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Exam 11: Capital Budgeting

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Question 21

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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.(Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

A) Between 6% and 8%
B) Between 8% and 10%
C) Between 10% and 12%
D) Less than zero

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

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Question 22

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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 internal rate of return? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

A) Between 6% and 8%
B) Between 8% and 10%
C) Between 10% and 12%
D) Between 12% and 14%

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

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Question 23

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Randall 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,Randall estimates it could sell the equipment for $30,000.If Randall leases the equipment,it would pay $30,000 each year,which would include all maintenance costs.If the hurdle rate for Randall is 12%,Randall should: (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Do not round intermediate calculations.Round your final answer to the nearest hundred. )

A decision that requires managers to choose from among a set of alternative capital investment opportunities is a(n) :

An acquaintance of yours owes you $1,000,but only has $800 to pay you now.He says he can either give you the $800 now in full settlement of the debt,or he can give you $1,000 one year from now.If you would let him keep the money for two years,though,he would give you $1,100 at that point.You have a savings account that earns 12% interest. a.What is the present value of the payment now? b.What is the present value of the payment a year from now? c.What is the present value of the payment two years from now? d.Which option would be best for you financially?

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 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?

Ironwood,Inc. ,which has a hurdle rate of 12%,is considering three different independent investment opportunities.Each project has a seven-year life.The annual cash flows and initial investment for each of the projects are as follows: (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Do not round intermediate calculations.Round your final answer to the nearest hundred. ) In what order should Ironwood prioritize investment in the projects?

The value today of cash flow to be received in the future is called:

Patterson Corp.is considering the purchase of a new piece of equipment,which would have an initial cost of $500,000,a 7-year life,and $150,000 salvage value.The increase in cash flow each year of the equipment's life would be as follows: What is the payback period?

Palmer 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 after tax of $100,000.The equipment will have an initial cost of $400,000 and have a 7-year life.If the salvage value of the equipment is estimated to be $75,000,what is the payback period?

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

Palmer 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 after tax of $100,000.The equipment will have an initial cost of $400,000 and have a 7-year life.If the salvage value of the equipment is estimated to be $75,000,what is the accounting rate of return?

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? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

Mindy 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 after tax of $50,000.The equipment will have an initial cost of $500,000 and have an 8-year life.The equipment has no salvage value.The hurdle rate is 10%.Answer the following: a.What is the net present value? b.What would the net present value be with a 15% hurdle rate? c.Based on the NPV calculations,in what range would the equipment's internal rate of return fall?

When a project has a positive net present value,it has a profitability index:

Emerson Corp.is trying to decide whether to lease or purchase a piece of equipment needed for the next five years.The equipment would cost $500,000 to purchase,and maintenance costs would be $20,000 per year.After five years,Emerson estimates it could sell the equipment for $100,000.If Emerson leases the equipment,it would pay $150,000 each year,which would include all maintenance costs.Emerson's hurdle rate is 12%. a.What is the net present value of the cost of purchasing the equipment? b.What is the net present value of the cost of leasing the equipment? c.Based on financial factors,should Emerson purchase or lease the equipment? Why?

Grace Corp. ,whose required rate of return is 10%,is considering the purchase of a new piece of equipment.The internal rate of return of the project,which has a life of 8 years,is 12%.The project would have:

Projects that are unrelated to one another,so that investing in one project does not preclude or affect the choice about investing in the other alternatives,are:

You are saving for a car that costs $28,000 that you hope to purchase in five years.How much will you need to deposit today in a savings account that earns 8%,compounded annually,to withdraw enough for the purchase? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest whole dollar amount. )