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Exam 13: Capital Budgeting Decisions

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Question 61

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When discounted cash flow methods of capital budgeting are used,the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project.

A) True
B) False

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Question 62

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(Ignore income taxes in this problem.)Ducey Corporation is contemplating purchasing equipment that would increase sales revenues by $79,000 per year and cash operating expenses by $27,000 per year.The equipment would cost $150,000 and have a 6 year life with no salvage value.The annual depreciation would be $25,000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

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Simple rate of return = Annua...

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Question 63

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

A preference decision in capital budgeting:

(Ignore income taxes in this problem.) 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. -The present value of the annual cost savings of $78,000 is closest to:

(Ignore income taxes in this problem.)Consider the following three investment opportunities: Project I would require an immediate cash outlay of $40,000 and would result in cash savings of $9,000 each year for 5 years. Project II would require cash outlays of $7,000 per year and would provide a cash inflow of $40,000 at the end of 5 years. Project III would require a cash outlay of $36,000 now and would provide a cash inflow of $60,000 at the end of 5 years. Required: The discount rate is 10%.Use the net present value method to determine which,if any,of the three projects is acceptable.

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

(Ignore income taxes in this problem.) 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 in this problem.) 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:

The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the internal rate of return.

Puello Corporation has provided the following data concerning an investment project that it is considering: The life of the project is 4 years.The company's discount rate is 8%.The net present value of the project is closest to:

The simple rate of return focuses on cash flows rather than on accounting net operating income.

(Ignore income taxes in this problem.) Vandezande Inc. is considering the acquisition of a new machine that costs $370,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are: Assume cash flows occur uniformly throughout a year except for the initial investment. -The payback period of this investment is closest to:

(Ignore income taxes in this problem.)Choudhury Corporation is considering the following three investment projects: The only cash outflows are the initial investments in the projects. Required: Rank the investment projects using the project profitability index.Show your work

Facio Corporation has provided the following data concerning an investment project that it is considering: 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:

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

Basta Corporation has provided the following data concerning an investment project that it is considering: The working capital would be released for use elsewhere at the end of the project in 4 years.The company's discount rate is 8%.The net present value of the project is closest to:

(Ignore income taxes in this problem.)The management of Truelove Corporation is considering a project that would require an initial investment of $321,000 and would last for 7 years.The annual net operating income from the project would be $28,000,including depreciation of $42,000.At the end of the project,the scrap value of the project's assets would be $27,000. Required: Determine the payback period of the project.Show your work!

(Ignore income taxes in this problem.)Bied's Pharmacy has purchased a small auto for delivery of prescriptions.The auto cost $28,000 and will be usable for seven years.Delivery of prescriptions (which the pharmacy has never done before)should increase revenues by at least $25,000 per year.The cost of these prescriptions will be about $18,000 per year.The pharmacy depreciates all assets by the straight-line method. Required: a.Compute the payback period on the new auto. b.Compute the simple rate of return of the new auto.

(Ignore income taxes in this problem.)Hady Corporation is considering purchasing a machine that would cost $688,800 and have a useful life of 7 years.The machine would reduce cash operating costs by $118,759 per year.The machine would have no salvage value. Required: a.Compute the payback period for the machine. b.Compute the simple rate of return for the machine.