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Exam 10: Capital Budgeting Decisions

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Question 51

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The internal rate of return is computed by finding the discount rate that maximizes the difference between the present value of a project's cash outflows and the present value of its cash inflows.

A) True
B) False

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Question 52

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(Ignore income taxes in this problem.) Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the purchase of a machine to produce baseball bats. The machine will cost $60,000 and have a 10-year useful life. The following annual revenues and expenses are projected: The machine will have no salvage value. Assume cash flows occur uniformly throughout a year except for the initial investment. -The payback period for the new machine is about:

A) 6.0 years
B) 1.5 years
C) 5.4 years
D) 3.75 years

E) All of the above
F) B) and C)

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Question 53

Multiple Choice

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(Ignore income taxes in this problem.) The management of Stanforth Corporation is investigating automating a process. Old equipment, with a current salvage value of $24,000, would be replaced by a new machine. The new machine would be purchased for $516,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $173,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.) The management of Moya Corporation is investigating purchasing equipment that would cost $336,000 and have an 8 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $288,000 per year and cash operating expenses by $164,000 per year. 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.) Baber Corporation is planning an investment with the following characteristics: The initial cost of the equipment is closest to:

Dul 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 3 years. The company's discount rate is 7%. The net present value of the project is closest to:

(Ignore income taxes in this problem.) Shiffler Corporation is contemplating purchasing equipment that would increase sales revenues by $246,000 per year and cash operating expenses by $133,000 per year. The equipment would cost $275,000 and have a 5 year life with no salvage value. The annual depreciation would be $55,000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!

The net present value of a proposed investment is negative. Therefore, the discount rate used must be:

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

(Ignore income taxes in this problem.) Baker Corporation is considering buying a new donut maker. This machine will replace an old donut maker that still has a useful life of 4 years. The new machine will cost $3,500 a year to operate, as opposed to the old machine, which costs $3,900 per year to operate. Also, because of increased capacity, an additional 10,000 donuts a year can be produced. The company makes a contribution margin of $0.15 per donut. The old machine can be sold for $6,000 and the new machine costs $28,000. The incremental annual net cash inflows provided by the new machine would be:

(Ignore income taxes in this problem.) Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: Westland College uses a 10% discount rate and the total cost approach to net present value analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of eight years. -The net present value of overhauling the present system is closest to:

(Ignore income taxes in this problem.) The management of Kleppe Corporation is investigating automating a process by replacing old equipment by a new machine. The old equipment would be sold for scrap now for $19,000. The new machine would cost $180,000, would have a 9 year useful life, and would have no salvage value. By automating the process, the company would save $30,000 per year in cash operating costs. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!

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 project has the highest ranking according to the net present value and the project profitability index criteria?

(Ignore income taxes in this problem.) The management of Mashiah Corporation is considering the purchase of a machine that would cost $290,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $102,000 per year. The company requires a minimum pretax return of 13% on all investment projects. -The net present value of the proposed project is closest to:

For capital budgeting decisions, the simple rate of return method is superior to the net present value method.

(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 net present value on this investment is closest to:

(Ignore income taxes in this problem.) The following data concern an investment project: The working capital will be released for use elsewhere at the conclusion of the project. Required: Compute the project's net present value.

Czlapinski Corporation is considering a capital budgeting project that would require an initial investment of $440,000 and working capital of $32,000. The working capital would be released for use elsewhere at the end of the project in 4 years. The investment would generate annual cash inflows of $147,000 for the life of the project. At the end of the project, equipment that had been used in the project could be sold for $11,000. The company's discount rate is 7%. The net present value of the project is closest to:

(Ignore income taxes in this problem.) Overland Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. -The net present value of this investment is:

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