Exam 7: Capital Budgeting Decisions

The simple rate of return method does not take into account the time value of money.

(Ignore income taxes in this problem. )Dube Corporation is considering the following three investment projects: The profitability index of investment project E is closest to:

(Ignore income taxes in this problem. )Dimpson 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!

Bevans Corporation is considering a capital budgeting project that would require an initial investment of $190, 000.The investment would generate annual cash inflows of $58, 000 for the life of the project, which is 4 years.The company's discount rate is 7%.The net present value of the project is closest to:

The net present value of an investment project is $28, 842 and its project profitability index is 0.1518.The initial investment in this project was:

When cash flows are uneven and vary from year to year, the net present value method is easier to use than the internal rate of return method.

If a project does not have constant incremental revenues and expenses over its useful life, the simple rate of return will fluctuate from year to year.

The Gomez Corporation is considering two projects, T and V.The following information has been gathered on these projects: Based on this information, which of the following statements is(are)true? I.Project T has the highest ranking according to the project profitability index criterion. II)Project V has the highest ranking according to the net present value criterion.

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 project has the highest ranking according to the net present value and the project profitability index criteria?

(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 annual cash operating costs associated with this alternative is:

(Ignore income taxes in this problem. )An expansion at Fidell, Inc. , would increase sales revenues by $75, 000 per year and cash operating expenses by $38, 000 per year.The initial investment would be for equipment that would cost $135, 000 and have a 5 year life with no salvage value.The annual depreciation on the equipment would be $27, 000.The simple rate of return on the investment is closest to:

Vinup 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 in 4 years.The company's discount rate is 13%.The net present value of the project is closest to:

(Ignore income taxes in this problem. )Bill Anders retires in 5 years.He would have to purchase equipment costing $500, 000 to equip the outlet and invest an additional $150, 000 for inventories and other working capital needs.Other outlets in the fast-food chain have an annual net cash inflow of about $160, 000.Mr.Anders would close the outlet in 5 years.He estimates that the equipment could be sold at that time for about 10% of its original cost and the working capital would be released for use elsewhere.Mr.Anders' required rate of return is 16%. Required: What is the investment's net present value? Is this an acceptable investment?

(Ignore income taxes in this problem. )Dunay Corporation is considering investing $510, 000 in a project.The life of the project would be 4 years.The project would require additional working capital of $24, 000, which would be released for use elsewhere at the end of the project.The annual net cash inflows would be $162, 000.The salvage value of the assets used in the project would be $41, 000.The company uses a discount rate of 10%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem. )Baber Corporation is planning an investment with the following characteristics: The initial cost of the equipment is closest to:

(Ignore income taxes in this problem. )Beaver Corporation is investigating the purchase of a new threading machine that costs $18, 000.The machine would save about $4, 000 per year over the present method of threading component parts, and would have a salvage value of about $3, 000 in 6 years when the machine would be replaced.The company's required rate of return is 12%.The machine's net present value is closest to:

The required rate of return is the minimum rate of return that an investment project must yield to the acceptable.

(Ignore income taxes in this problem. )The management of Gramby Corporation is investigating the purchase of a new satellite routing system with a useful life of 5 years.The company uses a discount rate of 18% in its capital budgeting.The net present value of the investment, excluding its intangible benefits, is -$245, 970. Required: 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. )Hinck Corporation is investigating automating a process by purchasing a new machine for $520, 000 that would have a 8 year useful life and no salvage value.By automating the process, the company would save $134, 000 per year in cash operating costs.The company's current equipment would be sold for scrap now, yielding $22, 000.The annual depreciation on the new machine would be $65, 000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

(Ignore income taxes in this problem. )The management of Komatz Corporation is considering the purchase of a automated molding machine that would cost $308, 424, would have a useful life of 8 years, and would have no salvage value.The automated molding machine would result in cash savings of $71, 000 per year due to lower labor and other costs. Required: Determine the internal rate of return on the investment in the new automated molding machine.Show your work!