Exam 14: Capital Budgeting Decisions

(Ignore income taxes in this problem.) The management of Rexwinkle Corporation is investigating automating a process by replacing old equipment by a new machine. The old equipment would be sold for scrap now for $29,000. The new machine would cost $469,000, would have a 7 year useful life, and would have no salvage value. By automating the process, the company would save $177,000 per year in cash operating costs. 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.) An expansion at Huebschman, Inc., would increase sales revenues by $76,000 per year and cash operating expenses by $33,000 per year. The initial investment would be for equipment that would cost $196,000 and have a 7 year life with no salvage value. The annual depreciation on the equipment would be $28,000. The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.) A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year. The payback period for this machine in years is closest to:

Rennin Dairy Corporation is considering a plant expansion decision that has an estimated useful life of 20 years. This project has an internal rate of return of 15% and a payback period of 9.6 years. How would a decrease in the expected salvage value from this project in 20 years affect the following for this project?

(Ignore income taxes in this problem.) Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project: The company's required rate of return is 12%. What is the payback period for this project?

(Ignore income taxes in this problem.) Dilworth 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.) Seastrand Corporation is investigating automating a process by purchasing a new machine for $322,000 that would have a 7 year useful life and no salvage value. By automating the process, the company would save $117,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $17,000. The annual depreciation on the new machine would be $46,000. 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.) Stratford Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $90,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, and assuming the company's discount rate is 10%, what is the purchase price of the machine if the net present value of the investment is $170,000?

(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 net present value of the investment is:

(Ignore income taxes in this problem.) Korber Corporation is considering investing $820,000 in a project. The life of the project would be 8 years. The project would require additional working capital of $18,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $246,000. The salvage value of the assets used in the project would be $41,000. The company uses a discount rate of 19%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.) Valdivieso Roofing is considering the purchase of a crane that would cost $137,885, would have a useful life of 9 years, and would have no salvage value. The use of the crane would result in labor savings of $23,000 per year. The internal rate of return on the investment in the crane is closest to:

(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 the annual benefit, 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?

(Ignore income taxes in this problem.) The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%. -The present value of all future operating cash inflows is closest to:

(Ignore income taxes in this problem.) The management of Seman Corporation is considering the purchase of a machine that would cost $41,110 and would have a useful life of 6 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $10,000 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.) The following information concerns a proposed investment: The internal rate of return is (do not interpolate):

The payback method measures:

(Ignore income taxes in this problem.) Dokes, Inc. is considering the purchase of a machine that would cost $440,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $62,000. The machine would reduce labor and other costs by $81,000 per year. Additional working capital of $8,000 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.) 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 net present value of the presentation equipment?

(Ignore income taxes in this problem) Digrande Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 6 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is -$250,113. 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?

Cresol Corporation has a large number of potential investment opportunities that are acceptable. However, Cresol does not have enough investment funds to invest in all of them. Which calculation would be the best one for Cresol to use to determine which projects to choose?