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Exam 13: Capital Budgeting Decisions

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Question 1

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(Ignore income taxes in this problem.)Ursus,Inc.,is considering a project that would have a ten-year life and would require a $1,000,000 investment in equipment.At the end of ten years,the project would terminate and the equipment would have no salvage value.The project would provide net operating income each year as follows: All of the above items,except for depreciation,represent cash flows.The company's required rate of return is 12%. Required: a.Compute the project's net present value. b.Compute the project's internal rate of return to the nearest whole percent. c.Compute the project's payback period. d.Compute the project's simple rate of return.

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a.Because depreciation is the only nonca...

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Question 2

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(Ignore income taxes in this problem.) Lambert Manufacturing has $100,000 to invest in either Project A or Project B. The following data are available on these projects: Both projects will have a useful life of 6 years and the total cost approach to net present value analysis. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's required rate of return is 14%. -The net present value of Project B is:

A) $90,355
B) $76,115
C) $36,115
D) $54,355

E) C) and D)
F) None of the above

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Question 3

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If the salvage value of equipment at the end of a project is highly uncertain,the salvage value should be ignored in capital budgeting decisions..

The required rate of return is the maximum rate of return that an investment project must yield to the acceptable.

(Ignore income taxes in this problem.)Mattice Corporation is considering investing $440,000 in a project.The life of the project would be 5 years.The project would require additional working capital of $34,000,which would be released for use elsewhere at the end of the project.The annual net cash inflows would be $123,000.The salvage value of the assets used in the project would be $49,000.The company uses a discount rate of 11%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.)Gallatin,Inc.,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%. Required: Compute the net present value of the new product.

(Ignore income taxes in this problem.) Treads Corporation is considering the purchase of a new machine to replace an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to buy the new machine, the old machine can be sold for $60,000. The old machine would have no salvage value in five years. The new machine would be purchased for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, the company would benefit from annual cash savings of $300,000. Treads Corporation uses a discount rate of 12%. -The internal rate of return of the project is closest to:

Rank the projects according to the profitability index,from most profitable to least profitable.

(Ignore income taxes in this problem.) The management of Opray Corporation is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% on all investment projects. -The net present value of the proposed project is closest to:

The assumption that the cash flows from an investment project are reinvested at the company's discount rate applies to:

Moates Corporation has provided the following data concerning an investment project that it is considering: The net present value of the project is closest to:

(Ignore income taxes in this problem.) Becker Billing Systems, Inc., has an antiquated high-capacity printer that needs to be upgraded. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: The company uses a 10% discount rate and the total-cost approach to capital budgeting 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 ten years. -The net present value of the new system alternative is closest to:

(Ignore income taxes in this problem.) The following data pertain to an investment project: $\begin{array}{lr}\text {Investment required. }&\$ 34,055\\\text {Annual savings }&\$ 5,000\\\text {Life of the project. }&15 \text { years }\\\end{array}$ The internal rate of return is closest to:

(Ignore income taxes in this problem.) Oriental 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 simple rate of return on the investment would be:

The cost of capital is the average rate of return that the company earns on its investments.

(Ignore income taxes in this problem.) Trovato Corporation is considering a project that would require an investment of $48,000.No other cash outflows would be involved.The present value of the cash inflows would be $51,840.The profitability index of the project is closest to:

(Ignore income taxes in this problem.) Paragas, Inc., is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 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 19% on all investment projects. -The net present value of the proposed project is closest to:

(Ignore income taxes in this problem.) Given the following data: The life of the equipment must be:

Basey 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:

Kanzler Corporation is considering a capital budgeting project that would require an initial investment of $450,000 and working capital of $25,000.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 $143,000 for the life of the project.At the end of the project,equipment that had been used in the project could be sold for $10,000.The company's discount rate is 14%.The net present value of the project is closest to: