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Exam 14: Capital Budgeting Decisions

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Question 81

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.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:

A) $246,590
B) $238,670
C) $322,000
D) $366,920

E) A) and B)
F) All of the above

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Question 82

Multiple Choice

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Rollans 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:

A) $308,778
B) $224,000
C) $108,778
D) $118,230

E) All of the above
F) A) and D)

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Question 83

Multiple Choice

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Mester Corporation has provided the following information concerning a capital budgeting project: Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using tables.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 net present value of the project is closest to: (Round intermediate calculations and final answer to the nearest dollar amount.)

Bedolla 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 $430,000 and annual incremental cash operating expenses would be $310,000. 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:

A company with $810,000 in operating assets is considering the purchase of a machine that costs $86,000 and which is expected to reduce operating costs by $18,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to (Ignore income taxes.) : (Round your answer to 1 decimal place.)

When a company invests in equipment, it is not ordinarily allowed to immediately expense the entire cost of the equipment when computing taxable income.

Crowl Corporation is investigating automating a process by purchasing a machine for $809,100 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $141,500 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $22,900. The annual depreciation on the new machine would be $89,900. The simple rate of return on the investment is closest to (Ignore income taxes.) : (Round your answer to 1 decimal place.)

In preference decisions, the profitability index and internal rate of return methods will rank projects in the same order of preference.

The management of an amusement park is considering purchasing a new ride for $80,000 that would have a useful life of 10 years and a salvage value of $10,000. The ride would require annual operating costs of $32,000 throughout its useful life. The company's discount rate is 9%. Management is unsure about how much additional ticket revenue the new ride would generate-particularly since customers pay a flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence of the ride would attract new customers. (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:How much additional revenue would the ride have to generate per year to make it an attractive investment?

Porco Corporation is considering a capital budgeting project that would require investing $280,000 in equipment with a 4 year useful life and zero salvage value. Annual incremental sales would be $680,000 and annual incremental cash operating expenses would be $480,000. A one-time expense of $90,000 for renovations would be required in year 3. 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!

Cabe Corporation uses a discount rate of 18% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 7 years has thus far yielded a net present value of -$155,606. 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.Ignoring any salvage value, to the nearest whole dollar 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?

Stepnoski Corporation is considering a capital budgeting project that would involve investing $208,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of the useful life. Annual incremental sales from the project would be $680,000 and the annual incremental cash operating expenses would be $540,000. A one-time renovation expense of $60,000 would be required in year 3. The project would require investing $16,000 of working capital in the project immediately, but this amount would be recovered at the end of the project in 4 years. 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.The income tax expense in year 3 is:

Tiff Corporation has provided the following data concerning a proposed investment project (Ignore income taxes.): The company uses a discount rate of 16%. The working capital would be released at the end of the project.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.

Last year the sales at Summit Corporation were $419,000 and were all cash sales. The expenses at Summit were $259,500 and were all cash expenses. The tax rate was 30%. The after-tax net cash inflow at Summit last year was:

The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $12,000, would be replaced by a new machine. The new machine would be purchased for $360,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $125,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.) : (Round your answer to 1 decimal place.)

Bonomo Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment.The income tax expense in year 3 is:

Rapozo 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 $164,667 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 table.Required:Determine the net present value of the project. (Round intermediate calculations and final answer to the nearest dollar amount.)

The management of Opray Corporation is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% 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.The net present value of the proposed project is closest to:

In an effort to reduce costs, Pontic Manufacturing Corporation is considering an investment in equipment that will reduce defects. This equipment will cost $420,000, will have an estimated useful life of 10 years, and will have an estimated salvage value of $50,000 at the end of 10 years. The company's discount rate is 22%. What amount of cost savings will this equipment have to generate per year in each of the 10 years in order for it to be an acceptable project? (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.)

Some investment projects require that a company increase its working capital. Under the net present value method, the investment and eventual recovery of working capital should be treated as: