Exam 12: Capital Budgeting Decisions

(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment that costs $480,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are: -If the discount rate is 10%,the net present value of the investment is closest to:

The internal rate of return of an investment project is the:

(Ignore income taxes in this problem)The management of Serpas Corporation is considering the purchase of a machine that would cost $180,000,would last for 5 years,and would have no salvage value.The machine would reduce labor and other costs by $46,000 per year.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. )The following data pertain to an investment proposal: The working capital would be released for use elsewhere when the project is completed.What is the net present value of the project,using a discount rate of 8 percent?

(Ignore income taxes in this problem.) Shields 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 Yates Company purchased a piece of equipment which is expected to have a useful life of 7 years with no salvage value at the end of the 7-year period.This equipment is expected to generate a cash inflow of $32,000 each year of its useful life.If this investment has a internal rate of return of 14%,then the initial cost of the equipment is:

(Ignore income taxes in this problem. )Pal Corporation is contemplating purchasing equipment that would increase sales revenues by $438,000 per year and cash operating expenses by $258,000 per year.The equipment would cost $504,000 and have a 9 year life with no salvage value.The annual depreciation would be $56,000. 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.) Friden Company has just purchased a new piece of equipment with the following characteristics: -Assume straight-line depreciation and no salvage value.The payback period would be:

(Ignore income taxes in this problem. )Verdin Corporation uses a discount rate of 16% in its capital budgeting.Management is considering an investment in telecommunications equipment with a useful life of 6 years.Excluding the salvage value of the equipment,the net present value of the investment in the equipment is -$166,194. Required: How large would the salvage value of the telecommunications equipment have to be to make the investment in the telecommunications equipment financially attractive?

(Ignore income taxes in this problem.) The management of Pattee Corporation is considering three investment projects-M, N, and O. Project M would require an investment of $25,000, Project N of $67,000, and Project O of $70,000. The present value of the cash inflows would be $28,750 for Project M, $73,700 for Project N, and $79,100 for Project O. -The profitability index of investment project N is closest to:

(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 net present value of this investment is closest to:

A very useful guide for making investment decisions is: The shorter the payback period,the more profitable the project.

(Ignore income taxes in this problem. )The management of Rusell Corporation is considering a project that would require an investment of $282,000 and would last for 6 years.The annual net operating income from the project would be $107,000,which includes depreciation of $43,000.The scrap value of the project's assets at the end of the project would be $24,000.The payback period of the project is closest to:

Projects with shorter payback periods are always more profitable than projects with longer payback periods.

(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 any salvage value,to the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?

In comparing two investment alternatives,the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach.

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

(Ignore income taxes in this problem. )Janes,Inc. ,is considering the purchase of a machine that would cost $430,000 and would last for 6 years,at the end of which,the machine would have a salvage value of $47,000.The machine would reduce labor and other costs by $109,000 per year.Additional working capital of $4,000 would be needed immediately,all of which would be recovered at the end of 6 years.The company requires a minimum pretax return of 17% on all investment projects. Required: Determine the net present value of the project.Show your work!

(Ignore income taxes in this problem)Lett Corporation is investigating buying a small used aircraft for the use of its executives.The aircraft would have a useful life of 7 years.The company uses a discount rate of 15% in its capital budgeting.The net present value of the investment,excluding the salvage value of the aircraft,is -$578,739.Management is having difficulty estimating the salvage value of the aircraft.To the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?