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Exam 14: Capital Budgeting Decisions

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Question 31

True/False

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

A) True
B) False

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Question 32

Multiple Choice

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Lafromboise 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 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 income tax expense in year 2 is:

A) $12,000
B) $42,000
C) $30,000
D) $60,000

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

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Question 33

Multiple Choice

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Vanzant 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 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 income tax expense in year 2 is:

A company wants to have $20,000 at the end of a ten-year period by investing a single sum now. How much needs to be invested in order to have the desired sum in ten years, if the money can be invested at 12%? (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.)

Eddie Corporation is considering the following three investment projects (Ignore income taxes.) : The profitability index of investment project D is closest to:

Schweinsberg Corporation is considering a capital budgeting project. The project would require an investment of $120,000 in equipment with a 4 year expected life and zero salvage value. The company uses straight-line depreciation and the annual depreciation expense will be $30,000. Annual incremental sales would be $230,000 and annual incremental cash operating expenses would be $180,000. The company's income tax rate is 30% and the after-tax discount rate is 15%. The company takes income taxes into account in its capital budgeting.Assume cash flows occur at the end of the year except for the initial investments.Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.The net present value of the project is closest to:

Croce, Incorporated, is investigating an investment in equipment that would have a useful life of 7 years. The company uses a discount rate of 8% in its capital budgeting. The net present value of the investment, excluding the salvage value, is −$515,967. To the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive? (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.

Marbry 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 income tax expense in year 3 is:

The management of Byrge Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines. The aircraft would have a useful life of 5 years. The company uses a discount rate of 13% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is −$396,300. (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.How large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

HI Corporation is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its 7-year useful life. The machine will cost $211,580 and has no salvage value. The machine has a 14% internal rate of return. (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:What are the annual cost savings promised by the machine? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Boe Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 9 years. The company uses a discount rate of 10% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is −$439,527. Management is having difficulty estimating the salvage value of the aircraft. To the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Marbry 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 income tax expense in year 3 is:

Marbry 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 income tax expense in year 2 is:

The management of Winstead Corporation is considering the following three investment projects (Ignore income taxes.): The only cash outflows are the initial investments in the projects.Required:Rank the investment projects using the profitability index.

Cirillo Corporation is considering a capital budgeting project that involves investing $660,000 in equipment that would have a useful life of 3 years and zero salvage value. The net annual operating cash inflow, which is the difference between the incremental sales revenue and incremental cash operating expenses, would be $350,000 per year. The company uses straight-line depreciation and the depreciation expense on the equipment would be $220,000 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 6%.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!

Prudencio 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.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:

Stockinger 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 11%. 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. 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 2 is:

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.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:

Newfield Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation. The depreciation expense will be $30,000 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 13%.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!

Inocencio Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment.The total cash flow net of income taxes in year 3 is: