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Exam 14: Capital Budgeting Decisions

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Question 191

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Eddie Corporation is considering the following three investment projects (Ignore income taxes.) : Rank the projects according to the profitability index, from most profitable to least profitable.

A) E, C, D
B) E, D, C
C) D, C, E
D) C, E, D

E) All of the above
F) C) and D)

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Question 192

Multiple Choice

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Purvell Corporation has just acquired a new machine with the following characteristics (Ignore income taxes.) : 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:

A) 3.33 years
B) 3.0 years
C) 8.0 years
D) 2.9 years

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

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Question 193

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Under the simplifying assumptions made in the text, to calculate the amount of income tax expense associated with an investment project, first calculate the incremental net cash inflow during each year of the project and then multiply each year's incremental net cash inflow by the tax rate.

Lennox Corporation has provided the following information concerning a capital budgeting project: The company's tax rate is 30%. The company's after-tax discount rate is 8%. The project would require an investment of $20,000 at the beginning of the project. This working capital would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment.The total cash flow net of income taxes in year 2 is:

Moates Corporation has provided the following data concerning an investment project that it is considering: Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The net present value of the project is closest to:

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. (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.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?

In net present value analysis, an investment in equipment at the beginning of a project should be:

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.) :Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

A project has an initial investment of $100,000 and a profitability index of 0.15. The discount rate is 12%. The present value of cash inflows for the project is closest to:

Houze Corporation has provided the following information concerning a capital budgeting project: The 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 total cash flow net of income taxes in year 2 is:

A shorter payback period does not necessarily mean that one investment is more desirable than another.

Patenaude Corporation has provided the following information concerning a capital budgeting project: The expected life of the project and the equipment is 3 years and the equipment has zero salvage value. The 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 and the depreciation expense on the equipment would be $230,000 per year. 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 net annual operating cash inflow is the difference between the incremental sales revenue and incremental cash operating expenses.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!

The management of Penfold Corporation is considering the purchase of a machine that would cost $410,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $67,000 per year. The company requires a minimum pretax return of 7% on all investment projects.Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. The net present value of the proposed project is closest to (Ignore income taxes.) : (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

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.

Bau Long-Haul, Incorporated, 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.) :Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

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.) :

Respass Corporation has provided the following data concerning an investment project that it is considering: Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The net present value of the project is closest to:

A company has unlimited funds to invest at its discount rate. The company should invest in all projects having:

Ariel Corporation has provided the following information concerning a capital budgeting project: The expected life of the project and the equipment is 3 years and the equipment has zero salvage value. The 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 and the depreciation expense on the equipment would be $210,000 per year. 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 net annual operating cash inflow is the difference between the incremental sales revenue and incremental cash operating expenses.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!

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $230,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $36,000 per year to operate and maintain, but would save $75,000 per year in labor and other costs. The old machine can be sold now for scrap for $23,000. The simple rate of return on the new machine is closest to (Ignore income taxes.) : (Round your answer to 1 decimal place.)