Exam 12: Capital Budgeting Decisions

The length of time required to recover the initial cash outlay for a project is determined by using the:

(Ignore income taxes in this problem.) Shields Company has gathered the following data on a proposed investment project: -The internal rate of return on the investment is closest to:

(Ignore income taxes in this problem. )The management of Rosengarten Corporation is investigating the purchase of a new satellite routing system with a useful life of 7 years.The company uses a discount rate of 8% in its capital budgeting.The net present value of the investment,excluding its intangible benefits,is -$607,020. 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. )Farah Corporation has provided the following data concerning a proposed investment project: The company uses a discount rate of 11%.The working capital would be released at the end of the project. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.) The management of Gimenez Corporation is investigating an investment in equipment that would have a useful life of 7 years. The company uses a discount rate of 17% in its capital budgeting. Good estimates are available for the initial investment and the annual cash operating outflows, but not for the annual cash inflows and the salvage value of the equipment. The net present value of the initial investment and the annual cash outflows is -$274,265. -Ignoring the cash inflows,to the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive?

(Ignore income taxes in this problem. )The Higgins Company has just purchased a piece of equipment at a cost of $120,000.This equipment will reduce operating costs by $40,000 each year for the next eight years.This equipment replaces old equipment which was sold for $8,000 cash.The new equipment has a payback period of:

If two projects require the same amount of investment,then the preference ranking computed using either the project profitability index or the net present value will be the same.

(Ignore income taxes in this problem. )An expansion at Fenstermacher,Inc. ,would increase sales revenues by $315,000 per year and cash operating expenses by $186,000 per year.The initial investment would be for equipment that would cost $405,000 and have a 5 year life with no salvage value.The annual depreciation on the equipment would be $81,000.The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem. )The management of Eastridge Corporation is considering the purchase of a machine that would cost $50,470 and would have a useful life of 7 years.The machine would have no salvage value.The machine would reduce labor and other operating costs by $14,000 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.) Oriental Company has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. -The net present value of this investment would be:

A project requires an initial investment of $60,000 and has a project profitability index of 0.329.The present value of the future cash inflows from this investment is:

(Ignore income taxes in this problem. )Jane Summers has just inherited $600,000 from her mother's estate.She is considering investing part of these funds in a small catering business.She would need to purchase a delivery van and various equipment costing $100,000 to equip the business and another $50,000 for inventories and other working capital needs.Rent on the building used by the business will be $24,000 per year.Jane's marketing studies indicate that the annual cash inflow from the business will amount to $90,000.In addition to the building rent,other annual cash outflows for operating costs will amount to $30,000.Jane wants to operate the catering business for only six years.She estimates that the equipment could be sold at that time for about 10% of its original cost.Jane's required rate of return is 16%. Required: Compute the net present value of this investment.

The discount rate must be specified in advance for which of the following methods?

(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. -What would the annual net cash inflows from this project have to be in order to justify investing in remodeling?

(Ignore income taxes in this problem. )Sheridon Corporation is investigating automating a process by purchasing a new machine for $483,000 that would have a 7 year useful life and no salvage value.By automating the process,the company would save $140,000 per year in cash operating costs.The company's current equipment would be sold for scrap now,yielding $29,000.The annual depreciation on the new machine would be $69,000. 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. )Deibel Corporation is considering a project that would require an investment of $59,000.No other cash outflows would be involved.The present value of the cash inflows would be $66,080.The profitability index of the project is closest to:

If the internal rate of return is used as the discount rate in computing net present value,the net present value will be:

(Ignore income taxes in this problem.) Houis Inc. is considering the acquisition of a new machine that costs $300,000 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: -If the discount rate is 11%,the net present value of 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 net present value of the proposed project is closest to:

(Ignore income taxes in this problem.) Chow Company has gathered the following data on a proposed investment project: -The payback period for the investment is closest to: