000 per year in cash operating costs.The machine will cost $39, 540 and will have an 8-year useful life with zero salvage value.Straight-line depreciation will be used. Required: Compute the machine's internal rate of return.Would you recommend purchase of the machine? Explain.

(Ignore income taxes in this problem. )The management of Moya Corporation is investigating purchasing equipment that would cost $336, 000 and have an 8 year life with no salvage value.The equipment would allow an expansion of capacity that would increase sales revenues by $288, 000 per year and cash operating expenses by $164, 000 per year. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

The internal rate of return for a project can be determined:

(Ignore income taxes in this problem. )The Zinger Corporation is considering an investment that has the following data: Cash inflows occur evenly throughout the year.The payback period for this investment is:

(Ignore income taxes in this problem. )Messersmith Corporation is investigating automating a process by purchasing a machine for $688, 000 that would have an 8 year useful life and no salvage value.By automating the process, the company would save $160, 000 per year in cash operating costs.The new machine would replace some old equipment that would be sold for scrap now, yielding $19, 000.The annual depreciation on the new machine would be $86, 000.The simple rate of return on the investment is closest to:

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

Which of the following will have the largest dollar effect on the net present value of a 10 year investment project?