Exam 12: Capital Budgeting Decisions

(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 cash flows from intangible benefits,to the nearest whole dollar how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

(Ignore income taxes in this problem. )The management of Peregoy Corporation is considering the purchase of an automated molding machine that would cost $255,552,would have a useful life of 5 years,and would have no salvage value.The automated molding machine would result in cash savings of $64,000 per year due to lower labor and other costs. Required: Determine the internal rate of return on the investment in the new automated molding machine.Show your work!

Which one of the following statements about the payback method of capital budgeting is correct?

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

(Ignore income taxes in this problem. )The following information is available on a new piece of equipment: The life of the equipment is approximately:

(Ignore income taxes in this problem. )Limon Corporation is considering a project that would require an initial investment of $204,000 and would last for 6 years.The incremental annual revenues and expenses for each of the 6 years would be as follows: At the end of the project,the scrap value of the project's assets would be $12,000. Required: Determine the payback period of the project.Show your work!

One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached.

(Ignore income taxes in this problem. )The management of Suddreth Corporation is considering the following three investment projects: The only cash outflows are the initial investments in the projects. Required: Rank the investment projects using the project profitability index.Show your work

(Ignore income taxes in this problem.) Bugle's Bagel Bakery is investigating the purchase of a new bagel making machine. This machine would provide an annual operating cost savings of $3,650 for each of the next 4 years. In addition, this new machine would allow the production of one new type of bagel which would result in selling 1,500 dozen more bagels each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450 and it will have a 4 year useful life. Bugle's discount rate is 14%. -The total annual cash inflow from this machine for capital budgeting purposes is:

(Ignore income taxes in this problem. )If an investment of $14,760 now will yield $18,000 at the end of one year,then the internal rate of return for this investment to the nearest whole percentage is:

(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 the annual cash operating costs associated with this alternative is:

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

Preference decisions attempt to determine which of many alternative investment projects would be the best for the company to accept.

(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: -The payback period of this investment is closest to:

(Ignore income taxes in this problem. )The management of Rouleau Corporation is investigating automating a process.Old equipment,with a current salvage value of $10,000,would be replaced by a new machine.The new machine would be purchased for $240,000 and would have a 6 year useful life and no salvage value.By automating the process,the company would save $64,000 per year in cash operating costs.The simple rate of return on the investment is closest to:

Perkins Company is considering several investment proposals,as shown below: Rank the proposals in terms of preference using the project profitability index:

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

(Ignore income taxes in this problem. )Mcclam,Inc. ,is considering the purchase of a machine that would cost $100,000 and would last for 9 years.At the end of 9 years,the machine would have a salvage value of $23,000.The machine would reduce labor and other costs by $19,000 per year.Additional working capital of $2,000 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 net present value of the proposed project is closest to:

(Ignore income taxes in this problem. )Jim Bingham is considering starting a small catering business.He would need to purchase a delivery van and various equipment costing $125,000 to equip the business and another $60,000 for inventories and other working capital needs.Rent for the building used by the business will be $35,000 per year.Jim's marketing studies indicate that the annual cash inflow from the business will amount to $120,000.In addition to the building rent,annual cash outflow for operating costs will amount to $40,000.Jim wants to operate the catering business for only six years.He estimates that the equipment could be sold at that time for 4% of its original cost.Jim uses a 16% discount rate. Required: Would you advise Jim to make this investment?

(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 net present value of the proposed project is closest to: