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Exam 7: Capital Budgeting Decisions

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Question 31

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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 (Ignore income taxes.) : Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital would be released for use elsewhere when the project is completed. The net present value of the alternative of purchasing the new system is closest to:

A) $(1,076,495)
B) $(1,236,495)
C) $(1,169,895)
D) $(969,895)

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

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Question 32

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Becker Billing Systems, Inc., has an antiquated high-capacity printer that needs to be upgraded. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives (Ignore income taxes.) : Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. The company uses a 10% discount rate and the total-cost approach to capital budgeting 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 ten years. The net present value of the new system alternative is closest to:

A) $(862,900)
B) $(552,900)
C) $(758,400)
D) $(987,400)

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

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Question 33

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(Ignore income taxes in this problem.) Bied's Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost $28,000 and will be usable for seven years. Delivery of prescriptions (which the pharmacy has never done before) should increase revenues by at least $25,000 per year. The cost of these prescriptions will be about $18,000 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.

Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life. Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation, but have been unable to estimate the cash flows associated with the intangible benefits. Using the company's 12% required rate of return, the net present value of the cash flows associated with just the tangible costs and benefits is a negative $282,500. How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment? (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.

The minimum required rate of return is the discount rate that makes the net present value of the project equal to zero.

(Ignore income taxes in this problem.) The management of Winstead 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

The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project.

A shorter payback period does not necessarily mean that one investment is more desirable than another.

(Ignore income taxes in this problem.) The management of Harling Corporation is considering the purchase of a machine that would cost $90,504 and would have a useful life of 5 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $27,000 per year. Required: Determine the internal rate of return on the investment in the new machine. Show your work!

The management of Plotnik Corporation is investigating purchasing equipment that would increase sales revenues by $269,000 per year and cash operating expenses by $156,000 per year. The equipment would cost $294,000 and have a 6 year life with no salvage value. The simple rate of return on the investment is closest to (Ignore income taxes.) :

Slomkowski Corporation is contemplating purchasing equipment that would increase sales revenues by $298,000 per year and cash operating expenses by $143,000 per year. The equipment would cost $712,000 and have a 8 year life with no salvage value. The annual depreciation would be $89,000. The simple rate of return on the investment is closest to (Ignore income taxes.) :

The management of Lanzilotta Corporation is considering a project that would require an investment of $263,000 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.) :

Eddie Corporation is considering the following three investment projects (Ignore income taxes.) : Rank the projects according to the profitability index, from most profitable to least profitable.

Discounted cash flow techniques automatically take into account recovery of the initial investment.

Basey Corporation has provided the following data concerning an investment project that it is considering: Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. 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:

Crowl Corporation is investigating automating a process by purchasing a machine for $792,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $132,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $21,000. The annual depreciation on the new machine would be $88,000. The simple rate of return on the investment is closest to (Ignore income taxes.) :

Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.) : The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return for the investment (rounded to the nearest tenth of a percent) is:

The internal rate of return is the rate of return of an investment project over its useful life.

Facio Corporation has provided the following data concerning an investment project that it is considering: Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. The working capital would be released for use elsewhere at the end of the project in 3 years. The company's discount rate is 8%. The net present value of the project is closest to:

A company is considering buying a machine that costs $500,000, has a useful life of ten years, and is depreciated over its useful life by the straight-line method. The salvage value of the machine at the end of ten years will be $40,000. This machine will replace an old machine that is fully depreciated; the old machine has a salvage value of $75,000 now. If the simple rate of return of this investment is 12.7%, then the anticipated annual incremental net operating income from this machine for each of the next ten years is (Ignore income taxes.) :