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Exam 7: Capital Budgeting Decisions

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Question 91

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Goergen Corporation is considering a capital budgeting project that would require an initial investment of $700,000. The investment would generate annual cash inflows of $267,000 for the life of the project, which is 4 years. The company's discount rate is 10%. The net present value of the project is closest to: Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.

A) $368,000
B) $846,123
C) $146,123
D) $700,000

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

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Question 92

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(Ignore income taxes in this problem.) Ostermeyer Corporation is considering a project that would require an initial investment of $247,000 and would last for 7 years. The incremental annual revenues and expenses for each of the 7 years would be as follows: At the end of the project, the scrap value of the project's assets would be $16,000. Required: Determine the payback period of the project. Show your work!

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Question 93

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In calculating the payback period where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be deducted from the cost of the new equipment.

An expansion at Fey, Inc., would increase sales revenues by $150,000 per year and cash operating expenses by $47,000 per year. The initial investment would be for equipment that would cost $328,000 and have a 8 year life with no salvage value. The annual depreciation on the equipment would be $41,000. The simple rate of return on the investment is closest to (Ignore income taxes.) :

Parks Corporation is considering an investment proposal in which a working capital investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The working capital would be released for use elsewhere when the project is completed. If the company's discount rate is 10%, the investment's net present value is closest to (Ignore income taxes.) : Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.

Perkins Corporation is considering several investment proposals, as shown below: If the project profitability index is used, the ranking of the projects from most to least profitable would be:

When computing the project profitability index of an investment project, the investment required should exclude any investment made in working capital at the beginning of the project.

When the internal rate of return method is used to rank investment proposals, the higher the internal rate of return, the more desirable the investment.

The Zingstad Corporation is considering an investment with the following data (Ignore income taxes.) : Cash inflows occur evenly throughout the year. The payback period for this investment is:

Byerly Corporation has provided the following data concerning an investment project that it is considering: Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables 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:

Cabe Corporation uses a discount rate of 18% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 7 years has thus far yielded a net present value of -$155,606. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. Ignoring any salvage value, to the nearest whole dollar how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

The payback method is most appropriate for projects whose cash flows do not extend far into the future.

Moates Corporation has provided the following data concerning an investment project that it is considering: Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. The net present value of the project is closest to:

If the internal rate of return is less than the required rate of return for a project, then the net present value of that project is positive.

Penniston Corporation is considering a capital budgeting project that would require an initial investment of $630,000 and working capital of $73,000. The working capital would be released for use elsewhere at the end of the project in 3 years. The investment would generate annual cash inflows of $228,000 for the life of the project. At the end of the project, equipment that had been used in the project could be sold for $29,000. The company's discount rate is 12%. The net present value of the project is closest to: Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.

(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.

Orbit Airlines is considering the purchase of a new $275,000 maintenance hangar. The new hangar has an estimated useful life of 5 years with an expected salvage value of $50,000. The new hangar is expected to generate cost savings of $90,000 per year in each of the 5 years. A $20,000 increase in working capital will also be needed for this new hangar. The working capital will be released at the end of the 5 years. Orbit's discount rate is 18%. What is the net present value of the new hangar? (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.

(Ignore income taxes in this problem.) HI Corporation is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its 5-year useful life. The machine will cost $205,980 and has no salvage value. The machine has a 14% internal rate of return. Required: What are the annual cost savings promised by the machine?

(Ignore income taxes in this problem.) Consider the following three investment opportunities: Project I would require an immediate cash outlay of $40,000 and would result in cash savings of $9,000 each year for 5 years. Project II would require cash outlays of $7,000 per year and would provide a cash inflow of $40,000 at the end of 5 years. Project III would require a cash outlay of $36,000 now and would provide a cash inflow of $60,000 at the end of 5 years. Required: The discount rate is 10%. Use the net present value method to determine which, if any, of the three projects is acceptable.