Exam 7: Capital Budgeting Decisions

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 added to the cost of the new equipment.

(Ignore income taxes in this problem. )The management of Kleppe Corporation is investigating automating a process by replacing old equipment by a new machine.The old equipment would be sold for scrap now for $19, 000.The new machine would cost $180, 000, would have a 9 year useful life, and would have no salvage value.By automating the process, the company would save $30, 000 per year in cash operating costs. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

An investment project with a project profitability index of less than one should ordinarily be rejected.

(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 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. )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 net present value of this investment is:

Kingsolver 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:

(Ignore income taxes in this problem. )Flamio Corporation is considering a project that would require an initial investment of $210, 000 and would last for 6 years.The incremental annual revenues and expenses for each of the 6 years would be as follows: At the end of the project, the scrap value of the project's assets would be $24, 000. Required: Determine the payback period of the project.Show your work!

(Ignore income taxes in this problem. )The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125, 000.The equipment would have a useful life of six years, with a salvage value of $29, 000.This new equipment would be depreciated over its useful life by the straight-line method.It would replace existing equipment which is fully depreciated.The existing equipment has a salvage value now of $38, 000.The anticipated annual revenues and expenses associated with the new equipment are: Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project. The payback period is closest to:

(Ignore income taxes in this problem. )Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.The auto was purchased for $28, 000 and will have a 6-year useful life and a $4, 000 salvage value.Delivering prescriptions (which the pharmacy has never done before)should increase gross revenues by at least $32, 000 per year.The cost of these prescriptions to the pharmacy will be about $25, 000 per year.The pharmacy depreciates all assets using the straight-line method.The payback period for the auto is closest to:

The project profitability index is computed by dividing the present value of the cash inflows of the project by present value of the cash outflows of the project.

The project profitability index is used to compare the net present values of two investments that require different amounts of investment funds.

(Ignore income taxes in this problem. )The Sawyer Corporation has $80, 000 to invest and is considering two different projects, X and Y.The following data are available on the projects: Both projects will have a useful life of 5 years;at the end of 5 years, the working capital will be released for use elsewhere.Sawyer's discount rate is 12%. The net present value of project Y is closest to:

(Ignore income taxes in this problem. )Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $250, 000 and would have a ten-year useful life.Unfortunately, the new machine would have no salvage value.The new machine would cost $12, 000 per year to operate and maintain, but would save $55, 000 per year in labor and other costs.The old machine can be sold now for scrap for $10, 000.The simple rate of return on the new machine is closest to:

When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash inflow at the beginning of the project and as a cash outflow at the end of the project.

(Ignore income taxes in this problem. )Bonamo Corporation uses a discount rate of 15% in its capital budgeting.Partial analysis of an investment in automated equipment with a useful life of 6 years has thus far yielded a net present value of -$196, 163.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. Required: a.Ignoring any salvage value, 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? b.Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

Mujalli Corporation is considering a capital budgeting project that would require an initial investment of $200, 000.The investment would generate annual cash inflows of $64, 000 for the life of the project, which is 4 years.At the end of the project, equipment that had been used in the project could be sold for $10, 000.The company's discount rate is 9%.The net present value of the project is closest to:

In the payback method, depreciation is deducted from net operating income when computing the annual net cash flow.

(Ignore income taxes in this problem. )Carlson Manufacturing has some equipment that needs to be rebuilt or replaced.The following information has been gathered relative to this decision: Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson Manufacturing will have no future use for the equipment. If the new equipment is purchased, the present value of the cash flows that occur now is:

(Ignore income taxes in this problem. )The following data pertain to an investment project: The internal rate of return is closest to:

If the internal rate of return exceeds the required rate of return for a project, then the net present value of that project is negative.