Exam 10: Capital Budgeting Decisions

(Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine that costs $420,000 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 12%, the net present value of the investment is closest to:

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

The investment required for the project profitability index should:

Valotta 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.) Dimpson 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

The Gomez Corporation is considering two projects, T and V. The following information has been gathered on these projects: Based on this information, which of the following statements is (are) true? I. Project T has the highest ranking according to the project profitability index criterion. II) Project V has the highest ranking according to the net present value criterion.

(Ignore income taxes in this problem.) Hinck Corporation is investigating automating a process by purchasing a new machine for $520,000 that would have a 8 year useful life and no salvage value. By automating the process, the company would save $134,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $22,000. The annual depreciation on the new machine would be $65,000. 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.) Riveros, Inc., is considering the purchase of a machine that would cost $120,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $29,000. The machine would reduce labor and other costs by $25,000 per year. Additional working capital of $9,000 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 net present value of the proposed project is closest to:

(Ignore income taxes in this problem.) Betterway Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost $30,000 and will be usable for five years. Delivery of prescriptions (which the pharmacy has never done before) should increase revenues by at least $29,000 per year. The cost of these prescriptions will be about $21,000 per year. The pharmacy depreciates all assets by the straight-line method. Required: a. Compute the payback period on the new auto. b. Compute the simple rate of return of the new auto.

(Ignore income taxes in this problem.) Messersmith Corporation is investigating automating a process by purchasing a machine for $688,000 that would have an 8 year useful life and no salvage value. By automating the process, the company would save $160,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $19,000. The annual depreciation on the new machine would be $86,000. The simple rate of return on the investment is closest to:

When making preference decisions about competing investment proposals, the internal rate of return is superior to the project profitability index.

(Ignore income taxes in this problem.) The following data on a proposed investment project have been provided: 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:

Schoultz 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 12%. The net present value of the project is closest to:

A project requires an initial investment of $70,000 and has a project profitability index of 0.932. The present value of the future cash inflows from this investment is:

(Ignore income taxes in this problem.) The management of Helberg Corporation is considering a project that would require an investment of $203,000 and would last for 6 years. The annual net operating income from the project would be $103,000, which includes depreciation of $30,000. The scrap value of the project's assets at the end of the project would be $23,000. The cash inflows occur evenly throughout the year. The payback period of the project 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 overhauling the present system is closest to:

The internal rate of return method assumes that the cash flows generated by the project are immediately reinvested elsewhere at a rate of return that equals the internal rate of return.

(Ignore income taxes in this problem) Buse Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 8 years. The company uses a discount rate of 14% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is -$488,487. Management is having difficulty estimating the salvage value of the aircraft. To the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?

(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 net present value of the proposed project is closest to:

The simple rate of return in any one year may be less than or greater than the internal rate of return of a project.