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Exam 12: Capital Budgeting Decisions

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Question 81

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(Ignore income taxes in this problem.) Fossa Road Paving Corporation is considering an investment in a curb-forming machine.The machine will cost $240,000, will last 10 years, and will have a $40,000 salvage value at the end of 10 years.The machine is expected to generate net cash inflows of $60,000 per year in each of the 10 years.Fossa's discount rate is 18%.The net present value of the proposed investment is closest to:

A) $5,840
B) $37,280
C) $(48,780)
D) $69,640

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

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Question 82

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When the net cash inflow is the same every year for a project after the initial investment, the internal rate of return of a project can be determined by dividing the initial investment required in the project by the annual net cash inflow.This computation yields a factor that can be looked up in a table of present values of annuities to find the internal rate of return.

A) True
B) False

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Question 83

Multiple Choice

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Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000.The investment would generate annual cash inflows of $133,000 for the life of the project, which is 4 years.At the end of the project, equipment that had been used in the project could be sold for $32,000.The company's discount rate is 14%.The net present value of the project is closest to:

The internal rate of return of the project is closest to:

The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash outflows with the present value of its cash inflows.

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

(Ignore income taxes in this problem.) The management of Leitheiser Corporation is considering a project that would require an initial investment of $51,000.No other cash outflows would be required.The present value of the cash inflows would be $57,630.The profitability index of the project is closest to:

Rank the projects according to the profitability index, from most profitable to least profitable.

The net present value of Project A is closest to:

Goergen Corporation is considering a capital budgeting project that would require an initial investment of $700,000.The investment would generate annual cash inflows of $267,000 for the life of the project, which is 4 years.The company's discount rate is 10%.The net present value of the project is closest to:

In the payback method, depreciation is added back to net operating income when computing the annual net cash flow.

(Ignore income taxes in this problem.)Joanette, Inc., is considering the purchase of a machine that would cost $240,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $48,000.The machine would reduce labor and other costs by $62,000 per year.Additional working capital of $7,000 would be needed immediately, all of which would be recovered at the end of 5 years.The company requires a minimum pretax return of 17% on all investment projects. Required: Determine the net present value of the project.Show your work!

A company is pondering an investment project that has an internal rate of return which is equal to the company's discount rate.The project profitability index of this investment project is:

(Ignore income taxes in this problem.) Bau Long-Haul, Inc., 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 in this problem.)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. Required: a.Compute the payback period for the machine. b.Compute the simple rate of return for the machine.

Information on four investment proposals is given below: Rank the proposals in terms of preference from highest to lowest according to the project profitability index:

(Ignore income taxes in this problem.) Trovato Corporation is considering a project that would require an investment of $48,000.No other cash outflows would be involved.The present value of the cash inflows would be $51,840.The profitability index of the project is closest to:

(Ignore income taxes in this problem.)Wary Corporation is considering the purchase of a machine that would cost $240,000 and would last for 9 years.At the end of 5 years, the machine would have a salvage value of $29,000.The machine would reduce labor and other costs by $63,000 per year.The company requires a minimum pretax return of 10% on all investment projects. Required: Determine the net present value of the project.Show your work!

If the net present value of a project is zero based on a discount rate of 16%, then the internal rate of return is:

The payback period on the new machine is closest to: