Exam 7: Capital Budgeting Decisions

Correl Corporation has provided the following data concerning an investment project that it is considering: The life of the project is 4 years.The company's discount rate is 15%.The net present value of the project is closest to:

(Ignore income taxes in this problem. )Riveros, Inc. , is considering the purchase of a machine that would cost $120, 000 and would last for 8 years.At the end of 8 years, the machine would have a salvage value of $29, 000.The machine would reduce labor and other costs by $25, 000 per year.Additional working capital of $9, 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 18% on all investment projects.The net present value of the proposed project is closest to:

If the project profitability index of an investment project is zero, then:

(Ignore income taxes in this problem. )Lebert, Inc. , is considering the purchase of a machine that would cost $380, 000 and would last for 7 years.At the end of 7 years, the machine would have a salvage value of $49, 000.The machine would reduce labor and other costs by $96, 000 per year.Additional working capital of $6, 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 18% on all investment projects. The net present value of the proposed project is closest to:

(Ignore income taxes in this problem. )Jimba's, Inc. , has purchased a new donut maker.It cost $20, 000 and has an estimated life of 10 years.The following annual donut sales and expenses are projected: Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period on the new machine is closest to:

The simple rate of return in any one year may be less than or greater than the internal rate of return of a project.

(Ignore income taxes in this problem. )Wombles Corporation is contemplating purchasing equipment that would increase sales revenues by $478, 000 per year and cash operating expenses by $249, 000 per year.The equipment would cost $738, 000 and have a 9 year life with no salvage value.The annual depreciation would be $82, 000.The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem. )Swaggerty Corporation is considering purchasing a machine that would cost $462, 000 and have a useful life of 7 years.The machine would reduce cash operating costs by $115, 500 per year.The machine would have no salvage value. Required: a.Compute the payback period for the machine. b.Compute the simple rate of return for the machine.

(Ignore income taxes in this problem. )Overland Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment.Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the investment is:

(Ignore income taxes in this problem. )The following data on a proposed investment project have been provided: 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:

(Ignore income taxes in this problem. )Harrison Corporation is studying a project that would have an eight-year life and would require a $300, 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 10%.The payback period for this project is closest to:

(Ignore income taxes in this problem. )Farah Corporation has provided the following data concerning a proposed investment project: The company uses a discount rate of 11%.The working capital would be released at the end of the project. Required: Compute the net present value of the project.

(Ignore income taxes in this problem. )Frick Road Paving Corporation is considering an investment in a curb-forming machine.The machine will cost $180, 000, will last 10 years, and will have a $30, 000 salvage value at the end of 10 years.The machine is expected to generate net cash inflows of $40, 000 per year in each of the 10 years.Frick's discount rate is 10%.The net present value of the proposed investment is closest to:

(Ignore income taxes in this problem. )Pro-Mate, Inc.is a producer of athletic equipment.The company is considering the purchase of a machine to produce baseball bats.The machine will cost $60, 000 and have a 10-year useful life.The following annual revenues and expenses are projected: The machine will have no salvage value.Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return would be about:

The basic premise of the payback method is that the more quickly the cost of an investment is recovered the more desirable is the investment.

When making preference decisions about competing investment proposals, the internal rate of return is superior to the project profitability index.

(Ignore income taxes in this problem. )Lajeunesse Corporation uses a discount rate of 19% in its capital budgeting.Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -$127, 991.This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. 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 Mashiah Corporation is considering the purchase of a machine that would cost $290, 000, would last for 6 years, and would have no salvage value.The machine would reduce labor and other costs by $102, 000 per year.The company requires a minimum pretax return of 13% on all investment projects. The net present value of the proposed project is closest to:

The internal rate of return is computed by finding the discount rate that maximizes the difference between the present value of a project's cash outflows and the present value of its cash inflows.

(Ignore income taxes in this problem. )Lebert, Inc. , is considering the purchase of a machine that would cost $380, 000 and would last for 7 years.At the end of 7 years, the machine would have a salvage value of $49, 000.The machine would reduce labor and other costs by $96, 000 per year.Additional working capital of $6, 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 18% 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: