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Exam 12: Capital Budgeting Decisions

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Question 91

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(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:

A) $2,200
B) $200
C) $2,000
D) $5,000

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

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Question 92

Multiple Choice

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(Ignore income taxes in this problem.) An investment project requires an initial investment of $100,000.The project is expected to generate net cash inflows of $28,000 per year for the next five years.These cash inflows occur evenly throughout the year.Assuming a 12% discount rate, the project's payback period is:

A) 0.28 years
B) 3.36 years
C) 3.57 years
D) 1.40 years

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

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Question 93

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(Ignore income taxes in this problem.) Anthony operates a part time auto repair service.He estimates that a new diagnostic computer system will result in increased cash inflows of $1,500 in Year 1, $2,100 in Year 2, and $3,200 in Year 3.If Anthony's required rate of return is 10%, then the most he would be willing to pay for the new diagnostic computer system would be:

(Ignore income taxes in this problem.) Golab Roofing is considering the purchase of a crane that would cost $69,846, would have a useful life of 6 years, and would have no salvage value.The use of the crane would result in labor savings of $21,000 per year.The internal rate of return on the investment in the crane is closest to:

The net present value of the project is closest to:

Basta 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 4 years.The company's discount rate is 8%.The net present value of the project is closest to:

The simple rate of return is computed by dividing the annual net operating income generated by a project by the initial investment in the project.

(Ignore income taxes in this problem) The management of Byrge Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines.The aircraft would have a useful life of 8 years.The company uses a discount rate of 10% in its capital budgeting.The net present value of the investment, excluding the intangible benefits, is -$448,460.To the nearest whole dollar how large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive?

(Ignore income taxes in this problem.) Nevland Corporation is considering the purchase of a machine that would cost $130,000 and would last for 6 years.At the end of 6 years, the machine would have a salvage value of $18,000.By reducing labor and other operating costs, the machine would provide annual cost savings of $44,000.The company requires a minimum pretax return of 19% on all investment projects.The net present value of the proposed project is closest to:

Rennin Dairy Corporation is considering a plant expansion decision that has an estimated useful life of 20 years.This project has an internal rate of return of 15% and a payback period of 9.6 years.How would a decrease in the expected salvage value from this project in 20 years affect the following for this project?

(Ignore income taxes in this problem.) A company is considering buying a machine that costs $500,000, has a useful life of ten years, and is depreciated over its useful life by the straight-line method.The salvage value of the machine at the end of ten years will be $40,000.This machine will replace an old machine that is fully depreciated; the old machine has a salvage value of $75,000 now.If the simple rate of return of this investment is 12.7%, then the anticipated annual incremental net operating income from this machine for each of the next ten years is:

(Ignore income taxes in this problem.) Olinick Corporation is considering a project that would require an investment of $343,000 and would last for 8 years.The incremental annual revenues and expenses generated by the project during those 8 years would be as follows: The scrap value of the project's assets at the end of the project would be $23,000.The cash inflows occur evenly throughout the year.The payback period of the project is closest to:

(Ignore income taxes in this problem.)Devon Corporation uses a discount rate of 8% in its capital budgeting.Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -$496,541.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. Required: a.Ignoring any salvage value, 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? b.Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

(Ignore income taxes in this problem) The management of Elamin Corporation is considering the purchase of a machine that would cost $365,695 and would have a useful life of 9 years.The machine would have no salvage value.The machine would reduce labor and other operating costs by $61,000 per year.The internal rate of return on the investment in the new machine is closest to:

(Ignore income taxes in this problem.) A company with $500,000 in operating assets is considering the purchase of a machine that costs $60,000 and which is expected to reduce operating costs by $15,000 each year.These reductions in cost occur evenly throughout the year.The payback period for this machine in years is closest to:

(Ignore income taxes in this problem.)Tiff Corporation has provided the following data concerning a proposed investment project: The company uses a discount rate of 16%.The working capital would be released at the end of the project. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.) Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life.Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation, but have been unable to estimate the cash flows associated with the intangible benefits.Using the company's 12% required rate of return, the net present value of the cash flows associated with just the tangible costs and benefits is a negative $282,500.How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment?

The present value of the annual cost savings of $78,000 is closest to:

The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to: