Exam 14: Capital Budgeting Decisions

(Ignore income taxes in this problem.) Bradley Company's required rate of return is 14%. The company has an opportunity to be the exclusive distributor of a very popular consumer item. No new equipment would be needed, but the company would have to use one-fourth of the space in a warehouse it owns. The warehouse cost $200,000 new. The warehouse is currently half-empty and there are no other plans to use the empty space. In addition, the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line. The company would have the distributorship for only 5 years. The distributorship would generate a $17,000 annual net cash inflow. Required: What is the net present value of the project at a discount rate of 14 per cent? Should be project be accepted?

(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 Torn Corporation is considering a project that would require an initial investment of $332,000 and would last for 8 years. The annual net operating income from the project would be $78,000, including depreciation of $38,000. At the end of the project, the scrap value of the project's assets would be $28,000. Required: Determine the payback period of the project. Show your work!

(Ignore income taxes in this problem.) The management of Lassonde Corporation is considering the purchase of a machine that would cost $290,000, would last for 9 years, and would have no salvage value. The machine would reduce labor and other costs by $56,000 per year. The company requires a minimum pretax return of 8% on all investment projects. -The present value of the annual cost savings of $56,000 is closest to:

(Ignore income taxes in this problem.) Purvell Company has just acquired a new machine. Data on the machine follow: The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year. -The payback period would be closest to:

(Ignore income taxes in this problem.) Monson Company is considering three investment opportunities with cash flows as described below: Required: Compute the net present value of each project assuming Monson Company uses a 12% discount rate.

Information on four investment proposals is given below: Rank the proposals in terms of preference according to the project profitability index:

(Ignore income taxes in this problem.) The management of Erion Corporation is considering the purchase of an automated molding machine that would cost $280,534, would have a useful life of 5 years, and would have no salvage value. The automated molding machine would result in cash savings of $74,000 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!

A project requires an initial investment of $70,000 and has a project profitability index of 0.141. The present value of the future cash inflows from this investment is:

(Ignore income taxes in this problem.) Ursus, Inc., is considering a project that would have a ten-year life and would require a $1,000,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: All of these items, except for depreciation of $100,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company's required rate of return is 12%. Required: a. Compute the project's net present value. b. Compute the project's internal rate of return to the nearest whole percent. c. Compute the project's payback period. d. Compute the project's simple rate of return.

(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 seventh year. The present value of the net cash flow (cash inflows less cash outflows) for this year only is:

(Ignore income taxes in this problem.) Parks Company is considering an investment proposal in which a working capital investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The working capital would be released for use elsewhere when the project is completed. If the company's discount rate is 10%, the investment's net present value is:

(Ignore income taxes in this problem.) The management of Wiersema Corporation is investigating purchasing equipment that would increase sales revenues by $257,000 per year and cash operating expenses by $103,000 per year. The equipment would cost $430,000 and have a 5 year life with no salvage value. The simple rate of return on the investment is closest to:

Fonics Corporation is considering the following three competing investment proposals: Using the project profitability index, how would the above investments be ranked (highest to lowest)?

(Ignore income taxes in this problem) The management of Nagata Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines. The aircraft would have a useful life of 6 years. The company uses a discount rate of 13% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is -$326,237. To the nearest whole dollar how large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive?

(Ignore income taxes in this problem.) Given the following data: Based on the data given, the annual cost savings would be:

The net present value method assumes that the project's cash flows are reinvested at the:

(Ignore income taxes in this problem.) The management of Cerra Corporation is considering three investment projects I, J, and K. Project I would require an investment of $18,000, Project J of $42,000, and Project K of $85,000. The present value of the cash inflows would be $19,260 for Project I, $45,780 for Project J, and $91,800 for Project K. -The profitability index of investment project J is closest to:

(Ignore income taxes in this problem.) Varnes Corporation is contemplating purchasing equipment that would increase sales revenues by $217,000 per year and cash operating expenses by $109,000 per year. The equipment would cost $324,000 and have a 6 year life with no salvage value. The annual depreciation would be $54,000. 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.) Tighe Corporation is contemplating purchasing equipment that would increase sales revenues by $420,000 per year and cash operating expenses by $231,000 per year. The equipment would cost $747,000 and have a 9 year life with no salvage value. The annual depreciation would be $83,000. The simple rate of return on the investment is closest to: