Exam 26: Capital Budgeting

[The following information applies to the questions displayed below.] The Terme Corporation is contemplating the purchase of new equipment,which may potentially increase revenues by 25%.Currently,sales are $750,000 per year and variable costs are 55% of sales.The equipment is expected to last for 5 years with no residual value.The cash outflow expected at the beginning of the year is $ 357,500. -By how much would Terme's annual gross profit increase if the investment is undertaken?

Capital budgeting Flynn Corporation is debating whether to purchase a new computerized production system.The system will cost $450,000,and have an estimated 10-year life with a salvage value of $70,000.The estimated operating results from the new production system are as follows: All revenue and expenses other than depreciation will be received and paid in cash.Compute the following for this proposal: (rounded) (a)Annual net cash flow: $________ (b)Payback period: ________ (c)Return on average investment: ________ (d)Net present value,discounted at an annual rate of 6%: (The present value of $1 due in 10 years,discounted at 6%,is 0.558;present value of $1 received annually for 10 years,discounted at 6%,is 7.360. ): $________

When an investment fails to provide the desired rate of return,the investment should be rejected.

[The following information applies to the questions displayed below.] The Terme Corporation is contemplating the purchase of new equipment,which may potentially increase revenues by 25%.Currently,sales are $750,000 per year and variable costs are 55% of sales.The equipment is expected to last for 5 years with no residual value.The cash outflow expected at the beginning of the year is $ 357,500. -Ignoring income taxes,what is the estimated annual net operating income increase/decrease?

Capital budget audit Briefly discuss the reasons that a company's management would conduct a regular capital budget audit.

A short payback period is preferred so that the investment's costs can be put to other uses.

[The following information applies to the questions displayed below.] Helicopter Gear is planning to expand its product line,which requires investment of $475,200 in special-purpose machinery.The machinery has a useful life of six years and no salvage value.The estimated annual results of offering the new products are as follows: All revenue from the new products and all expenses (except depreciation)will be received or paid in cash in the same period as recognized for accounting purposes. -Compute the net present value of this proposed investment,using a discount rate of 12%.(An annuity table shows that the present value of $1 received annually for six years,discounted at 12%,is 4.111. )

Capital budgeting Zhang Corporation is considering investing $190,000 in equipment to produce a new product.Useful service life of the equipment is estimated to be 5 years,with zero salvage value.Straight-line depreciation is used.The company estimates that production and sale of the new product will increase net income by $65,000 a year.(Round your years and percentage answers to one decimal place. ) (a)The payback period will be ________ years. (b)The expected rate of return on average investment will be ________.

[The following information applies to the questions displayed below.] The management of Ortega Manufacturing has three different proposals under consideration.The Accounting Department has prepared the following information: -Which of the above proposals generates the greatest annual cash flow?

[The following information applies to the questions displayed below.] Newport Corporation is considering investing $65,000 in equipment to produce a new product.The useful service life of the equipment is estimated to be ten years,with no salvage value.Straight-line depreciation is used.The company estimates that production and sale of the new product will increase net income by $6,500 per year. -The payback period of this investment is:

When straight-line depreciation is used,the average carrying value of an asset with no salvage value is equal to the asset's original cost divided by its estimated useful life.

When management considers an investment,they look for the payback period to be:

Capital investments are difficult,if not impossible,to reverse once funds have been invested.

In considering investment in new plant assets,the payback period is computed without regard to the total useful life of the investment.

Carter & Co.is trying to decide which of two investments they should consider.The following information is available: Each investment is expected to have a useful life of 5 years.(Rounded) (a)What is the rate of return on average investment of each investment? (b)What is the payback period of each investment?

Joseph Company is considering replacing an existing piece of machinery with newer technology.In deciding whether to replace the existing machinery,management should consider which costs as relevant?

[The following information applies to the questions displayed below.] Rooney,Inc.is considering the purchase of a new machine costing $640,000.The machine's useful life is expected to be 8 years with no salvage value.The straight-line depreciation method will be used.The net increase in annual after tax cash flow is expected to be $147,000.Rooney estimates its cost of capital to be 14%.(The present value of a $1 annuity for 8 years at 14% is 4.639,and the present value of $1 to be received in 8 years is 0.351. ) -The net present value of the investment in the machine under consideration is:

Which of the following is not an important financial consideration in capital budgeting?

The minimum rate of return used by an investor to bring future cash flows to their present value is called:

An investment cost $80,000 with no salvage value,a 5-year useful life,and had an expected annual increase in net income of $7,000.Straight-line depreciation is used.What is the expected return on average investment?