Exam 12: Capital Budgeting Decisions

(Ignore income taxes in this problem. )The Gage Company purchased a machine which will be depreciated by the straight-line method over its estimated 6 year life.The machine will have no salvage value.It will generate cash inflows of $7,000 each year over the next 6 years.Gage Company's required rate of return is 14%.If the net present value of this investment is $12,016,the purchase price of the machine was:

(Ignore income taxes in this problem. )The management of Ossenfort Corporation is investigating purchasing equipment that would cost $440,000 and have a 8 year life with no salvage value.The equipment would allow an expansion of capacity that would increase sales revenues by $192,000 per year and cash operating expenses by $61,000 per year. 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. )Benz Company is considering the purchase of a machine that costs $100,000,has a useful life of 18 years,and no salvage value.The company's discount rate is 12%.If the machine's net present value is $5,850,then the annual cash inflows associated with the machine must be (round to the nearest whole dollar):

(Ignore income taxes in this problem. )Hartong Corporation is contemplating purchasing equipment that would increase sales revenues by $185,000 per year and cash operating expenses by $89,000 per year.The equipment would cost $416,000 and have a 8 year life with no salvage value.The annual depreciation would be $52,000.The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.) Meharg Corporation is considering the purchase of a machine that would cost $120,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $25,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $30,000. The company requires a minimum pretax return of 10% on all investment projects. -The present value of the annual cost savings of $30,000 is closest to:

(Ignore income taxes in this problem.) The Crawford Company is pondering an investment in a machine that costs $350,000, that will have a useful life of eight years, and that will have a salvage value of $25,000. If this machine is purchased, a similar, old machine will be sold at a salvage value of $40,000. The anticipated yearly revenues and expenses associated with the new machine are: All of the revenues and expenses except depreciation are for cash. The company's required rate of return is 12%. The annual cash flows occur uniformly throughout the year. -The simple rate of return,to the nearest tenth of a percent,of this investment is:

(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 7 years,and would have no salvage value.The machine would reduce labor and other costs by $88,000 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!

(Ignore income taxes in this problem.) The management of Melchiori Corporation is considering the purchase of a machine that would cost $310,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $116,000 per year. The company requires a minimum pretax return of 16% on all investment projects. -The present value of the annual cost savings of $116,000 is closest to:

The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero.

(Ignore income taxes in this problem. )A piece of equipment has a cost of $20,000.The equipment will provide cost savings of $3,500 each year for ten years,after which time it will have a salvage value of $2,500.If the company's discount rate is 12%,the equipment's net present value is:

(Ignore income taxes in this problem. )Bill Anders retires in 8 years.He has $650,000 to invest and is considering a franchise for a fast-food outlet.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 8 years.He estimates that the equipment could be sold at that time for about 10% of its original cost.Mr.Anders' required rate of return is 16%. Required: What is the investment's net present value when the discount rate is 16 percent? Is this an acceptable investment?

(Ignore income taxes in this problem.) Trybus Corporation uses a discount rate of 16% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 5 years has thus far yielded a net present value of -$233,764. 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. )Mercredi,Inc. ,is considering investing in automated equipment with a ten-year useful life.Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation,but have been unable to estimate the cash flows associated with the intangible benefits.Using the company's 14% required rate of return,the net present value of the cash flows associated with just the tangible costs and benefits is a negative $182,560.How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment?

(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision: Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years Mr. Lichty plans to close the car wash and retire. -If the new equipment is purchased,the present value of all cash flows that occur now is:

(Ignore income taxes in this problem)The management of Mazor Corporation is considering the purchase of a machine that would cost $144,144 and would have a useful life of 5 years.The machine would have no salvage value.The machine would reduce labor and other operating costs by $39,000 per year.The internal rate of return on the investment in the new machine is closest to:

(Ignore income taxes in this problem. )The management of Dewitz Corporation is considering a project that would require an initial investment of $65,000.No other cash outflows would be required.The present value of the cash inflows would be $72,800.The profitability index of the project is closest to:

The simple rate of return is the same as the internal rate of return.

(Ignore income taxes in this problem. )Juliar Inc.has provided the following data concerning a proposed investment project: The company uses a discount rate of 12%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.) Gillaspie, Inc., is considering the purchase of a machine that would cost $300,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $51,000. The machine would reduce labor and other costs by $86,000 per year. Additional working capital of $10,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 13% on all investment projects. -The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:

(Ignore income taxes in this problem. )Rogers Company is studying a project that would have a ten-year life and would require an $800,000 investment in equipment which has no salvage value.The project would provide net operating income each year as follows for the life of the project: The company's required rate of return is 8%.What is the payback period for this project?