Exam 14: Capital Budgeting Decisions

(Ignore income taxes in this problem.) The management of Morrissette Corporation is considering a project that would require an investment of $284,000 and would last for 7 years. The annual net operating income from the project would be $135,000, which includes depreciation of $37,000. The scrap value of the project's assets at the end of the project would be $25,000. The payback period of the project is closest to:

(Ignore income taxes in this problem.) Furner Inc. is considering investing in a project that would require an initial investment of $480,000. The life of the project would be 8 years. The annual net cash inflows from the project would be $120,000. The salvage value of the assets at the end of the project would be $72,000. The company uses a discount rate of 17%. Required: Compute the net present value of the project.

(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 18%, the net present value of the investment is closest to:

(Ignore income taxes in this problem.) Picado, Inc. is investigating an investment in equipment that would have a useful life of 8 years. The company uses a discount rate of 9% in its capital budgeting. The net present value of the investment, excluding the salvage value, is -$389,000. 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.) Grimmett Company is considering purchasing a machine that would cost $403,200 and have a useful life of 9 years. The machine would reduce cash operating costs by $74,667 per year. The machine would have a salvage value of $60,480 at the end of the project. 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.) Vetrano Corporation uses a discount rate of 13% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 5 years has thus far yielded a net present value of -$553,822. 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. Required: a. Ignoring any salvage value, how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive? b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

(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 simple rate of return would be closest to:

(Ignore income taxes in this problem) The management of Rousseau Corporation is considering the purchase of a machine that would cost $340,000, would last for 8 years, and would have no salvage value. The machine would reduce labor and other costs by $67,000 per year. The company requires a minimum pretax return of 15% on all investment projects. The net present value of the proposed project is closest to:

(Ignore income taxes in this problem.) Tanna Corporation is considering three investment projects: O, P, and Q. Project O would require an investment of $38,000, Project P of $49,000, and Project Q of $91,000. No other cash outflows would be involved. The present value of the cash inflows would be $42,180 for Project O, $53,900 for Project P, and $91,910 for Project Q. Rank the projects according to the profitability index, from most profitable to least profitable.

(Ignore income taxes in this problem.) The management of Contrell Corporation is considering the following three investment projects: The only cash outflows are the initial investments in the projects. Required: Rank the investment projects using the project profitability index. Show your work

(Ignore income taxes in this problem.) The management of Kniffin Corporation is investigating the purchase of a new satellite routing system with a useful life of 9 years. The company uses a discount rate of 9% in its capital budgeting. The net present value of the investment, excluding its intangible benefits, is -$717,002. Required: How large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

(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 salvage value, to the nearest whole dollar how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

The total-cost approach and the incremental-cost approach to evaluating two competing investment opportunities:

A project profitability index greater than zero for a project indicates that:

(Ignore income taxes in this problem.) Lajeunesse Limos, Inc., is considering the purchase of a limousine that would cost $195,661, would have a useful life of 9 years, and would have no salvage value. The limousine would bring in cash inflows of $47,000 per year in excess of its cash operating costs. Required: Determine the internal rate of return on the investment in the new limousine. Show your work!

(Ignore income taxes in this problem.) AB Company is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its 6-year useful life. The machine will cost $83,150 and has no salvage value. The machine has a 20% internal rate of return. Required: What are the annual cost savings promised by the machine?

(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 simple rate of return for the new machine is closest to:

(Ignore income taxes in this problem.) The management of an amusement park is considering purchasing a new ride for $40,000 that would have a useful life of 15 years and a salvage value of $6,000. The ride would require annual operating costs of $22,000 throughout its useful life. The company's discount rate is 12%. Management is unsure about how much additional ticket revenue the new ride would generate-particularly since customers pay a flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence of the ride would attract new customers. Required: How much additional revenue would the ride have to generate per year to make it an attractive investment?