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Exam 12: Capital Budgeting Decisions

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Question 21

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(Ignore income taxes in this problem.)Gallatin, Inc., has assembled the estimates shown below relating to a proposed new product.These estimates are based on a 5-year project life, at the end of which the new equipment would be sold, working capital would revert to other uses in the company, and the product would be discontinued.Gallatin uses a discount rate of 10%. Required: Compute the net present value of the new product.

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Question 22

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(Ignore income taxes in this problem.) Crockin Corporation is considering a machine that will save $9,000 a year in cash operating costs each year for the next six years.At the end of six years it would have no salvage value.If this machine costs $33,165 now, the machine's internal rate of return is closest to:

A) 16%
B) 17%
C) 18%
D) 19%

E) All of the above
F) A) and B)

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Question 23

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(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:

The minimum required rate of return is the discount rate that makes the net present value of the project equal to zero.

(Ignore income taxes in this problem.) Dowlen, Inc., is considering the purchase of a machine that would cost $150,000 and would last for 6 years.At the end of 6 years, the machine would have a salvage value of $23,000.The machine would reduce labor and other costs by $36,000 per year.Additional working capital of $6,000 would be needed immediately.All of this working capital would be recovered at the end of the life of the machine.The company requires a minimum pretax return of 12% on all investment projects.The net present value of the proposed project is closest to:

The net present value of Project B is closest to:

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:

(Ignore income taxes in this problem.) Welch Corporation is planning an investment with the following characteristics: The initial cost of the equipment is closest to:

(Ignore income taxes in this problem.)Boxton Corporation's required rate of return is 12%.The company is considering the purchase of a new machine that will save $20,000 per year in cash operating costs.The machine will cost $128,360 and will have a 10-year useful life with zero salvage value.Straight-line depreciation will be used. Required: Compute the machine's internal rate of return.Would you recommend purchase of the machine? Explain.

(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.

Ignoring the annual benefit, to the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?

(Ignore income taxes in this problem.)Bradley Corporation's required rate of return is 14%.The company has an opportunity to be the exclusive distributor of a very popular consumer item.No new equipment would be needed, but the company would have to use one-fourth of the space in a warehouse it owns.The warehouse cost $200,000 new.The warehouse is currently half-empty and there are no other plans to use the empty space.In addition, the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line.The company would have the distributorship for only 5 years.The distributorship would generate a $17,000 annual net cash inflow. Required: What is the net present value of the project?

(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:

The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the internal rate of return.

Discounted cash flow techniques automatically take into account recovery of the initial investment.

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.

Respass Corporation has provided the following data concerning an investment project that it is considering: The net present value of the project is closest to:

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:

The simple rate of return on the investment would be:

(Ignore income taxes in this problem.)Maxcy Limos, Inc., is considering the purchase of a limousine that would cost $187,335, would have a useful life of 9 years, and would have no salvage value.The limousine would bring in cash inflows of $45,000 per year in excess of its cash operating costs. Required: Determine the internal rate of return on the investment in the new limousine.Show your work!