Exam 7: Capital Budgeting Decisions

(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 simple rate of return on the new machine is closest to:

A project requires an initial investment of $70, 000 and has a project profitability index of 0.932.The present value of the future cash inflows from this investment is:

(Ignore income taxes in this problem. )Jason Corporation has invested in a machine that cost $80, 000, that has a useful life of eight years, and that has no salvage value at the end of its useful life.The machine is being depreciated by the straight-line method, based on its useful life.It will have a payback period of five years.Given these data, the simple rate of return on the machine is closest to:

Preference decisions follow screening decisions and seek to rank investment proposals in order of their desirability.

(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 overhauling the present system is closest to:

(Ignore income taxes in this problem. )Baker Corporation is considering buying a new donut maker.This machine will replace an old donut maker that still has a useful life of 4 years.The new machine will cost $3, 500 a year to operate, as opposed to the old machine, which costs $3, 900 per year to operate.Also, because of increased capacity, an additional 10, 000 donuts a year can be produced.The company makes a contribution margin of $0.15 per donut.The old machine can be sold for $6, 000 and the new machine costs $28, 000.The incremental annual net cash inflows provided by the new machine would be:

(Ignore income taxes in this problem. )The management of Helberg Corporation is considering a project that would require an investment of $203, 000 and would last for 6 years.The annual net operating income from the project would be $103, 000, which includes depreciation of $30, 000.The scrap value of the project's assets at the end of the project would be $23, 000.The cash inflows occur evenly throughout the year.The payback period of the project is closest to:

(Ignore income taxes in this problem. )Clairmont Corporation is considering the purchase of a machine that would cost $150, 000 and would last for 5 years.At the end of 5 years, the machine would have a salvage value of $18, 000.By reducing labor and other operating costs, the machine would provide annual cost savings of $37, 000.The company requires a minimum pretax return of 12% on all investment projects. The net present value of the proposed project is closest to:

(Ignore income taxes in this problem. )Galindo Long-Haul, Inc. , is considering the purchase of a tractor-trailer that would cost $178, 848, would have a useful life of 8 years, and would have no salvage value.The tractor-trailer would be used in the company's hauling business, resulting in additional net cash inflows of $36, 000 per year.The internal rate of return on the investment in the tractor-trailer is closest to:

For capital budgeting decisions, the simple rate of return method is superior to the net present value method.

(Ignore income taxes in this problem. )Henscheid Roofing is considering the purchase of a crane that would cost $104, 972, would have a useful life of 7 years, and would have no salvage value.The use of the crane would result in labor savings of $23, 000 per year.The internal rate of return on the investment in the crane is closest to:

(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 overhauling the present system is closest to:

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

(Ignore income taxes in this problem. )Villena Corporation is considering a project that would require an investment of $48, 000.No other cash outflows would be involved.The present value of the cash inflows would be $52, 800.The profitability index of the project is closest to:

(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 equipment is rebuilt, the present value of the cash flows that occur now is:

(Ignore income taxes in this problem. )The following data pertain to an investment proposal: The net present value of the proposed investment is closest to:

(Ignore income taxes in this problem. )Crowley Corporation is considering three investment projects: F, G, and H.Project F would require an investment of $21, 000, Project G of $49, 000, and Project H of $82, 000.No other cash outflows would be involved.The present value of the cash inflows would be $21, 210 for Project F, $57, 820 for Project G, and $95, 120 for Project H.Rank the projects according to the profitability index, from most profitable to least profitable.

(Ignore income taxes in this problem. )The management of Kountz Corporation is considering the purchase of a machine that would cost $74, 520 and would have a useful life of 8 years.The machine would have no salvage value.The machine would reduce labor and other operating costs by $20, 000 per year. Required: Determine the internal rate of return on the investment in the new machine.Show your work!

(Ignore income taxes in this problem. )Avanca Fitness Center is considering an investment in some additional weight training equipment.The equipment has an estimated useful life of 10 years with no salvage value at the end of the 10 years.Ataxia's internal rate of return on this equipment is 12%.Ataxia's discount rate is also 12%.The payback period on this equipment is closest to:

(Ignore income taxes in this problem. )The management of Basler Corporation is considering the purchase of a machine that would cost $440, 000, would last for 5 years, and would have no salvage value.The machine would reduce labor and other costs by $128, 000 per year.The company requires a minimum pretax return of 12% on all investment projects. Required: Determine the net present value of the project.Show your work!