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Exam 11: Capital Budgeting

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Question 41

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You purchase a home for $200,000 that you expect to appreciate 6% in value on an annual basis. How much will the home be worth in ten years?

A) $111,680
B) $358,120
C) $1,472,020
D) $2,636,160

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

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Question 42

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Projects that involve a choice among competing alternatives, where selection of one project implies rejection of all the other alternatives, are:

A) mutually exclusive projects.
B) screening projects.
C) independent projects.
D) preference projects.

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

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Question 43

Multiple Choice

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Which of the following capital budgeting methods focuses on net income rather than cash flows?

Byron Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. The salvage value of the equipment is estimated to be $75,000. If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes.

Dallas Corp. is trying to decide whether to lease or purchase a piece of equipment needed for the next five years. The equipment would cost $100,000 to purchase, and maintenance costs would be $10,000 per year. After five years, Dallas estimates it could sell the equipment for $30,000. If Dallas leased the equipment, it would pay a set annual fee that would include all maintenance costs. Dallas has determined after a net present value analysis that at its hurdle rate of 12% it would be better off by $11,000 if it leases the equipment. What would the approximate annual cost be if Dallas were to lease the equipment?

Lexington Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $500,000 and have an 8-year life. There is no salvage value of the equipment. The hurdle rate is 8%. Ignore income taxes. Calculate the following: a. Accounting rate of return b. Payback period

You want to invest $10,000 in a business opportunity. If you keep the money invested in the business for two years, you will receive $11,000 back. If you keep the money invested in the business for five years, you will receive $13,000 back. Currently, the money is in your savings account, which earns 5% interest, compounded annually. a. What is the future value of the money if it remains in your savings account for two years? b. What is the future value of the money if it remains in your savings account for five years? c. Is it better to invest in the business for two years, five years, or not at all? Why?

Grove Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income of $200,000. The equipment will have an initial cost of $1,200,000 and have an 8 year life. The salvage value of the equipment is estimated to be $200,000. The hurdle rate is 10%. Ignore income taxes. Answer the following: a. What is the accounting rate of return? b. What is the payback period? c. What is the net present value? d. What would the net present value be with a 15% hurdle rate? e. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?

You are saving for a car that you plan to purchase in five years. You plan to put $3,000 in savings (which earns 8%, compounded annually) at the end of each year until then. How much will you have saved for the car at the end of the five years?

An annuity is a series of consecutive payments that are equal in dollar amount, have interest periods of equal length, and earn an equal interest rate each period

You are saving for a car and have decided you can afford to deposit $5,000 into a savings account at the end of each of the next five years, at which point you will withdraw the money to purchase the car. You can deposit the money in a savings account that earns 8% interest with no annual fee, or you can choose a savings account that earns 10% interest, but has an annual fee of $100.00 that would come out of your deposits. a. If you choose the free savings account, how much money will you be able to withdraw five years from now? b. If you choose the savings account with a fee, how much money will you be able to withdraw five years from now? c. Which option would be best for you financially?

Lawrence Corp. is considering the purchase of a new piece of equipment. When discounted at a hurdle rate of 8%, the project has a net present value of $24,580. When discounted at a hurdle rate of 10%, the project has a net present value of ($28,940) . The internal rate of return of the project is:

A problem in which you must calculate the worth to you today of receiving a certain amount at some time in the future is a:

The discount rate that would return a net present value equal to zero is the:

A positive net present value indicates that a project will:

Grady Corp. is considering the purchase of a new piece of equipment. The equipment costs $50,000, and will have a salvage value of $5,000 after nine years. Using the new piece of equipment will increase Grady's annual cash flows by $6,000. Grady has a hurdle rate of 12%. a. What is the present value of the increase in annual cash flows? b. What is the present value of the salvage value? c. What is the net present value of the equipment purchase? d. Based on financial factors, should Grady purchase the equipment? Why?

The total time to recover an original investment is the:

Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. If the hurdle rate is 10%, what is the internal rate of return? Ignore income taxes.

How much will you have in a savings account in ten years, if you deposit $1000 in the account at the end of each year and the account earns 6% interest, compounded annually?

An analysis that reveals whether changing the underlying assumptions would affect the decision is a: