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Exam 13: Capital Budgeting Decisions

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Question 31

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(Ignore income taxes in this problem.) 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:

A) $1,290
B) $(1,290)
C) $2,000
D) $4,350

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Question 32

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(Ignore income taxes in this problem.) Crowl Corporation is investigating automating a process by purchasing a machine for $792,000 that would have a 9 year useful life and no salvage value.By automating the process,the company would save $132,000 per year in cash operating costs.The new machine would replace some old equipment that would be sold for scrap now,yielding $21,000.The annual depreciation on the new machine would be $88,000.The simple rate of return on the investment is closest to:

A) 11.1%
B) 16.7%
C) 5.7%
D) 5.1%

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Question 33

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(Ignore income taxes in this problem.) 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 in this problem.) Joetz 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 of the investment is closest to:

(Ignore income taxes in this problem.) Whitton Corporation uses a discount rate of 16%.The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years.The machine would have no salvage value.The net present value of this machine is closest to:

A project requires an initial investment of $200,000 and has a project profitability index of 0.250.The present value of the future cash inflows from this investment is:

(Ignore income taxes in this problem.) Ryner Corporation is considering three investment projects: S,T,and U.Project S would require an investment of $20,000,Project T of $69,000,and Project U of $83,000.No other cash outflows would be involved.The present value of the cash inflows would be $23,200 for Project S,$77,970 for Project T,and $94,620 for Project U.Rank the projects according to the profitability index,from most profitable to least profitable.

(Ignore income taxes in this problem.) Purvell Corporation has just acquired a new machine with the following characteristics: 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 payback period is closest to:

(Ignore income taxes in this problem.) Charlie Corporation is considering buying a new donut maker.This machine will replace an old donut maker that still has a useful life of 6 years.The new machine will cost $3,600 a year to operate,as opposed to the old machine,which costs $3,800 per year to operate.Also,because of increased capacity,an additional 20,000 donuts a year can be produced.The company makes a contribution margin of $0.10 per donut.The old machine can be sold for $7,000 and the new machine costs $30,000.The incremental annual net cash inflows provided by the new machine would be:

(Ignore income taxes in this problem.) 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:

sales and expenses are projected: Assume cash flows occur uniformly throughout a year except for the initial investment. -The payback period on the new machine is closest to:

(Ignore income taxes in this problem.) Vandezande Inc. is considering the acquisition of a new machine that costs $370,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are: Assume cash flows occur uniformly throughout a year except for the initial investment. -If the discount rate is 10%,the net present value of the investment is closest to:

(Ignore income taxes in this problem.) The management of Plotnik Corporation is investigating purchasing equipment that would increase sales revenues by $269,000 per year and cash operating expenses by $156,000 per year.The equipment would cost $294,000 and have a 6 year life with no salvage value.The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.)The management of Zachery Corporation is considering the purchase of a automated molding machine that would cost $203,255,would have a useful life of 5 years,and would have no salvage value.The automated molding machine would result in cash savings of $65,000 per year due to lower labor and other costs. Required: Determine the internal rate of return on the investment in the new automated molding machine.Show your work!

When the net cash inflow is the same every year for a project after the initial investment,the internal rate of return of a project can be determined by dividing the initial investment required in the project by the annual net cash inflow.This computation yields a factor that can be looked up in a table of present values of annuities to find the internal rate of return.

(Ignore income taxes in this problem.) Bau Long-Haul,Inc.,is considering the purchase of a tractor-trailer that would cost $281,656,would have a useful life of 7 years,and would have no salvage value.The tractor-trailer would be used in the company's hauling business,resulting in additional net cash inflows of $76,000 per year.The internal rate of return on the investment in the tractor-trailer is closest to:

(Ignore income taxes in this problem.)The management of Nixon Corporation is investigating purchasing equipment that would cost $518,000 and have a 7 year life with no salvage value.The equipment would allow an expansion of capacity that would increase sales revenues by $364,000 per year and cash operating expenses by $211,000 per year. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

An increase in the expected salvage value at the end of a capital budgeting project will increase the internal rate of return for that project.

Some investment projects require that a company increase its working capital.Under the net present value method,the investment and eventual recovery of working capital should be treated as:

In the payback method,depreciation is added back to net operating income when computing the annual net cash flow.