Exam 14: Capital Budgeting Decisions

(Ignore income taxes in this problem.) Kumanu, Inc. is considering investing in new FMS equipment for its factory. This equipment will cost $80,000, is expected to last 6 years, and is expected to have a $10,000 salvage value at the end of 6 years. The new equipment is expected to generate cost savings of $20,000 per year in each of the 6 years. Kumanu's discount rate is 16%. What is the net present value of this equipment?

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

(Ignore income taxes in this problem.) Jones and Company has just purchased a new piece of equipment, the cost characteristics of which are given below: The company uses a required rate of return of 10% and depreciates equipment using the straight-line method. -The internal rate of return of the investment is closest to:

(Ignore income taxes in this problem) The management of Malit Corporation is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 17% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is -$367,742. 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.) Cuarto Corporation just invested in a project that has an internal rate of return of 24%. This project is expected to generate $44,000 of net cash inflows each year of its 6 year life. The project has no salvage value. What was the initial investment required for this project?

One strength of the simple rate of return method is that it takes into account the time value of money in computing the return on an investment project.

(Ignore income taxes in this problem.) The management of Kissinger Corporation is investigating automating a process. Old equipment, with a current salvage value of $23,000, would be replaced by a new machine. The new machine would be purchased for $330,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $108,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.) Fast Food, Inc., has purchased a new donut maker. It cost $16,000 and has an estimated life of 10 years. The following annual donut sales and expenses are projected: -The payback period on the new machine is closest to:

(Ignore income taxes in this problem.) Banderas Corporation is considering the purchase of a machine that would cost $330,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $79,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $59,000. The company requires a minimum pretax return of 12% on all investment projects. The net present value of the proposed project is closest to:

(Ignore income taxes in this problem.) The Wisbley Company is contemplating the purchase of a helicopter for its executives to use in their business trips. This helicopter could be either purchased or leased from the manufacturer. The useful life of the helicopter is four years. Data concerning these two alternatives follow: If the helicopter is leased, it would be returned to the manufacturer in four years. Wisbley's required rate of return is 22%. -The present value of all the cash outflows for rental payments, if the helicopter is leased, would be:

(Ignore income taxes in this problem.) Anne, Inc., is considering the purchase of a machine that would cost $200,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $46,000. The machine would reduce labor and other costs by $31,000 per year. Additional working capital of $7,000 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 8% on all investment projects. -The net present value of the proposed project is closest to:

(Ignore income taxes in this problem.) How is depreciation handled by the following capital budgeting techniques?

(Ignore income taxes in this problem.) Steinmann Inc. is considering the acquisition of a new machine that costs $410,000 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 present value of the salvage value to be received in seven years is:

(Ignore income taxes in this problem.) Anne, Inc., is considering the purchase of a machine that would cost $200,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $46,000. The machine would reduce labor and other costs by $31,000 per year. Additional working capital of $7,000 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 8% 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.) Steinmann Inc. is considering the acquisition of a new machine that costs $410,000 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: -Consider only the cash flows for the third year. The present value of the net cash flows (cash inflows less cash outflows) for this year only is:

(Ignore income taxes in this problem.) Bleeker Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 8 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is -$240,849. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft. -Ignoring any salvage value, to the nearest whole dollar how large would the annual benefit have to be to make the investment in the aircraft financially attractive?

(Ignore income taxes in this problem.) Ferris Company has an old machine that is fully depreciated but has a current salvage value of $5,000. The company wants to purchase a new machine which would cost $60,000 and have a 5-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are: Required: a. Compute the payback period on the new equipment. b. Compute the simple rate of return on the new equipment.

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

(Ignore income taxes in this problem.) Isomer Industrial Training Corporation is considering the purchase of new presentation equipment at a cost of $150,000. The equipment has an estimated useful life of 10 years with an expected salvage value of zero. The equipment is expected to generate net cash inflows of $35,000 per year in each of the 10 years. Isomer's discount rate is 16%. Isomer uses the straight-line method of depreciation for its assets. -Between what two percents does the internal rate of return of the presentation equipment fall?

An investment project with a project profitability index of less than zero should ordinarily be rejected.