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Exam 12: Capital Budgeting Decisions

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Question 51

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Rick's Repairs, Inc. is considering renting a new shop. The landlord has offered a number of alternatives for paying the rent. The company's desired rate of return is 10%. The landlord offered a 3-year lease with the rent payments as follows: $16,000 at the end of the first year, $24,000 at the end of the second year, and $20,000 at the end of the third year. Using a spreadsheet or a financial calculator, calculate the present value of the rent payments over the life of the lease. The present value of the rent payments over the life of the lease is:

A) $45,079
B) $49,200
C) $49,406
D) $60,000

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

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Question 52

Multiple Choice

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The following is a disadvantage of the payback period method:

A) It is more complicated to calculate with unequal annual cash flows
B) There is no consideration of cash flows after the payback period
C) There is no consideration of the timing of cash flows
D) Both A and B are disadvantages of this method

E) None of the above
F) A) and B)

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Question 53

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George is considering the following investment proposal: Required: Determine the following values: a. Payback period b. Accounting rate of return on average investment c. Net present value

The management of Leahy Enterprises is currently evaluating the following investment proposal: The proposal's payback period and proposal's internal rate of return (IRR) approximate:

Manifest Company is evaluating a proposal to purchase a new machine that would cost $50,000 and have a salvage value of $6,000 in 5 years. The new machine will provide savings of $7,000 in operating costs when compared to that of the existing machine (which has operating costs of $27,000). If Manifest purchases the new machine, it will sell the old one for its current salvage value of $7,000. If Manifest does not purchase the new machine, it will dispose of the old machine in 5 years at an estimated value of $2,000. The old machine's present book value is $25,000. The old machine will require repairs estimated at $20,000 in one year. Manifest's cost of capital is 12 percent. Additional information for a 12 percent time value of money: Required: a. Use the total cost approach to evaluate the alternatives of keeping the old machine and purchasing the new machine. Indicate which alternative is preferred. b. Use the differential cost approach to evaluate the desirability of purchasing the new machine. Indicate which alternative is preferred.

Janice decided to purchase a new automobile. Being concerned about environmental issues, she is leaning toward the hybrid rather than the gasoline only model. Nevertheless, as a new business school graduate, she wants to determine if there is an economic justification for purchasing the hybrid, which costs $1,200 more than the regular model. She has determined that city/highway combined gas mileage of the hybrid and regular models are 30 and 24 miles per gallon respectively. Janice anticipates she will travel an average of 10,000 miles per year for the next several years. Assuming that Janice plans to keep the car about 5 years and does not believe there will be a trade-in premium associated with the hybrid model, determine the net present value of the incremental investment at 4 percent time value of money.

Kansas Mining is evaluating a proposal to invest in a new piece of equipment costing $50,000 with the following annual cash flows over the equipment's 4-year useful life: Using a spreadsheet or financial calculator, determine the net present value for the investment. The investment's net present value is:

The payback period method is frequently used as a screening tool, but it does not take into consideration the profitability of a project.

Rick's Repairs, Inc. is considering renting a new shop. The landlord has offered a number of alternatives for paying the rent. The present value factors at the company's rate of return are as follows: The landlord offered a 2-year lease with $20,000 to be paid for rent at the end of each year. The present value of rent payments over the life of the lease is:

Cornell Manufacturing Company is considering the following investment proposal: The investment's payback period in years (rounded to two decimal points) is:

Taser Company has to purchase some new equipment. Two manufacturers have provided the following information: Because the company requires a present value analysis, the following present value factors are furnished: Required: a. Determine the present value of annual savings for each piece of equipment. Show your calculations clearly. b. What is the payback for each piece of equipment? Show your calculations clearly. c. Which investment is preferable? Why?

Taxes have the effect of reducing both cash inflows from taxable revenues and cash outflows for tax deductible expenses.

The internal rate of return is sometimes called the:

Which of the following processes involve the development of capital budgeting project performance reports that compare planned to actual results?

Copa Corporation is considering the purchase of a new machine costing $169,000. The machine would generate net cash inflows of $43,690 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Copa's cost of capital is 14 percent. Copa uses straight-line depreciation. Using a spreadsheet or financial calculator, determine the net present value for the investment. The proposal's net present value is (rounded to the nearest dollar) :

Westmont Publishing is considering the purchase of a used printing press costing $69,700. The printing press would generate a net cash inflow of $31,000 a year for 3 years. At the end of 3 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation. Using a spreadsheet or financial calculator, determine the net present value for the investment. The investment's net present value is:

Jose Construction is considering the purchase of a crane costing $400,000. The expected life is 4 years. The company uses the straight-line method of depreciation with no mid-year convention. The company's tax rate is 34 percent. The company's cost of capital is 12%. Required: Determine the present value of the tax shield under the straight-line method, using a spreadsheet or financial calculator.

The objective of capital budgeting models is to eliminate risk.

Firefox Company is considering the following investment proposal: Additional information for interest rate of 10 percent and four time periods: What is the net present value for the investment?

Dutch Donut Shop is considering an investment of $50,000. Data related to the investment and present value factors are as follows: The net present value of the investment is: