Exam 10: Capital Budgeting Decisions

The project profitability index is computed by dividing the present value of the cash inflows of the project by present value of the cash outflows of the project.

(Ignore income taxes in this problem.) An investment project has the following characteristics: The life of the equipment is closest to:

The net present value and internal rate of return methods of capital budgeting are superior to the payback method because they:

(Ignore income taxes in this problem.) The Sawyer Corporation has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. -The net present value of project Y is closest to:

(Ignore income taxes in this problem.) The management of Edelmann Corporation is considering the following three investment projects: Rank the projects according to the profitability index, from most profitable to least profitable.

(Ignore income taxes in this problem.) Vernon Corporation has been offered a 5-year contract to supply a part for the military. After careful study, the company has developed the following estimated data relating to the contract: It is not expected that the contract would be extended beyond the initial contract period. The company's discount rate is 10%. Required: Use the net present value method to determine if the contract should be accepted.

Vinup 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 in 4 years. The company's discount rate is 13%. The net present value of the project is closest to:

(Ignore income taxes in this problem.) Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $6,000 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 18% on all investment projects -The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:

(Ignore income taxes in this problem.) Henscheid Roofing is considering the purchase of a crane that would cost $104,972, would have a useful life of 7 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:

The internal rate of return for a project can be determined:

One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached.

The payback method of making capital budgeting decisions does not give full consideration to the time value of money.

(Ignore income taxes in this problem.) Avanca Fitness Center is considering an investment in some additional weight training equipment. The equipment has an estimated useful life of 10 years with no salvage value at the end of the 10 years. Ataxia's internal rate of return on this equipment is 12%. Ataxia's discount rate is also 12%. The payback period on this equipment is closest to:

If a company has computed a project profitability index of -0.015 for an investment project, then:

In capital budgeting computations, discounted cash flow methods:

(Ignore income taxes in this problem.) The management of an amusement park is considering purchasing a new ride for $400,000 that would have a useful life of 5 years and a salvage value of $40,000. The ride would require annual operating costs of $190,000 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 because 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?

Bowen Corporation is considering several investment proposals, as shown below: If the project profitability index is used, the ranking of the projects from most to least profitable would be:

(Ignore income taxes in this problem.) The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000. The equipment would have a useful life of six years, with a salvage value of $29,000. This new equipment would be depreciated over its useful life by the straight-line method. It would replace existing equipment which is fully depreciated. The existing equipment has a salvage value now of $38,000. The anticipated annual revenues and expenses associated with the new equipment are: Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project. -For this investment, the simple rate of return to the nearest tenth of a percent is:

(Ignore income taxes in this problem.) Jimba's, Inc., has purchased a new donut maker. It cost $20,000 and has an estimated life of 10 years. The following annual donut sales and expenses are projected: -The payback period on the new machine is closest to:

(Ignore income taxes in this problem.) Allen College has a telephone system that is in poor condition. The system can be either overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: Allen College uses a 12% discount rate and the total cost approach to net present value analysis. Both alternatives are expected to have a useful life of eight years. -The net present value of the alternative of replacing the present system with the proposed new system is closest to: