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Exam 14: Capital Budgeting Decisions

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Question 161

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The management of Osborn Corporation is investigating an investment in equipment that would have a useful life of 8 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is −$403,414. To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive? (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

A) $48,410
B) $50,427
C) $81,202
D) $403,414

E) A) and D)
F) B) and C)

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Question 162

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The management of Lanzilotta Corporation is considering a project that would require an investment of $263,000 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.) :

A) 3.8 years
B) 2.6 years
C) 2.7 years
D) 4.0 years

E) All of the above
F) A) and D)

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Question 163

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Morrel University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhauled now or replaced with a new shuttle bus. The following data have been gathered concerning these two alternatives (Ignore income taxes.) : Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The University could continue to use the present bus for the next seven years. Whether the present bus is used or a new bus is purchased, the bus would be traded in for another bus at the end of seven years. The University uses a discount rate of 12% and the total cost approach to net present value analysis.If the present bus is repaired, the present value of the salvage received on sale of the bus seven years from now is closest to:

Bourland Corporation is considering a capital budgeting project that would require investing $80,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $250,000 and annual incremental cash operating expenses would be $180,000. The project would also require a one-time renovation cost of $40,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 8%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 3 is:

Mattice Corporation is considering investing $820,000 in a project. The life of the project would be 6 years. The project would require additional working capital of $32,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $174,000. The salvage value of the assets used in the project would be $42,000. The company uses a discount rate of 13%. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Compute the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Purvell Corporation has just acquired a new machine with the following characteristics (Ignore income taxes.) : The company uses straight-line depreciation and a $5,000 salvage value. Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage at the end of the project.The simple rate of return would be closest to:

When a company is cash poor, a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return.

Boxton Corporation's required rate of return is 12%. The company is considering the purchase of a new machine that will save $20,000 per year in cash operating costs. The machine will cost $128,360 and will have a 10-year useful life with zero salvage value. Straight-line depreciation will be used. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Compute the machine's internal rate of return. Would you recommend purchase of the machine?

Ursus, Incorporated, is considering a project that would have a eight-year life and would require a $2,904,000 investment in equipment. At the end of eight years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows (Ignore income taxes.): Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 11%.Required:a. Compute the project's net present value. (Round your intermediate calculations and final answer to the nearest whole dollar amount.) b. Compute the project's internal rate of return. (Round your final answer to the nearest whole percent.) c. Compute the project's payback period. (Round your answer to 2 decimal place.) d. Compute the project's simple rate of return. (Round your final answer to the nearest whole percent.)

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 (Ignore income taxes.) : Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital would be released for use elsewhere when the project is completed. The net present value of the alternative of overhauling the present system is closest to:

Strausberg Incorporated is considering investing in a project that would require an initial investment of $270,000. The life of the project would be 4 years. The annual net cash inflows from the project would be $81,000. The salvage value of the assets at the end of the project would be $27,000. The company uses a discount rate of 10%. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Compute the net present value of the project.

If investment funds are limited, the net present value of one project should not be compared directly to the net present value of another project unless the initial investments in these projects are equal.

Welch Corporation is planning an investment with the following characteristics (Ignore income taxes.) : Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The initial cost of the equipment is closest to:

Jark Corporation has invested in a machine that cost $60,000, that has a useful life of six years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of four years. Given these data, the simple rate of return on the machine is closest to (Ignore income taxes.) :

Cardinal Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost $28,000 and will be usable for four years. Delivery of prescriptions (which the pharmacy has never done before) should increase revenues by at least $40,000 per year. The cost of these prescriptions will be about $30,000 per year. The pharmacy depreciates all assets by the straight-line method. (Ignore income taxes.)Required:a. Compute the payback period on the new auto.b. Compute the simple rate of return of the new auto.

Infante Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment.The total cash flow net of income taxes in year 2 is:

How much would you have to invest today in the bank at an interest rate of 8% to have an annuity of $4,800 per year for 7 years, with nothing left in the bank at the end of the 7 years? Select the amount below that is closest to your answer. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.) Garrison 16e Rechecks 2017-12-15

Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects (Ignore income taxes.) : Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.The net present value of Project A is closest to:

Shilt Corporation is considering a capital budgeting project that would require investing $40,000 in equipment with a 4 year useful life and zero salvage value. Data concerning that project appear below: The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The company's tax rate is 30% and the after-tax discount rate is 13%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

Gallatin, Incorporated, has assembled the estimates shown below relating to a proposed new product. These estimates are based on a 5-year project life, at the end of which the new equipment would be sold, working capital would revert to other uses in the company, and the product would be discontinued. Gallatin uses a discount rate of 10%. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Compute the net present value of the new product.