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Exam 13: Capital Budgeting Decisions

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Question 91

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(Ignore income taxes in this problem.) Olinick Corporation is considering a project that would require an investment of $343,000 and would last for 8 years.The incremental annual revenues and expenses generated by the project during those 8 years would be as follows: The scrap value of the project's assets at the end of the project would be $23,000.The cash inflows occur evenly throughout the year.The payback period of the project is closest to:

A) 3.0 years
B) 5.1 years
C) 3.2 years
D) 4.8 years

E) None of the above
F) C) and D)

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Question 92

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(Ignore income taxes in this problem) The management of Byrge Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines.The aircraft would have a useful life of 8 years.The company uses a discount rate of 10% in its capital budgeting.The net present value of the investment,excluding the intangible benefits,is -$448,460.To the nearest whole dollar how large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive?

A) $44,846
B) $56,058
C) $84,060
D) $448,460

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

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Question 93

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(Ignore income taxes in this problem.) Joetz Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. -The simple rate of return for the investment (rounded to the nearest tenth of a percent) is:

If the net present value of a project is zero based on a discount rate of 16%,then the internal rate of return is:

The internal rate of return method assumes that the cash flows generated by the project are immediately reinvested elsewhere at a rate of return that equals the company's cost of capital.

(Ignore income taxes in this problem.) Oriental Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. -The payback period for the investment would be:

(Ignore income taxes in this problem.)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. Required: Compute the net present value of this investment.

(Ignore income taxes in this problem.) Highpoint,Inc.,is considering investing in automated equipment with a ten-year useful life.Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation,but have been unable to estimate the cash flows associated with the intangible benefits.Using the company's 12% required rate of return,the net present value of the cash flows associated with just the tangible costs and benefits is a negative $282,500.How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment?

(Ignore income taxes in this problem.)Cardinal Pharmacy has purchased a small auto for delivery of prescriptions.The auto cost $28,000 and will be usable for four years.Delivery of prescriptions (which the pharmacy has never done before)should increase revenues by at least $40,000 per year.The cost of these prescriptions will be about $30,000 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) Boe Corporation is investigating buying a small used aircraft for the use of its executives.The aircraft would have a useful life of 9 years.The company uses a discount rate of 10% in its capital budgeting.The net present value of the investment,excluding the salvage value of the aircraft,is -$439,527.Management is having difficulty estimating the salvage value of the aircraft.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?

A company is pondering an investment project that has an internal rate of return which is equal to the company's discount rate.The project profitability index of this investment project is:

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?

(Ignore income taxes in this problem.) Croce,Inc.,is investigating an investment in equipment that would have a useful life of 7 years.The company uses a discount rate of 8% in its capital budgeting.The net present value of the investment,excluding the salvage value,is -$515,967.To the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive?

(Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $263,000 and would last for 8 years.The annual net operating income from the project would be $66,000,which includes depreciation of $31,000.The scrap value of the project's assets at the end of the project would be $15,000.The cash inflows occur evenly throughout the year.The payback period of the project is closest to:

(Ignore income taxes in this problem.) Oriental Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. -The net present value of this investment would be:

sales and expenses are projected: Assume cash flows occur uniformly throughout a year except for the initial investment. -The simple rate of return for the new machine is closest to:

A company has unlimited funds to invest at its discount rate.The company should invest in all projects having:

(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?

A project has an initial investment of $100,000 and a project profitability index of 0.15.The discount rate is 12%.The net present value of the project is closest to: