Exam 12: Capital Budgeting Decisions

If a company has computed the project profitability index of an investment project as 0.15,then:

(Ignore income taxes in this problem. )Tu Corporation is investigating automating a process by purchasing a machine for $423,000 that would have a 9 year useful life and no salvage value.By automating the process,the company would save $112,000 per year in cash operating costs.The new machine would replace some old equipment that would be sold for scrap now,yielding $27,000.The annual depreciation on the new machine would be $47,000.The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem. )Charley has a typing service.He estimates that a new computer will result in increased cash inflow $1,600 in Year 1,$2,000 in Year 2 and $3,000 in Year 3.If Charley's required rate of return is 12%,the most that Charley would be willing to pay for the new computer would be:

The capital budgeting method that recognizes the time value of money by discounting cash flows over the life of the project,using the company's required rate of return as the discount rate is called the:

(Ignore income taxes in this problem)The management of Hirsh Corporation is investigating an investment in equipment that would have a useful life of 9 years.The company uses a discount rate of 13% in its capital budgeting.The net present value of the investment,excluding the annual cash inflow,is -$666,493.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.) Shields Company has gathered the following data on a proposed investment project: -The net present value on this investment is closest to:

Spring Company has invested $20,000 in a project.Spring's discount rate is 12% and the project profitability index on the project is zero.Which of the following statements would be true? I.The net present value of the project is $20,000. II)The project's internal rate of return is equal to 12%.

(Ignore income taxes in this problem. )Duhl Long-Haul,Inc. ,is considering the purchase of a tractor-trailer that would cost $126,175,would have a useful life of 5 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 $35,000 per year.The internal rate of return on the investment in the tractor-trailer is closest to:

(Ignore income taxes in this problem.) Oriental Company has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. -The simple rate of return on the investment would be:

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

(Ignore income taxes in this problem. )The management of Fowkes Corporation is considering a project that would require an initial investment of $331,000 and would last for 8 years.The annual net operating income from the project would be $54,000,including depreciation of $40,000.At the end of the project,the scrap value of the project's assets would be $11,000. Required: Determine the payback period of the project.Show your work!

(Ignore income taxes in this problem. )Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.The auto was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value.Delivering prescriptions (which the pharmacy has never done before)should increase gross revenues by at least $5,000 per year.The cost of these prescriptions to the pharmacy will be about $2,000 per year.The pharmacy depreciates all assets using the straight-line method.The payback period for the auto is:

The project profitability index is used to compare the internal rates of return of two companies with different investment amounts.

(Ignore income taxes in this problem. )Tranter,Inc. ,is considering a project that would have a ten-year life and would require a $1,200,000 investment in equipment.At the end of ten years,the project would terminate and the equipment would have no salvage value.The project would provide net operating income each year as follows: All of the above items,except for depreciation,represent cash flows.The company's required rate of return is 12%. Required: a.Compute the project's net present value. b.Compute the project's internal rate of return to the nearest whole percent. c.Compute the project's payback period. d.Compute the project's simple rate of return.

(Ignore income taxes in this problem. )Czaplinski Corporation is considering a project that would require an investment of $323,000 and would last for 7 years.The incremental annual revenues and expenses generated by the project during those 7 years would be as follows: The scrap value of the project's assets at the end of the project would be $22,000.The payback period of the project is closest to:

Blanding Company is considering several investment proposals,as shown below: Using the project profitability index,the ranking would be:

(Ignore income taxes in this problem.) Rushforth Manufacturing has $90,000 to invest in either Project A or Project B. The following data are available on these projects: Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Rushforth's required rate of return is 14%. -The net present value of Project B is:

(Ignore income taxes in this problem. )The management of an amusement park is considering purchasing a new ride for $40,000 that would have a useful life of 10 years and a salvage value of $4,000.The ride would require annual operating costs of $19,000 throughout its useful life.The company's discount rate is 8%.Management is unsure about how much additional ticket revenue the new ride would generate-particularly because customers pay a flat fee when they enter the park that entitles them to unlimited rides.Hopefully,the presence of the ride would attract new customers. Required: How much additional revenue would the ride have to generate per year to make it an attractive investment?

(Ignore income taxes in this problem.) Oriental Company has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. -The payback period for the investment would be:

(Ignore income taxes in this problem. )Dunay Corporation is considering investing $810,000 in a project.The life of the project would be 9 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 17%. Required: Compute the net present value of the project.