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Exam 13: Capital Budgeting Decisions

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Question 51

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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:

A) $(134,696)
B) $(82,720)
C) $(9,720)
D) $54,000

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

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Question 52

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(Ignore income taxes in this problem.) 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: 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:

A) $(2,260)
B) $2,260
C) $904
D) $(904)

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

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Question 53

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Ignoring the cash inflows,to the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive?

Stomberg Corporation has provided the following data concerning an investment project that it is considering: The life of the project is 4 years.The company's discount rate is 10%.The net present value of the project is closest to:

(Ignore income taxes in this problem.)The management of Winstead Corporation is considering the following three investment projects: The only cash outflows are the initial investments in the projects. Required: Rank the investment projects using the project profitability index.Show your work

(Ignore income taxes in this problem.)Cooney Inc.has provided the following data concerning a proposed investment project: The company uses a discount rate of 17%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.)Chipps Corporation uses a discount rate of 9% in its capital budgeting.Management is considering an investment in telecommunications equipment with a useful life of 5 years.Excluding the salvage value of the equipment,the net present value of the investment in the equipment is -$530,985. Required: How large would the salvage value of the telecommunications equipment have to be to make the investment in the telecommunications equipment financially attractive?

The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project.

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.)Bill Anders is considering investing in a franchise in a fast-food chain.He would have to purchase equipment costing $420,000 to equip the outlet and invest an additional $30,000 for inventories and other working capital needs.Other outlets in the fast-food chain have an annual net cash inflow of about $120,000.Mr.Anders would close the outlet in 5 years.He estimates that the equipment could be sold at that time for about 10% of its original cost and the working capital would be released for use elsewhere.Mr.Anders' required rate of return is 8%. Required: What is the investment's net present value? Is this an acceptable investment?

(Ignore income taxes in this problem.) 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: 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 new bus is purchased,the present value of the annual cash operating costs associated with this alternative is closest to:

The internal rate of return method assumes that a project's cash flows are reinvested at the:

(Ignore income taxes in this problem.)Russnak Corporation is investigating automating a process by purchasing a new machine for $198,000 that would have a 9 year useful life and no salvage value.By automating the process,the company would save $68,000 per year in cash operating costs.The company's current equipment would be sold for scrap now,yielding $18,000.The annual depreciation on the new machine would be $22,000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000.The investment would generate annual cash inflows of $133,000 for the life of the project,which is 4 years.At the end of the project,equipment that had been used in the project could be sold for $32,000.The company's discount rate is 14%.The net present value of the project 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 net present value of the investment is:

(Ignore income taxes in this problem.) 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: 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 net present value of the alternative of overhauling the present system is closest to:

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.

(Ignore income taxes in this problem.) Slomkowski Corporation is contemplating purchasing equipment that would increase sales revenues by $298,000 per year and cash operating expenses by $143,000 per year.The equipment would cost $712,000 and have a 8 year life with no salvage value.The annual depreciation would be $89,000.The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.)The management of Crosson Corporation is investigating the purchase of a new satellite routing system with a useful life of 9 years.The company uses a discount rate of 17% in its capital budgeting.The net present value of the investment,excluding its intangible benefits,is -$173,055. Required: 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?

Byerly 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: