Exam 14: Capital Budgeting Decisions

(Ignore income taxes in this problem.) The management of Matza Corporation is considering the purchase of a machine that would cost $370,000, would last for 9 years, and would have no salvage value. The machine would reduce labor and other costs by $63,000 per year. The company requires a minimum pretax return of 10% on all investment projects. Required: Determine the net present value of the project. Show your work!

In capital budgeting, what will be the effect on the following if there is an increase in the discount rate?

(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. -Rank the projects according to the profitability index, from most profitable to least profitable.

The payback method of making capital budgeting decisions gives full consideration to the time value of money.

(Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment which has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment. Assuming that the cash inflows occur evenly over the year, 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 present value of the cash outflows for repairs, assuming the helicopter is purchased, would be:

(Ignore income taxes in this problem.) Stern Corporation is considering the purchase of a machine that would cost $270,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $38,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $54,000. 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.) The management of Crail Corporation is considering a project that would require an initial investment of $51,000. No other cash outflows would be required. The present value of the cash inflows would be $60,180. The profitability index of the project is closest to:

A weakness of the internal rate of return method for screening investment projects is that it:

(Ignore income taxes in this problem.) Sloman Company is considering purchasing a machine that would cost $436,800 and have a useful life of 5 years. The machine would reduce cash operating costs by $132,364 per year. The machine would have no salvage value. Required: a. Compute the payback period for the machine. b. Compute the simple rate of return for the machine.

(Ignore income taxes in this problem.) Burwinkel Corporation is considering a project that would require an investment of $252,000 and would last for 7 years. The incremental annual revenues and expenses generated by the project during those 7 years would be as follows: The scrap value of the project's assets at the end of the project would be $28,000. The payback period of the project is closest to:

(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 the net cash flows (all cash inflows less all cash outflows) occurring during year 6 is closest to:

(Ignore income taxes in this problem.) Corin Corporation is considering the purchase of a machine that would cost $420,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $97,000. The machine would reduce labor and other costs by $76,000 per year. The company requires a minimum pretax return of 16% on all investment projects. Required: Determine the net present value of the project. Show your work!

(Ignore income taxes in this problem.) Arthur operates a part-time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of $2,100 in Year 1, $3,200 in Year 2, and $4,000 in Year 3. If Arthur's discount rate is 10%, then the most he would be willing to pay for the new computer system would be:

(Ignore income taxes in this problem.) The following data concern an investment project: The working capital will be released for use elsewhere at the conclusion of the project. Required: Compute the project's net present value.

(Ignore income taxes in this problem.) Pare Long-Haul, Inc. is considering the purchase of a tractor-trailer that would cost $104,520, would have a useful life of 6 years, and would have no salvage value. The tractor-trailer would be used in the company's hauling business, resulting in additional net cash inflows of $24,000 per year. The internal rate of return on the investment in the tractor-trailer is closest to:

(Ignore income taxes in this problem.) Gimar Corporation uses a discount rate of 16% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -$423,974. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. -Ignoring any cash flows from intangible benefits, to the nearest whole dollar how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the discount rate.

(Ignore income taxes in this problem.) The Whitton Company uses a discount rate of 16%. The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years. The machine would have no salvage value. The net present value of this machine to the nearest whole dollar is:

(Ignore income taxes in this problem.) Boston Company is contemplating the purchase of a new machine on which the following information has been gathered: The company's discount rate is 16%, and the machine will be depreciated using the straight-line method. Given these data, the machine has a net present value of: