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Exam 14: Capital Budgeting Decisions

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Question 211

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Morefield Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation. The depreciation expense will be $10,000 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 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!

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Question 212

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The management of Hibert Corporation is considering three investment projects-W, X, and Y. Project W would require an investment of $21,000, Project X of $66,000, and Project Y of $95,000. The present value of the cash inflows would be $22,470 for Project W, $73,920 for Project X, and $98,800 for Project Y. (Ignore income taxes.) Rank the projects according to the profitability index, from most profitable to least profitable.

A) Y, W, X
B) X, Y, W
C) X, W, Y
D) W, Y, X

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

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Question 213

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At an interest rate of 14%, approximately how much would you need to invest today if you wanted to have $2,000,000 in 10 years? (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. (Round your intermediate calculations to 3 decimal places.)

Whitton Corporation uses a discount rate of 16%. The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years. The machine would have no salvage value. The net present value of this machine is closest to (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.

Donayre Corporation is considering a capital budgeting project that would require investing $160,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $450,000 and annual incremental cash operating expenses would be $320,000. The project would also require a one-time renovation cost of $70,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 7%. 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.The total cash flow net of income taxes in year 3 is: