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Exam 14: Capital Budgeting Decisions

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Question 131

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Devon Corporation uses a discount rate of 8% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of −$497,741. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required: a. Ignoring any salvage value, how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?(Round your final answers to the nearest whole dollar amount.)

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a. Minimum annual cash flows from the in...

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Question 132

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Orbit Airlines is considering the purchase of a new $275,000 maintenance hangar. The new hangar has an estimated useful life of 5 years with an expected salvage value of $50,000. The new hangar is expected to generate cost savings of $90,000 per year in each of the 5 years. A $20,000 increase in working capital will also be needed for this new hangar. The working capital will be released at the end of the 5 years. Orbit's discount rate is 18%. What is the net present value of the new hangar? (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

A) $8,280
B) $9,440
C) $17,020
D) $28,280

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

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Question 133

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Ostermeyer Corporation is considering a project that would require an initial investment of $247,000 and would last for 7 years. The incremental annual revenues and expenses for each of the 7 years would be as follows (Ignore income taxes.): At the end of the project, the scrap value of the project's assets would be $16,000.Required:Determine the payback period of the project.

Becker Billing Systems, Incorporated, 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.) : Click here to view Exhibit 14B-1 and Exhibit 14B-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:

Debona Corporation is considering a capital budgeting project that would require investing $80,000 in equipment with a 4 year useful life and zero salvage value. Annual incremental sales would be $300,000 and annual incremental cash operating expenses would be $230,000. A one-time expense of $30,000 for renovations would be required in year 3. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The company's tax rate is 30% and the after-tax discount rate is 12%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

Skowyra Corporation has provided the following information concerning a capital budgeting project: The expected life of the project and the equipment is 3 years and the equipment has zero salvage value. The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment and the depreciation expense on the equipment would be $180,000 per year. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The income tax rate is 30%. The after-tax discount rate is 7%. The net annual operating cash inflow is the difference between the incremental sales revenue and incremental cash operating expenses.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

An expansion at Fey, Incorporated, would increase sales revenues by $150,000 per year and cash operating expenses by $47,000 per year. The initial investment would be for equipment that would cost $328,000 and have an 8 year life with no salvage value. The annual depreciation on the equipment would be $41,000. The simple rate of return on the investment is closest to (Ignore income taxes.) :

Manjarrez Corporation has provided the following information concerning a capital budgeting project: The company's income tax rate is 30% and its after-tax discount rate is 6%. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.The net present value of the entire project is closest to:

Podratz Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The total cash flow net of income taxes in year 3 is:

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

The Zingstad Corporation is considering an investment with the following data (Ignore income taxes.) : Cash inflows occur evenly throughout the year. The payback period for this investment is:

Russnak Corporation is investigating automating a process by purchasing a new machine for $525,000 that would have a 6 year useful life and no salvage value. By automating the process, the company would save $165,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $32,000. The annual depreciation on the new machine would be $87,500. (Ignore income taxes.)Required:Determine the simple rate of return on the investment. (Round your answer to 1 decimal place.)

Facio Corporation has provided the following data concerning an investment project that it is considering: Click here to view Exhibit 14B-1 and Exhibit 14B-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:

Ramson Corporation is considering purchasing a machine that would cost $756,000 and have a useful life of 8 years. The machine would reduce cash operating costs by $132,632 per year. The machine would have a salvage value of $151,200 at the end of the project. (Ignore income taxes.)Required:a. Compute the payback period for the machine.b. Compute the simple rate of return for the machine.

Joanette, Incorporated, is considering the purchase of a machine that would cost $410,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $41,000. The machine would reduce labor and other costs by $101,000 per year. Additional working capital of $3,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company requires a minimum pretax return of 13% on all investment projects. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Determine the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.)

The internal rate of return method assumes that a project's cash flows are reinvested at the:

Bourland Corporation is considering a capital budgeting project that would require investing $80,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $250,000 and annual incremental cash operating expenses would be $180,000. The project would also require a one-time renovation cost of $40,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 8%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the tables provided.The net present value of the entire project is closest to:

The payback method is most appropriate for projects whose cash flows do not extend far into the future.

Sester Corporation has provided the following information concerning a capital budgeting project: The expected life of the project and the equipment is 3 years and the equipment has zero salvage value. The company uses straight-line depreciation on all equipment and the depreciation expense on the equipment would be $250,000 per year. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The net annual operating cash inflow is the difference between the incremental sales revenue and incremental cash operating expenses.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

Galati Corporation has provided the following information concerning a capital budgeting project: The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation. The depreciation expense will be $20,000 per year. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The income tax rate is 30% and the after-tax discount rate is 8%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!