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Exam 14: Capital Budgeting Decisions

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Question 141

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Bellows Corporation is considering a capital budgeting project that would require investing $80,000 in equipment with a 4 year useful life and zero salvage value. Data concerning that project appear below: The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The company's tax rate is 30% and the after-tax discount rate is 11%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

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Question 142

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Colantro Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment.The income tax expense in year 2 is:

A) $30,000
B) $3,000
C) $9,000
D) $12,000

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

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Question 143

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Prudencio Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 3 is:

Bau Long-Haul, Incorporated, is considering the purchase of a tractor-trailer that would cost $363,510, 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 $90,000 per year. The internal rate of return on the investment in the tractor-trailer is closest to (Ignore income taxes.) : Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Suppose an investment has cash inflows of R dollars at the end of each year for two years. The present value of these cash inflows using a 12% discount rate will be:

Bratton Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment; the annual depreciation expense will be $40,000. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.The net present value of the project is closest to:

Correll Corporation is considering a capital budgeting project that would require investing $240,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $570,000 and annual incremental cash operating expenses would be $420,000. The project would also require a one-time renovation cost of $40,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 15%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the tables provided.The net present value of the entire project is closest to:

Olis Corporation is considering a capital budgeting project that would require investing $240,000 in equipment with a 4 year useful life and zero salvage value. Annual incremental sales would be $690,000 and annual incremental cash operating expenses would be $480,000. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The company's tax rate is 30% and the after-tax discount rate is 8%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

Coffie Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment.The total cash flow net of income taxes in year 2 is:

Hady Corporation is considering purchasing a machine that would cost $688,800 and have a useful life of 7 years. The machine would reduce cash operating costs by $118,759 per year. The machine would have no salvage value. (Ignore income taxes.) Required: a. Compute the payback period for the machine.b. Compute the simple rate of return for the machine.

Yau Corporation is considering a capital budgeting project that would require investing $120,000 in equipment with a 4 year useful life and zero salvage value. Data concerning that project appear below: An investment of $20,000 in working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The company's tax rate is 30% and the after-tax discount rate is 9%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

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.)

An investment project with a profitability index of 0.04 has an internal rate of return that is less than the discount rate.

Boynes Corporation is considering a capital budgeting project that would require investing $200,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $490,000 and annual incremental cash operating expenses would be $330,000. The project would also require an immediate investment in working capital of $10,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $70,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 14%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.The net present value of the entire project is closest to:

Maurer Corporation is considering a capital budgeting project that would involve investing $220,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of the useful life. Annual incremental sales from the project would be $600,000 and the annual incremental cash operating expenses would be $470,000. A one-time renovation expense of $50,000 would be required in year 3. The company's income tax rate is 30%.The company uses straight-line depreciation on all equipment.The income tax expense in year 3 is:

Congener Beverage Corporation is considering an investment in a project that has an internal rate of return of 20%. The only cash outflow for this project is the initial investment. The project is estimated to have an 8 year life and no salvage value. Cash inflows from this project are expected to be $100,000 per year in each of the 8 years. Congener's discount rate is 16%. What is the net present value of this project? (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Fontana Corporation is considering a capital budgeting project that would require investing $240,000 in equipment with an expected life of 4 years and zero salvage value. The annual incremental sales would be $640,000 and the annual incremental cash operating expenses would be $440,000. The company's income tax rate is 30%. The company uses straight-line depreciation on all equipment.The total cash flow net of income taxes in year 2 is:

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $450,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $20,000 per year to operate and maintain, but would save $100,000 per year in labor and other costs. The old machine can be sold now for scrap for $50,000. The simple rate of return on the new machine is closest to (Ignore income taxes.) :

The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.) :

A capital budgeting project's incremental net income computation for purposes of determining incremental tax expense includes investments in working capital.