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Exam 14: Capital Budgeting Decisions

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Question 111

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Fast Food, Incorporated, has purchased a new donut maker. It cost $16,000 and has an estimated life of 10 years. The following annual donut sales and expenses are projected (Ignore income taxes.) : Assume cash flows occur uniformly throughout a year except for the initial investment.The payback period on the new machine is closest to:

A) 5 years
B) 2.7 years
C) 3.6 years
D) 1.4 years

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

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Question 112

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Vandezande Incorporated is considering the acquisition of a new machine that costs $423,000 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 (Ignore income taxes.) : Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period of this investment is closest to: (Round your answer to 1 decimal place.)

A) 2.1 years
B) 5.0 years
C) 4.3 years
D) 2.7 years

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

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Question 113

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The following information concerning a proposed capital budgeting project has been provided by Jochum Corporation:Click here to viewExhibit 14B-1 to determine the appropriate discount factor(s) using tables. The expected life of the project is 4 years. The income tax rate is 30%. The after-tax discount rate is 12%. The company uses straight-line depreciation on all equipment and the annual depreciation expense would be $54,000. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The net present value of the project is closest to: (Round intermediate calculations and final answer to the nearest dollar amount.)

Falkowski Corporation has provided the following information concerning a capital budgeting project: The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation. The depreciation expense will be $50,000 per year. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The income tax rate is 30% and the after-tax discount rate is 8%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

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. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required:What are the annual cost savings promised by the machine?

Hinger Corporation is considering a capital budgeting project that would require investing $120,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $350,000 and annual incremental cash operating expenses would be $250,000. The project would also require an immediate investment in working capital of $10,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $40,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 11%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The total cash flow net of income taxes in year 3 is:

Dunstan Corporation is considering a capital budgeting project that involves investing $450,000 in equipment that would have a useful life of 3 years and zero salvage value. The company would also need to invest $20,000 immediately in working capital which would be released for use elsewhere at the end of the project in 3 years. The net annual operating cash inflow, which is the difference between the incremental sales revenue and incremental cash operating expenses, would be $220,000 per year. The company uses straight-line depreciation and the depreciation expense on the equipment would be $150,000 per year. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The income tax rate is 30%. The after-tax discount rate is 11%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

Planas Corporation has provided the following information concerning a capital budgeting project: The company's income tax rate is 30% and its after-tax discount rate is 14%. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 3 is:

Decelle Corporation is considering a capital budgeting project that would require investing $80,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $260,000 and annual incremental cash operating expenses would be $210,000. The project would also require an immediate investment in working capital of $20,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $20,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 12%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 2 is:

Boynes Corporation is considering a capital budgeting project that would require investing $200,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $490,000 and annual incremental cash operating expenses would be $330,000. The project would also require an immediate investment in working capital of $10,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $70,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 14%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 3 is:

Paragas, Incorporated, is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 19% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:

The management of Truelove Corporation is considering a project that would require an initial investment of $321,000 and would last for 7 years. The annual net operating income from the project would be $28,000, including depreciation of $42,000. At the end of the project, the scrap value of the project's assets would be $27,000. (Ignore income taxes.)Required:Determine the payback period of the project.

Manjarrez Corporation has provided the following information concerning a capital budgeting project: The company's income tax rate is 30% and its after-tax discount rate is 6%. The company uses straight-line depreciation on all equipment.Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 2 is:

The management of Leitheiser Corporation is considering a project that would require an initial investment of $51,000. No other cash outflows would be required. The present value of the cash inflows would be $57,630. The profitability index of the project is closest to (Ignore income taxes.) :

Charlie Corporation is considering buying a new donut maker. This machine will replace an old donut maker that still has a useful life of 6 years. The new machine will cost $3,740 a year to operate, as opposed to the old machine, which costs $4,150 per year to operate. Also, because of increased capacity, an additional 21,400 donuts a year can be produced. The company makes a contribution margin of $0.10 per donut. The old machine can be sold for $8,400 and the new machine costs $31,400. The incremental annual net cash inflows provided by the new machine would be (Ignore income taxes.) :

Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.) : Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.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 the investment is:

Antinoro Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment.The income tax expense in year 2 is:

Bied's Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost $28,000 and will be usable for seven years. Delivery of prescriptions (which the pharmacy has never done before) should increase revenues by at least $25,000 per year. The cost of these prescriptions will be about $18,000 per year. The pharmacy depreciates all assets by the straight-line method. (Ignore income taxes.)Required:a. Compute the payback period on the new auto.b. Compute the simple rate of return of the new auto.

The present value of an amount to be received in five years is exactly twice as large as the present value of an equal amount to be received in ten years.

Barbera Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment.The total cash flow net of income taxes in year 3 is: