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Exam 10: Capital Budgeting Decisions

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Question 71

Multiple Choice

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The net present value of an investment project is $28,842 and its project profitability index is 0.1518. The initial investment in this project was:

A) $190,000
B) $25,041
C) $215,800
D) $185,200

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

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Question 72

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In preference decision situations, a project with a lower net present value may be preferable to a project with a higher net present value.

A) True
B) False

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Question 73

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(Ignore income taxes in this problem.) Jergenson Corporation uses a discount rate of 13% in its capital budgeting. Management is considering an investment in telecommunications equipment with a useful life of 9 years. Excluding the salvage value of the equipment, the net present value of the investment in the equipment is -$581,045. Required: How large would the salvage value of the telecommunications equipment have to be to make the investment in the telecommunications equipment financially attractive?

Discounted cash flow techniques do not take into account recovery of initial investment.

The best capital budgeting method for ranking investment projects of different dollar amounts is the:

(Ignore income taxes in this problem.) A company with $600,000 in operating assets is considering the purchase of a machine that costs $72,000 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:

In calculating the payback period where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be added to the cost of the new equipment.

(Ignore income taxes in this problem.) Tangen Corporation is considering the purchase of a machine that would cost $380,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $80,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $104,000. The company requires a minimum pretax return of 14% on all investment projects. The net present value of the proposed project is closest to:

(Ignore income taxes in this problem.) Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: Westland College uses a 10% discount rate and the total cost approach to net present value analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of eight years. -The net present value of the new system alternative is:

(Ignore income taxes in this problem.) The management of Gramby Corporation is investigating the purchase of a new satellite routing system with a useful life of 5 years. The company uses a discount rate of 18% in its capital budgeting. The net present value of the investment, excluding its intangible benefits, is -$245,970. Required: 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?

(Ignore income taxes in this problem) The management of Favreau Corporation is considering the purchase of a machine that would cost $310,464 and would have a useful life of 5 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $84,000 per year. The internal rate of return on the investment in the new machine is closest to:

(Ignore income taxes in this problem.) Consider the following three investment opportunities: Project I would require an immediate cash outlay of $10,000 and would result in cash savings of $3,000 each year for 5 years. Project II would require cash outlays of $3,000 per year and would provide a cash inflow of $30,000 at the end of 5 years. Project III would require a cash outlay of $10,000 now and would provide a cash inflow of $30,000 at the end of 5 years. Required: The discount rate is 14%. Use the net present value method to determine which, if any, of the three projects is acceptable.

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

(Ignore income taxes in this problem.) Wombles Corporation is contemplating purchasing equipment that would increase sales revenues by $478,000 per year and cash operating expenses by $249,000 per year. The equipment would cost $738,000 and have a 9 year life with no salvage value. The annual depreciation would be $82,000. The simple rate of return on the investment is closest to:

(Ignore income taxes in this problem.) The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000. The equipment would have a useful life of six years, with a salvage value of $29,000. This new equipment would be depreciated over its useful life by the straight-line method. It would replace existing equipment which is fully depreciated. The existing equipment has a salvage value now of $38,000. The anticipated annual revenues and expenses associated with the new equipment are: Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project. -The payback period is closest to:

(Ignore income taxes in this problem) The management of Enamorado 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 5 years. The company uses a discount rate of 17% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is -$160,462. To the nearest whole dollar how large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive?

An investment project with a project profitability index of less than one should ordinarily be rejected.

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

(Ignore income taxes in this problem.) The management of Keno Corporation is considering three investment projects-B, C, and D. Project B would require an investment of $15,000, Project C of $50,000, and Project D of $89,000. The present value of the cash inflows would be $16,350 for Project B, $56,500 for Project C, and $96,120 for Project D. -The profitability index of investment project C is closest to:

When cash flows are uneven and vary from year to year, the net present value method is easier to use than the internal rate of return method.