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Exam 11: Capital Budgeting

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Question 51

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Boxwood,Inc.is considering three different independent investment opportunities.The present value of future cash flows,initial investment,and net present value for each of the projects are as follows: In what order should Boxwood prioritize investment in the projects?

A) A,B,C
B) C,B,A
C) A,C,B
D) C,A,B

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

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Question 52

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Nelson 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.If the salvage value of the equipment is estimated to be $75,000,what is the payback period? Ignore income taxes.

A) 3.25 years
B) 4.00 years
C) 4.75 years
D) 7.00 years

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

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Question 53

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Independent projects should be prioritized according to their:

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.

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 15%,what is the approximate net present value? 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. )

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 approximate net present value? 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. )

The minimum required rate of return for a project is the:

How much would you need to deposit in a savings account that earns 7%,compounded annually,to withdraw $20,000 eight years from now? (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. )

When cash flows are equal each year,the payback period is calculated as:

Cloud Corp.is considering the purchase of a new piece of equipment.The equipment costs $30,000,and will have a salvage value of $4,000 after nine years.Using the new piece of equipment will increase Cloud's annual cash flows by $6,000.Cloud has a hurdle rate of 12%. 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?

The internal rate of return is the rate of return that yields a zero net present value.

You have a savings account that earns 5% interest,compounded annually.A friend has offered you an investment opportunity;he says that if you invest in his new business,he will pay you $10,000 a year for the next five years.What is the maximum amount you would be willing to invest in your friend's business? (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. )

Which of the following capital budgeting methods does not use discounted cash flows?

Clyde 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 $600,000 and have an 8-year life.The equipment has no salvage value.The hurdle rate is 8%.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 12% hurdle rate? e.Based on the NPV calculations,in what range would the equipment's internal rate of return fall?

Heidi Inc.is considering whether to lease or purchase a piece of equipment.The total cost to lease the equipment will be $120,000 over its estimated life,while the total cost to buy the equipment will be $75,000 over its estimated life.At Heidi's required rate of return,the net present value of the cost of leasing the equipment is $73,700 and the net present value of the cost of buying the equipment is $68,000.Based on financial factors,Heidi should:

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

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

Carmen,Inc. ,which has a hurdle rate of 10%,is considering three different independent investment opportunities.Each project has a five-year life.The annual cash flows and initial investment for each of the projects are as follows: a.What is the present value of the annual cash flows for each of the three projects? b.What is the net present value of each of the projects? c.What is the profitability index of each of the projects? (Round to two decimal places. ) d.In what order should Carmen prioritize investment in the projects?

When making screening decisions using the net present value method,a project is acceptable if:

Fire 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 Fire's annual cash flows by $6,000. a.What is the payback period for the new piece of equipment? b.Suppose that the increase in cash flows was $10,000 in the first year,then decreased by $1,000 each year over the life of the equipment.What is the payback period for the equipment?