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Exam 14: Capital Budgeting Decisions

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Question 51

True/False

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The present value of a cash flow increases as it moves further into the future.

A) True
B) False

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Question 52

Multiple Choice

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The following information concerning a proposed capital budgeting project has been provided by Jochum Corporation: The expected life of the project is 4 years. The income tax rate is 30%. The after-tax discount rate is 9%. The company uses straight-line depreciation on all equipment and the annual depreciation expense would be $70,000. 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 project is closest to:

A) $176,900
B) $182,000
C) $84,770
D) $92,770

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

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Question 53

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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.The total cash flow net of income taxes in year 2 is:

Planas 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 14%. 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:

Jim Bingham is considering starting a small catering business. He would invest $125,000 to purchase a delivery van and various equipment and another $60,000 for inventories and other working capital needs. Rent for the building used by the business will be $35,000 per year. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. The annual cash inflow from the business will amount to $120,000. Jim wants to operate the catering business for only six years. He estimates that the equipment could be sold at that time for 4% of its original cost. Jim uses a 16% discount rate. All cash flows, except for the initial investment, would occur at the ends of the years.The investment in working capital would be returned at the end of the six 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.Required:Compute the net present value of this investment.

Domebo Corporation has entered into a 7 year lease for a piece of equipment. The annual payment under the lease will be $3,400, with payments being made at the beginning of each year. If the discount rate is 14%, the present value of the lease payments 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. (Round your intermediate calculations to 3 decimal places.)

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 project profitability index.

The simple rate of return is computed by dividing the annualincremental net operating income generated by a project by the initial investment in the project.

Mattice Corporation is considering investing $440,000 in a project. The life of the project would be 5 years. The project would require additional working capital of $34,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $123,000. The salvage value of the assets used in the project would be $49,000. The company uses a discount rate of 11%. (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:Compute the net present value of the project.

Jojola Corporation is investigating buying a small used aircraft for the use of its executives. 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 initial investment and the annual operating cash cost is -$439,238. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft. (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.Ignoring the annual benefit, 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?

The cost of capital is the average rate of return that the company earns on its investments.

Income taxes have no effect on whether a capital budgeting project should or should not be accepted in a for-profit company.

Information on four investment proposals is given below: Rank the proposals in terms of preference from highest to lowest according to the profitability index:

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.) :

An investment project requires an initial investment of $100,000. The project is expected to generate net cash inflows of $28,000 per year for the next five years. These cash inflows occur evenly throughout the year. Assuming a 12% discount rate, the project's payback period is (Ignore income taxes.) :

Roemen Corporation is considering a capital budgeting project that would require investing $160,000 in equipment with a 4 year useful life and zero salvage value. Annual incremental sales would be $410,000 and annual incremental cash operating expenses would be $280,000. An investment of $20,000 in 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 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!

The management of Lanzilotta Corporation is considering a project that would require an investment of $218,000 and would last for 6 years. The annual net operating income from the project would be $106,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $26,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.) : (Round your answer to 1 decimal place.)

In net present value analysis, the release of working capital at the end of a project should be:

Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $24,000 and will have a 6-year useful life and a $6,000 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $28,000 per year. The cost of these prescriptions to the pharmacy will be about $22,000 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is closest to (Ignore income taxes.) :

Moates 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 net present value of the project is closest to: (Round your intermediate calculations and final answer to the nearest whole dollar amount.)