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Exam 12: Capital Budgeting Decisions

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Question 31

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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:

A) $184,000
B) $579,982
C) $29,982
D) $20,420

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

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Question 32

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In calculating the payback period where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be deducted from the cost of the new equipment.

A) True
B) False

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Question 33

Multiple Choice

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The net present value of the proposed project is closest to:

(Ignore income taxes in this problem.) Crowl Corporation is investigating automating a process by purchasing a machine for $792,000 that would have a 9 year useful life and no salvage value.By automating the process, the company would save $132,000 per year in cash operating costs.The new machine would replace some old equipment that would be sold for scrap now, yielding $21,000.The annual depreciation on the new machine would be $88,000.The simple rate of return on the investment is closest to:

The simple rate of return would be closest to:

In calculating the "investment required" for the project profitability index, the amount invested should not be reduced by any salvage recovered from the sale of old equipment.

Facio 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 3 years.The company's discount rate is 8%.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:

If the internal rate of return is less than the required rate of return for a project, then the net present value of that project is positive.

The payback period is closest to:

(Ignore income taxes in this problem.)Ramson Corporation is considering purchasing a machine that would cost $756,000 and have a useful life of 8 years.The machine would reduce cash operating costs by $132,632 per year.The machine would have a salvage value of $151,200 at the end of the project. Required: a.Compute the payback period for the machine. b.Compute the simple rate of return for the machine.

(Ignore income taxes in this problem.)The management of Schenk Corporation is investigating automating a process by replacing old equipment by a new machine.The old equipment would be sold for scrap now for $13,000.The new machine would cost $648,000, would have a 9 year useful life, and would have no salvage value.By automating the process, the company would save $186,000 per year in cash operating costs. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

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

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

(Ignore income taxes in this problem.) 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 in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.The auto was purchased for $24,000 and will have a 6-year useful life and a $6,000 salvage value.Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $28,000 per year.The cost of these prescriptions to the pharmacy will be about $22,000 per year.The pharmacy depreciates all assets using the straight-line method.The payback period for the auto is closest to:

(Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $263,000 and would last for 8 years.The annual net operating income from the project would be $66,000, which includes depreciation of $31,000.The scrap value of the project's assets at the end of the project would be $15,000.The cash inflows occur evenly throughout the year.The payback period of the project is closest to:

Ignoring any salvage value, to the nearest whole dollar 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?

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?

The assumption that the cash flows from an investment project are reinvested at the company's discount rate applies to: