Exam 7: Capital Budgeting Decisions

(Ignore income taxes in this problem. )Allen College has a telephone system that is in poor condition.The system can be either overhauled or replaced with a new system.The following data have been gathered concerning these two alternatives: Allen College uses a 12% discount rate and the total cost approach to net present value analysis.Both alternatives are expected to have a useful life of eight years. The net present value of the alternative of replacing the present system with the proposed new system is closest to:

(Ignore income taxes in this problem. )Tangen Corporation is considering the purchase of a machine that would cost $380, 000 and would last for 6 years.At the end of 6 years, the machine would have a salvage value of $80, 000.By reducing labor and other operating costs, the machine would provide annual cost savings of $104, 000.The company requires a minimum pretax return of 14% on all investment projects.The net present value of the proposed project is closest to:

The payback method of making capital budgeting decisions does not give full consideration to the time value of money.

(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 internal rate of return on the investment is closest to:

If a company has computed a project profitability index of -0.015 for an investment project, then:

The internal rate of return method assumes that the cash flows generated by the project are immediately reinvested elsewhere at a rate of return that equals the internal rate of return.

(Ignore income taxes in this problem. )Sturn Corporation purchased a machine with an estimated useful life of seven years.The machine will generate cash inflows of $9, 000 each year over the next seven years.If the machine has no salvage value at the end of seven years, if Stutz's discount rate is 10%, and if the net present value of this investment is $17, 000 then the purchase price of the machine was closest to:

(Ignore income taxes in this problem. )Neighbors Corporation is considering a project that would require an investment of $279, 000 and would last for 8 years.The incremental annual revenues and expenses generated by the project during those 8 years would be as follows: The scrap value of the project's assets at the end of the project would be $15, 000.The cash inflows occur evenly throughout the year.The payback period of the project is closest to:

(Ignore income taxes in this problem. )The management of Duker Corporation is investigating purchasing equipment that would increase sales revenues by $130, 000 per year and cash operating expenses by $39, 000 per year.The equipment would cost $328, 000 and have an 8 year life with no salvage value.The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem. )The following data concern an investment project: The working capital will be released for use elsewhere at the conclusion of the project. Required: Compute the project's net present value.

(Ignore income taxes in this problem. )The management of Grayer Corporation is considering the following three investment projects: The only cash outflows are the initial investments in the projects. Required: Rank the investment projects using the project profitability index.Show your work!

The Weston Corporation is analyzing projects A, B, and C as possible investment opportunities.Each of these projects has a useful life of five years.The following information has been obtained: Which of the following statements is correct?

(Ignore income taxes in this problem. )Westland College has a telephone system that is in poor condition.The system either can be overhauled or replaced with a new system.The following data have been gathered concerning these two alternatives: Westland College uses a 10% discount rate and the total cost approach to net present value analysis.The working capital required under the new system would be released for use elsewhere at the conclusion of the project.Both alternatives are expected to have a useful life of eight years. The net present value of the new system alternative is:

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

(Ignore income taxes in this problem. )A company with $600, 000 in operating assets is considering the purchase of a machine that costs $72, 000 and which is expected to reduce operating costs by $18, 000 each year.These reductions in cost occur evenly throughout the year.The payback period for this machine in years is closest to:

(Ignore income taxes in this problem. )Vernon Corporation has been offered a 5-year contract to supply a part for the military.After careful study, the company has developed the following estimated data relating to the contract: It is not expected that the contract would be extended beyond the initial contract period.The company's discount rate is 10%. Required: Use the net present value method to determine if the contract should be accepted.

Schoultz 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 12%.The net present value of the project is closest to:

Czlapinski Corporation is considering a capital budgeting project that would require an initial investment of $440, 000 and working capital of $32, 000.The working capital would be released for use elsewhere at the end of the project in 4 years.The investment would generate annual cash inflows of $147, 000 for the life of the project.At the end of the project, equipment that had been used in the project could be sold for $11, 000.The company's discount rate is 7%.The net present value of the project is closest to:

(Ignore income taxes in this problem. )Weilbacher Corporation is considering the purchase of a machine that would cost $240, 000 and would last for 8 years.At the end of 5 years, the machine would have a salvage value of $50, 000.The machine would reduce labor and other costs by $72, 000 per year.The company requires a minimum pretax return of 16% on all investment projects. Required: Determine the net present value of the project.Show your work!

(Ignore income taxes in this problem. )Tidwell Corporation is considering the purchase of a machine costing $18, 000.Tidwell estimates that this machine will save $5, 000 per year in cash operating expenses for the next five years.If the machine has no salvage value at the end of five years and the discount rate used by Tidwell is 8%, then the machine's internal rate of return is closest to: