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Exam 11: Capital Budgeting Decisions

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Question 31

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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 added to the cost of the new equipment.

A) True
B) False

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Question 32

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Which of the following will have the largest dollar effect on the net present value of a 10 year investment project?

A) a decrease of $20,000 in the initial investment required with no effect on the expected salvage value in 10 years.
B) an increase of $20,000 in the expected salvage value in 10 years with no effect on the initial investment.
C) a decrease of $20,000 in both the working capital needed to start the project and the amount being released at the end of the 10 years.
D) an increase of $2,000 in the annual cash inflows from this project.

E) B) and C)
F) None of the above

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Question 33

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The simple rate of return method does not take into account the time value of money.

Burba Inc. is considering investing in a project that would require an initial investment of $200,000. The life of the project would be 5 years. The annual net cash inflows from the project would be $60,000. The salvage value of the assets at the end of the project would be $30,000. The company uses a discount rate of 17%. Required: Compute the net present value of the project.

Betterway Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost $30,000 and will be usable for five years. Delivery of prescriptions (which the pharmacy has never done before) should increase revenues by at least $29,000 per year. The cost of these prescriptions will be about $21,000 per year. The pharmacy depreciates all assets by the straight-line method. Required: a. Compute the payback period on the new auto. b. Compute the simple rate of return of the new auto.

The management of Mashiah Corporation is considering the purchase of a machine that would cost $290,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $102,000 per year. The company requires a minimum pretax return of 13% on all investment projects. The net present value of the proposed project is closest to:

The management of Duker Corporation is investigating purchasing equipment that would increase sales revenues by $130,000 per year and cash operating expenses by $39,000 per year. The equipment would cost $328,000 and have an 8 year life with no salvage value. The simple rate of return on the investment is closest to:

Kingsolver 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:

Juliar Inc. has provided the following data concerning a proposed investment project: The company uses a discount rate of 12%. Required: Compute the net present value of the project.

The management of Grayer 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

Jason Corporation has invested in a machine that cost $80,000, that has a useful life of eight 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 five years. Given these data, the simple rate of return on the machine is closest to:

The management of Stanforth Corporation is investigating automating a process. Old equipment, with a current salvage value of $24,000, would be replaced by a new machine. The new machine would be purchased for $516,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $173,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

Wombles Corporation is contemplating purchasing equipment that would increase sales revenues by $478,000 per year and cash operating expenses by $249,000 per year. The equipment would cost $738,000 and have a 9 year life with no salvage value. The annual depreciation would be $82,000. The simple rate of return on the investment is closest to:

Chee Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the investment is closest to:

If taxes are ignored, all of the following items are included in a discounted cash flow analysis except:

The Gomez Corporation is considering two projects, T and V. The following information has been gathered on these projects: Based on this information, which of the following statements is (are) true? I. Project T has the highest ranking according to the project profitability index criterion. II) Project V has the highest ranking according to the net present value criterion.

If a project does not have constant incremental revenues and expenses over its useful life, the simple rate of return will fluctuate from year to year.

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 net present value analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of eight years. The net present value of the new system alternative is:

The payback method of making capital budgeting decisions does not give full consideration to the time value of money.

Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000. The machine would reduce labor and other costs by $96,000 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 18% on all investment projects. The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to: