Exam 14: Capital Budgeting Decisions

(Ignore income taxes in this problem.) The management of Bischke Corporation is investigating an investment in equipment that would have a useful life of 8 years. The company uses a discount rate of 16% 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 -$238,486. -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.) Finlay Corporation is investigating automating a process by purchasing a machine for $225,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $54,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $24,000. The annual depreciation on the new machine would be $25,000. The simple rate of return on the investment 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: -If the discount rate is 14%, the net present value of the investment is closest to:

(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 payback period for the investment is:

(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 incremental net present value in favor of leasing rather than purchasing is (rounded off to the nearest hundred dollars):

(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. -What is the payback period of the presentation equipment?

(Ignore income taxes in this problem.) Mcniel Corporation is considering the following three investment projects: Required: Rank the investment projects using the project profitability index. Show your work!

(Ignore income taxes in this problem.) Mink, Inc., is considering the purchase of a machine that would cost $480,000 and would last for 7 years, at the end of which, the machine would have a salvage value of $82,000. The machine would reduce labor and other costs by $101,000 per year. Additional working capital of $2,000 would be needed immediately, all of which would be recovered at the end of 7 years. The company requires a minimum pretax return of 9% on all investment projects. Required: Determine the net present value of the project. Show your work!

(Ignore income taxes in this problem.) The management of Eversman Corporation is considering the following three investment projects: Rank the projects according to the profitability index, from most profitable to least profitable.

(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 payback period of this investment is closest to:

(Ignore income taxes in this problem.) The management of Bischke Corporation is investigating an investment in equipment that would have a useful life of 8 years. The company uses a discount rate of 16% 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 -$238,486. -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?

(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 stream of annual net cash inflows from operations is:

(Ignore income taxes in this problem.) Eckels Corporation is considering the following three investment projects: -Rank the projects according to the profitability index, from most profitable to least profitable.

The capital budgeting method that divides a project's annual incremental net operating income by the initial investment is the:

(Ignore income taxes in this problem.) Glassett Corporation is considering a project that would require an investment of $62,000. No other cash outflows would be involved. The present value of the cash inflows would be $70,060. The profitability index of the project is closest to:

(Ignore income taxes in this problem.) Prince Company's required rate of return is 10%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently. Required: a. Machine A will cost $25,000 and have a life of 15 years. Its salvage value will be $1,000, and cost savings are projected at $3,500 per year. Compute the machine's net present value. b. How much will Prince Company be willing to pay for Machine B if the machine promises annual cash inflows of $5,000 per year for 8 years? c. Machine C has a projected life of 10 years. What is the machine's internal rate of return, to the nearest whole percent, if it costs $30,000 and will save $6,000 annually in cash operating costs? Would you recommend purchase? Explain.

In preference decision situations, a project with a high net present value will always be preferable to a project with a lower net present value.

(Ignore income taxes in this problem.) Sue Falls is the president of Sports, Inc. She is considering buying a new machine that would cost $14,125. Sue has determined that the new machine promises an internal rate of return of 12%, but Sue has misplaced the paper which tells the annual cost savings promised by the new machine. She does remember that the machine has a projected life of 10 years. Based on these data, the annual cost savings are:

(Ignore income taxes in this problem.) Masone Inc. has provided the following data concerning a proposed investment project: The company uses a discount rate of 10%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.) The management of Gertz Corporation is investigating purchasing equipment that would cost $276,000 and have a 6 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $107,000 per year and cash operating expenses by $40,000 per year. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!