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Exam 7: Capital Budgeting Decisions

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(Ignore income taxes in this problem. )Cascade, Inc. , has assembled the estimates shown below relating to a proposed new product.These estimates are based on a 5-year project life, at the end of which the new equipment would be sold, working capital would revert to other uses in the company, and the product would be discontinued.Cascade uses a discount rate of 18%. Required: Compute the net present value of the new product.

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(Ignore income taxes in this problem. )Tranter, Inc. , is considering a project that would have a ten-year life and would require a $1, 500, 000 investment in equipment.At the end of ten years, the project would terminate and the equipment would have no salvage value.The project would provide net operating income each year as follows: All of the above items, except for depreciation, represent cash flows.The company's required rate of return is 12%. Required: a.Compute the project's net present value. b.Compute the project's internal rate of return to the nearest whole percent. c.Compute the project's payback period. d.Compute the project's simple rate of return.

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a.Because depreciation is the only nonca...

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(Ignore income taxes in this problem. ) Pro-Mate, Inc.is a producer of athletic equipment.The company is considering the purchase of a machine to produce baseball bats.The machine will cost $60, 000 and have a 10-year useful life.The following annual revenues and expenses are projected: The machine will have no salvage value.Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the new machine is about:

(Ignore income taxes in this problem. ) Buse Corporation is investigating buying a small used aircraft for the use of its executives.The aircraft would have a useful life of 8 years.The company uses a discount rate of 14% in its capital budgeting.The net present value of the investment, excluding the salvage value of the aircraft, is -$488, 487.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?

(Ignore income taxes in this problem. ) Baldock Inc.is considering the acquisition of a new machine that costs $420, 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. ) The management of Kobler Corporation is investigating an investment in equipment that would have a useful life of 5 years.The company uses a discount rate of 10% in its capital budgeting.Good estimates are available for the initial investment and the annual cash operating outflows, but not for the annual cash inflows and the salvage value of the equipment.The net present value of the initial investment and the annual cash outflows is -$235, 421. 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. ) 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. For this investment, the simple rate of return to the nearest tenth of a percent is:

(Ignore income taxes in this problem. )DE 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 $144, 200 and has no salvage value.The machine has a 12% internal rate of return. Required: What are the annual cost savings promised by the machine?

(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?

(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 14%.Ataxia's discount rate is also 14%.The payback period on this equipment is closest to:

(Ignore income taxes in this problem. )Alesi Corporation is considering purchasing a machine that would cost $243, 600 and have a useful life of 8 years.The machine would reduce cash operating costs by $76, 125 per year.The machine would have a salvage value of $60, 900 at the end of the project. Required: a.Compute the payback period for the machine. b.Compute the simple rate of return for the machine.

(Ignore income taxes in this problem. ) Crockin Corporation is considering a machine that will save $8, 000 a year in cash operating costs each year for the next six years.At the end of six years it would have no salvage value.If this machine costs $33, 848 now, the machine's internal rate of return is closest to:

(Ignore income taxes in this problem. )The management of an amusement park is considering purchasing a new ride for $400, 000 that would have a useful life of 5 years and a salvage value of $40, 000.The ride would require annual operating costs of $190, 000 throughout its useful life.The company's discount rate is 12%.Management is unsure about how much additional ticket revenue the new ride would generate-particularly because customers pay a flat fee when they enter the park that entitles them to unlimited rides.Hopefully, the presence of the ride would attract new customers. Required: How much additional revenue would the ride have to generate per year to make it an attractive investment?

Zabarkes Corporation is considering a capital budgeting project that would require an initial investment of $640, 000 and working capital of $79, 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 $205, 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 7%.The net present value of the project is closest to:

(Ignore income taxes in this problem. )Betterway Pharmacy has purchased a small auto for delivery of prescriptions.The auto cost $30, 000 and will be usable for five years.Delivery of prescriptions (which the pharmacy has never done before)should increase revenues by at least $29, 000 per year.The cost of these prescriptions will be about $21, 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. )Janes, Inc. , is considering the purchase of a machine that would cost $400, 000 and would last for 5 years, at the end of which, the machine would have a salvage value of $67, 000.The machine would reduce labor and other costs by $109, 000 per year.Additional working capital of $4, 000 would be needed immediately, all of which would be recovered at the end of 5 years.The company requires a minimum pretax return of 12% on all investment projects. Required: Determine the net present value of the project.Show your work!

(Ignore income taxes in this problem. ) Clairmont Corporation is considering the purchase of a machine that would cost $150, 000 and would last for 5 years.At the end of 5 years, the machine would have a salvage value of $18, 000.By reducing labor and other operating costs, the machine would provide annual cost savings of $37, 000.The company requires a minimum pretax return of 12% on all investment projects. The present value of the annual cost savings of $37, 000 is closest to:

(Ignore income taxes in this problem. ) Boyson, Inc. , is investigating an investment in equipment that would have a useful life of 9 years.The company uses a discount rate of 16% in its capital budgeting.The net present value of the investment, excluding the salvage value, is -$315, 027.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?

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

If taxes are ignored, all of the following items are included in a discounted cash flow analysis except: