Exam 10: Capital Budgeting Decisions

(Ignore income taxes in this problem.) Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following information has been gathered relative to this decision: Carlson uses the total cost approach to net present value analysis and a discount rate of 12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson Manufacturing will have no future use for the equipment. -If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is:

(Ignore income taxes in this problem.) Chee Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a year except for the initial investment. -The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.) The management of Komatz Corporation is considering the purchase of a automated molding machine that would cost $308,424, would have a useful life of 8 years, and would have no salvage value. The automated molding machine would result in cash savings of $71,000 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!

(Ignore income taxes in this problem.) The management of Kobler Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 10% 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 -$235,421. -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?

The salvage value of new equipment should be considered when using the internal rate of return method to evaluate a project.

(Ignore income taxes in this problem.) The Zinger Corporation is considering an investment that has the following data: Cash inflows occur evenly throughout the year. The payback period for this investment is:

The basic premise of the payback method is that the more quickly the cost of an investment is recovered the more desirable is the investment.

(Ignore income taxes in this problem.) Chee Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a year except for the initial investment. -The payback period for the investment is closest to:

(Ignore income taxes in this problem.) DE Corporation is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its 5-year useful life. The machine will cost $144,200 and has no salvage value. The machine has a 12% internal rate of return. Required: What are the annual cost savings promised by the machine?

(Ignore income taxes in this problem.) Alesi Corporation is considering purchasing a machine that would cost $243,600 and have a useful life of 8 years. The machine would reduce cash operating costs by $76,125 per year. The machine would have a salvage value of $60,900 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.) Clairmont Corporation is considering the purchase of a machine that would cost $150,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $37,000. The company requires a minimum pretax return of 12% on all investment projects. -The present value of the annual cost savings of $37,000 is closest to:

The Weston Corporation is analyzing projects A, B, and C as possible investment opportunities. Each of these projects has a useful life of five years. The following information has been obtained: -Which of the following statements is correct?

Correl Corporation has provided the following data concerning an investment project that it is considering: The life of the project is 4 years. The company's discount rate is 15%. The net present value of the project is closest to:

Preference decisions follow screening decisions and seek to rank investment proposals in order of their desirability.

(Ignore income taxes in this problem.) Allen Corporation's required rate of return is 14%. The company is considering the purchase of a new machine that will save $10,000 per year in cash operating costs. The machine will cost $39,540 and will have an 8-year useful life with zero salvage value. Straight-line depreciation will be used. Required: Compute the machine's internal rate of return. Would you recommend purchase of the machine? Explain.

Mujalli Corporation is considering a capital budgeting project that would require an initial investment of $200,000. The investment would generate annual cash inflows of $64,000 for the life of the project, which is 4 years. At the end of the project, equipment that had been used in the project could be sold for $10,000. The company's discount rate is 9%. The net present value of the project is closest to:

(Ignore income taxes in this problem.) Janes, Inc., is considering the purchase of a machine that would cost $400,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $67,000. The machine would reduce labor and other costs by $109,000 per year. Additional working capital of $4,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company requires a minimum pretax return of 12% on all investment projects. Required: Determine the net present value of the project. Show your work!

Kingsolver Corporation has provided the following data concerning an investment project that it is considering: The working capital would be released for use elsewhere at the end of the project. The net present value of the project is closest to:

(Ignore income taxes in this problem.) The management of Grayer 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 Keno Corporation is considering three investment projects-B, C, and D. Project B would require an investment of $15,000, Project C of $50,000, and Project D of $89,000. The present value of the cash inflows would be $16,350 for Project B, $56,500 for Project C, and $96,120 for Project D. -Rank the projects according to the profitability index, from most profitable to least profitable.