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Exam 12: Capital Budgeting Decisions

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Question 71

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(Ignore income taxes in this problem.) An expansion at Fey, Inc., would increase sales revenues by $150,000 per year and cash operating expenses by $47,000 per year.The initial investment would be for equipment that would cost $328,000 and have a 8 year life with no salvage value.The annual depreciation on the equipment would be $41,000.The simple rate of return on the investment is closest to:

A) 41.3%
B) 18.9%
C) 12.5%
D) 31.4%

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

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Question 72

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Neither the net present value method nor the internal rate of return method can be used as a screening tool in capital budgeting decisions.

A) True
B) False

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Question 73

Multiple Choice

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A preference decision in capital budgeting:

The project profitability index and the internal rate of return:

(Ignore income taxes in this problem.)Russnak Corporation is investigating automating a process by purchasing a new machine for $198,000 that would have a 9 year useful life and no salvage value.By automating the process, the company would save $68,000 per year in cash operating costs.The company's current equipment would be sold for scrap now, yielding $18,000.The annual depreciation on the new machine would be $22,000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

Penniston Corporation is considering a capital budgeting project that would require an initial investment of $630,000 and working capital of $73,000.The working capital would be released for use elsewhere at the end of the project in 3 years.The investment would generate annual cash inflows of $228,000 for the life of the project.At the end of the project, equipment that had been used in the project could be sold for $29,000.The company's discount rate is 12%.The net present value of the project is closest to:

(Ignore income taxes in this problem.) Slomkowski Corporation is contemplating purchasing equipment that would increase sales revenues by $298,000 per year and cash operating expenses by $143,000 per year.The equipment would cost $712,000 and have a 8 year life with no salvage value.The annual depreciation would be $89,000.The simple rate of return on the investment is closest to:

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 present value of the annual cost savings of $72,000 is closest to:

Ignoring any salvage value, to the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?

When computing the project profitability index of an investment project, the investment required should exclude any investment made in working capital at the beginning of the project.

The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project.

The net present value of Project B is:

Rank the projects according to the profitability index, from most profitable to least profitable.

(Ignore income taxes in this problem.) The following data pertain to an investment proposal: The net present value of the proposed investment is closest to:

(Ignore income taxes in this problem.) Ataxia Fitness Center is considering an investment in some additional weight training equipment.The equipment has an estimated useful life of 10 years with no salvage value at the end of the 10 years.Ataxia's internal rate of return on this equipment is 8%.Ataxia's discount rate is also 8%.The payback period on this equipment is closest to:

(Ignore income taxes in this problem.)HI Corporation is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its 5-year useful life.The machine will cost $205,980 and has no salvage value.The machine has a 14% internal rate of return. Required: What are the annual cost savings promised by the machine?

(Ignore income taxes in this problem.) A company has provided the following data concerning a proposed project: The annual cost savings must be closest to:

(Ignore income taxes in this problem.) Given the following data: The life of the equipment must be:

(Ignore income taxes in this problem.) The following data pertain to an investment project: The internal rate of return is closest to: