Exam 7: Capital Budgeting Decisions

Bullinger Corporation has provided the following data concerning an investment project that it is considering: The net present value of the project is closest to:

The investment required for the project profitability index should:

(Ignore income taxes in this problem. )Consider the following three investment opportunities: Project I would require an immediate cash outlay of $10, 000 and would result in cash savings of $3, 000 each year for 5 years. Project II would require cash outlays of $3, 000 per year and would provide a cash inflow of $30, 000 at the end of 5 years. Project III would require a cash outlay of $10, 000 now and would provide a cash inflow of $30, 000 at the end of 5 years. Required: The discount rate is 14%.Use the net present value method to determine which, if any, of the three projects is acceptable.

Valotta 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:

The salvage value of new equipment should be considered when using the internal rate of return method to evaluate a project.

(Ignore income taxes in this problem. )The management of Kiefert Corporation is investigating an investment in equipment that would have a useful life of 9 years.The company uses a discount rate of 18% in its capital budgeting.The net present value of the investment, excluding the annual cash inflow, is -$290, 453.To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the 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 present value of the annual cost savings of $102, 000 is closest to:

Discounted cash flow techniques do not take into account recovery of initial investment.

Bowen Corporation is considering several investment proposals, as shown below: If the project profitability index is used, the ranking of the projects from most to least profitable would be:

Fimbrez Corporation has provided the following data concerning an investment project that it is considering: The net present value of the project is closest to:

(Ignore income taxes in this problem. )Peter wants to buy a computer which he expects to save him $4, 000 each year in bookkeeping costs.The computer will last for five years, and at the end of five years it will have no salvage value.If Peter's required rate of return is 12%, what is the maximum price Peter should be willing to pay for the computer now?

(Ignore income taxes in this problem. )Mark Stevens is considering opening a hobby and craft store.He would invest $50, 000 to purchase equipment and furnishings and another $100, 000 for inventories and other working capital needs.Rent on the building used by the business will be $25, 000 per year.In addition to building rent, other annual cash outflows for operating costs will amount to $44, 000.Mark estimates that the annual cash inflow from the business will amount to $100, 000.Mark plans to operate the business for only six years.He estimates that the equipment and furnishings could be sold at that time for about 10% of its original cost.Mark's discount rate is 16%.All cash flows, except for the initial investment, would occur at the ends of the years. Required: Compute the net present value of this investment.

(Ignore income taxes in this problem. )Baldock Inc.is considering the acquisition of a new machine that costs $420, 000 and has a useful life of 5 years with no salvage value.The incremental net operating income and incremental net cash flows that would be produced by the machine are: Assume cash flows occur uniformly throughout a year except for the initial investment. If the discount rate is 12%, the net present value of the investment is closest to:

(Ignore income taxes in this problem. )Naomi Corporation has a capital budgeting project that has a negative net present value of $36, 000.The life of this project is 6 years.Naomi's discount rate is 20%.By how much would the annual cash inflows from this project have to increase in order to have a positive net present value?

(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 X is closest to:

(Ignore income taxes in this problem. )The management of Cantell Corporation is considering a project that would require an initial investment of $47, 000.No other cash outflows would be required.The present value of the cash inflows would be $55, 930.The profitability index of the project is closest to:

When using internal rate of return to evaluate investment projects, if the internal rate of return is greater than the required rate of return, the project should be accepted.

(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 net present value on this investment is closest to:

The net present value of a proposed investment is negative.Therefore, the discount rate used must be:

(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 simple rate of return on the investment is: