Chapter 13 Managerial Accounting

Chapter 13 - Capital Budgeting
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Question Type T/F T/F T/F T/F T/F T/F T/F T/F T/F T/F T/F T/F T/F T/F Conceptual M/C Conceptual M/C Conceptual M/C Conceptual M/C Conceptual M/C Conceptual
Professional Exam Adapted
LO2: Internal rate of return
LO3: Uncertain cash flows
LO6: Simple rate of return
LO4: Preference ranking
LO1: Net present value
LO5: Payback
Difficulty
M M M E H M M E M E M E E E M M M M M H
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ID 14-843 14-12 14-3 14-831 15-5 15-4 15-13 15-11 14-1 14-4 15-2 15-911 14-13 15-10
Origin Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors Authors David
CMA/CPA origin
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6/e: 15-33 6/e: 15-42 6/e: 14-25 6/e: 14-31 7/e: 14-17 8/e: ATB14-19
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Chapter 13 - Capital Budgeting M/C Conceptual M/C Conceptual M/C Conceptual M/C Conceptual M/C Conceptual M/C Conceptual M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C Keyes E E M M E E M H H H M M E H M M E H H E M M M M M E x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x CM A CM A CM A CM A CM A CMA, 12/94, Part 4, Q23 CMA, 12/93, Part4, Q13 CMA, 12/93, Part 4, Q11 4-9-2010 A CMA, 12/93, Part 4, Q1 CMA, 12/94, Part 4, Q20 5/e: 14-25 9eLD:CH14Q19 5/e: 14-39 3/e: 14-6 12/13/94,J 3/e: 14-20 10/11/2004 Single MC J4 3/e: 14-15 9eLD:CH14Q15 2/e: 13-16 10/11/2004 Single MC K4 5/e: 14-47 6/e: 14-47 10/11/2004 Single MC L4 6/e: 14-34 2/e: 13-2 1/e: 14-15 2/e: 13-9 6/e: 14-33 5/e: 14-24 CMA CMA CMA E.N. CMA CMA Authors Authors Authors Authors E.N. Authors E.N. Authors Authors Authors E.N. Authors Authors E.N. Authors Authors Authors Authors Authors Authors CMA, 12/93, Part 4, Q1 CMA, 12/94, Part 4, Q20 CMA, 12/94, Part 4, Q23 CMA, 12/93, Part4, Q13 CMA, 12/93, Part 4, Q11
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46
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Chapter 13 - Capital Budgeting 10/12/2004 N4 10/12/2004 O4 10/12/2004 M4 10/12/2004 P4 10/12/2004 R4 10/12/2004 Q4 10/12/2004 S4 10/13/2004 V4 6/e: 15-41 10/13/2004 W4 10/13/2004 T4 6/e: 15-54 6/e: 15-45 10/13/2004 U4 3/e: 15-19 5/e: 15-26 10/13/2004 X4 3/e: 15-15 4/e: 15-921 10/13/2004 Y4 12/13/94,C 4/e: 15-922 12/13/94,F 10/14/2004 Single MC Single MC Single MC Single MC Single MC Single MC Single MC Single MC Single MC Single MC E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. Authors E.N. E.N. Authors Authors E.N. Authors Authors E.N. Authors Authors E.N. E.N. Authors E.N. E.N.
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M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C M/C
E E E E E E E E M E E M E E E H E M E E M M H E
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Single MC
Single MC
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Chapter 13 - Capital Budgeting AA4 10/14/2004 AC4 10/14/2004 Z4 10/14/2004 AB4 10/14/2004 AD4 12/13/94,C 6/e: 14-19 to 22 5/e: 14-55 to 57 x x x x CM A CM A 9eLD:CH14Q11-13 10/13/2003 Multi MC A4 10/13/2003 Multi MC B4 10/11/2004 Multi MC H4 6/e: 14-51 to 54 4/e: 14-886 to 889 10/11/2004 Multi MC I4 6/e: 14-27 to 29 10/11/2004 Multi MC G4 x x x 10/12/2004 Multi MC J4 10/12/2004 Multi MC K4 10/12/2004 Multi MC
71 72 73 74 7578 7982 8385 8688 8990 9192 9394 9596 9798 99100 101102 103104 105106 107108 109-
M/C M/C M/C M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Multipart
E E E E EM EH M M M E E M EH E M E E E E
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Single MC Single MC Single MC Single MC
E.N. E.N. E.N. E.N. E.N. Authors Authors Larry Deppe CMA CMA E.N. Authors Authors E.N. Authors E.N. E.N. E.N. E.N. CMA, 12/95, Part 4, Q12&13 CMA, 12/95, Part 4, Q12&13
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Chapter 13 - Capital Budgeting 15 1316 1317 1318 1319 110 111112 113114 115116 117118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 M/C Multipart M/C Multipart M/C Multipart M/C Multipart M/C Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem L4 10/13/2004 Multi MC N4 10/13/2004 Multi MC M4 x x x x x x x x x x x x x x x x x x x x x x x x 5/e: 15-35 to 37 2/e: 14-5 to 6 12/14/94,C 10/14/2003 Problem N4 10/14/2003 Problem O4 10/14/2003 Problem M4 3/e: Problem 14-3 10/11/2004 Problem R4 9eLD:CH14P2 6/e: Problem 14-1 10/11/2004 Problem S4 5/e: Problem 14-2 10/11/2004 Problem T4 10/14/2003 Problem L4 10/12/2004 Problem W4 10/12/2004 Problem V4 10/12/2004 Problem U4 10/12/2004 Problem X4 10/12/2004 Problem Z4
EM EM M E M E E E M E M M E M E E E E E E E
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E.N. E.N. Authors Authors E.N. E.N. E.N. E.N. Authors E.N. Larry Deppe Authors E.N. Authors E.N. E.N. E.N. E.N. E.N. E.N. E.N.
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Chapter 13 - Capital Budgeting 136 137 138 139 140 141 142 143 144 145 146 147 Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem H E E E M E E E E E E E x x x x x x x x x x x x x x 7/10/2001,I7 10/12/2004 Problem Y4 10/13/2004 Problem AA4 10/13/2004 Problem AB4 10/14/2003 Problem Q4 10/14/2003 Problem P4 10/13/2004 Problem AC4 10/13/2004 Problem AD4 10/14/2004 Problem AG4 10/14/2004 Problem AH4 10/14/2004 Problem AE4 10/14/2004 Problem AF4 E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N.
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Chapter 13 Capital Budgeting Decisions

True / False Questions
1. If the internal rate of return exceeds the required rate of return for a project, then the net present value of that project is positive. True False
2. In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach. True False
3. The simple rate of return is the same as the internal rate of return. True False
4. The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero. True False
5. If two projects require the same amount of investment, then the preference ranking computed using either the project profitability index or the net present value will be the same. True False
6. In preference decisions, the profitability index and internal rate of return methods may produce conflicting rankings of projects. True False
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7. The project profitability index is used to compare the internal rates of return of two companies with different investment amounts. True False
8. Preference decisions attempt to determine which of many alternative investment projects would be the best for the company to accept. True False
9. Projects with shorter payback periods are always more profitable than projects with longer payback periods. True False
10. One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached. True False
11. A very useful guide for making investment decisions is: The shorter the payback period, the more profitable the project. True False
12. If new equipment is replacing old equipment, any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment. True False
13. The simple rate of return focuses on accounting net operating income rather than on cash flows. True False
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14. The simple rate of return method places its focus on cash flows instead of on accounting net operating income. True False
Multiple Choice Questions
15. If a company has computed the project profitability index of an investment project as 0.15, then: A. the project's internal rate of return is less than the discount rate. B. the project's internal rate of return is greater than the discount rate. C. the project's internal rate of return is equal to the discount rate. D. the relation between the rate of return and the discount rate is impossible to determine from the given data.
16. Spring Company has invested $20,000 in a project. Spring's discount rate is 12% and the project profitability index on the project is zero. Which of the following statements would be true? I. The net present value of the project is $20,000. II. The project's internal rate of return is equal to 12%. A. Only I. B. Only II. C. Both I and II. D. Neither I nor II.
17. If the internal rate of return is used as the discount rate in computing net present value, the net present value will be: A. positive. B. negative. C. zero. D. unknown.
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18. The discount rate must be specified in advance for which of the following methods?
A. Option A B. Option B C. Option C D. Option D
19. An investment project for which the net present value is $300 would result in which of the following conclusions? A. The net present value is too small; the project should be rejected. B. The rate of return of the investment project is greater than the required rate of return. C. The net present value method is not suitable for evaluating this project; the internal rate of return method should be used. D. The investment project should only be accepted if net present value is zero; a positive net present value indicates an error in the estimates associated with the analysis of this investment.
20. In capital budgeting, what will be the effect on the following if there is an increase in the working capital needed for a project?
A. Option A B. Option B C. Option C D. Option D E. Option E
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21. The capital budgeting method that recognizes the time value of money by discounting cash flows over the life of the project, using the company's required rate of return as the discount rate is called the: A. simple rate of return method. B. the net present value method. C. the internal rate of return method. D. the payback method.
22. The internal rate of return of an investment project is the: A. discount rate that results in a zero net present value for the project. B. minimum acceptable rate of return. C. weighted average rate of return generated by internal funds. D. company's cost of capital.
23. If an investment has a project profitability index of 0.15, then the: A. project's internal rate of return is 15%. B. discount rate is greater than the project's internal rate of return. C. net present value of the project is positive. D. the discount rate is 15%.
24. If investment A has a payback period of 3 years and investment B has a payback period of 4 years, then: A. A has a higher net present value than B. B. A has a lower net present value than B. C. A and B have the same net present value. D. the relation between investment A's net present value and investment B's net present value cannot be determined from the given information.
25. Which one of the following statements about the payback method of capital budgeting is correct? A. The payback method does not consider the time value of money. B. The payback method considers cash flows after the payback has been reached. C. The payback method uses discounted cash flow techniques. D. The payback method will lead to the same decision as other methods of capital budgeting.
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26. The length of time required to recover the initial cash outlay for a project is determined by using the: A. discounted cash flow method. B. the payback method. C. the net present value method. D. the simple rate of return method.
27. (Ignore income taxes in this problem.) An investment of P dollars now will yield cash inflows of $3,000 at the end of the first year and $2,000 at the end of the fourth year. If the internal rate of return for this investment is 20%, then the value of P is: A. $3,463 B. $2,499 C. $964 D. $4,185
28. (Ignore income taxes in this problem.) The Baker Company purchased a piece of equipment with the following expected results:
The initial cost of the equipment was: A. $300,100 B. $180,250 C. $190,600 D. Cannot be determined from the given information.
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29. (Ignore income taxes in this problem.) The Yates Company purchased a piece of equipment which is expected to have a useful life of 7 years with no salvage value at the end of the 7-year period. This equipment is expected to generate a cash inflow of $32,000 each year of its useful life. If this investment has a internal rate of return of 14%, then the initial cost of the equipment is: A. $150,000 B. $137,216 C. $12,800 D. $343,360
30. (Ignore income taxes in this problem.) The following information is available on a new piece of equipment:
The life of the equipment is approximately: A. 6 years B. 4.3 years C. 8 years D. It is impossible to determine from the data given.
31. (Ignore income taxes in this problem.) Mercredi, 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 14% required rate of return, the net present value of the cash flows associated with just the tangible costs and benefits is a negative $182,560. How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment? A. $18,256 B. $26,667 C. $35,000 D. $38,000
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32. (Ignore income taxes in this problem.) A piece of new equipment will cost $70,000. The equipment will provide a cost savings of $15,000 per year for ten years, after which it will have a $3,000 salvage value. If the required rate of return is 14%, the equipment's net present value is: A. $8,240 B. $(8,240) C. $23,888 D. $9,050
33. (Ignore income taxes in this problem.) Sibble Corporation is considering the purchase of a machine that would cost $330,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $50,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $76,000. The company requires a minimum pretax return of 12% on all investment projects. The net present value of the proposed project is closest to: A. -$56,020 B. -$6,020 C. -$48,764 D. -$27,670
34. (Ignore income taxes in this problem.) Benz Company is considering the purchase of a machine that costs $100,000, has a useful life of 18 years, and no salvage value. The company's discount rate is 12%. If the machine's net present value is $5,850, then the annual cash inflows associated with the machine must be (round to the nearest whole dollar): A. $42,413 B. $14,600 C. $13,760 D. It is impossible to determine from the data given.
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35. (Ignore income taxes in this problem.) Sam Weller is thinking of investing $70,000 to start a bookstore. Sam plans to withdraw $15,000 from the business at the end of each year for the next five years. At the end of the fifth year, Sam plans to sell the business for $110,000 cash. At a 12% discount rate, what is the net present value of the investment? A. $54,075 B. $62,370 C. $46,445 D. $70,000
36. (Ignore income taxes in this problem.) The following data pertain to an investment proposal:
The net present value of the proposed investment is: A. $1,720 B. $6,064 C. $2,154 D. $2,025
37. (Ignore income taxes in this problem) The management of Serpas Corporation is considering the purchase of a machine that would cost $180,000, would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by $46,000 per year. The company requires a minimum pretax return of 13% on all investment projects. The net present value of the proposed project is closest to: A. $27,138 B. $50,000 C. -$18,218 D. -$33,565
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38. (Ignore income taxes in this problem.) The Gage Company purchased a machine which will be depreciated by the straight-line method over its estimated 6 year life. The machine will have no salvage value. It will generate cash inflows of $7,000 each year over the next 6 years. Gage Company's required rate of return is 14%. If the net present value of this investment is $12,016, the purchase price of the machine was: A. $30,016 B. $15,207 C. $17,916 D. $18,000
39. (Ignore income taxes in this problem.) Stutz Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $8,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, if Stutz's discount rate is 12%, and if the net present value of this investment is $15,000, then the purchase price of the machine was: A. $17,888 B. $36,512 C. $15,000 D. $21,512
40. (Ignore income taxes in this problem.) Mcclam, Inc., is considering the purchase of a machine that would cost $100,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $23,000. The machine would reduce labor and other costs by $19,000 per year. Additional working capital of $2,000 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 13% on all investment projects. The net present value of the proposed project is closest to: A. $3,833 B. $5,167 C. -$2,492 D. $11,514
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41. (Ignore income taxes in this problem.) Charley has a typing service. He estimates that a new computer will result in increased cash inflow $1,600 in Year 1, $2,000 in Year 2 and $3,000 in Year 3. If Charley's required rate of return is 12%, the most that Charley would be willing to pay for the new computer would be: A. $4,623 B. $5,159 C. $3,294 D. $4,804
42. (Ignore income taxes in this problem.) A piece of equipment has a cost of $20,000. The equipment will provide cost savings of $3,500 each year for ten years, after which time it will have a salvage value of $2,500. If the company's discount rate is 12%, the equipment's net present value is: A. $580 B. $(225) C. $17,500 D. $2,275
43. (Ignore income taxes in this problem.) The following data pertain to an investment in
equipment: At the completion of the project, the working capital will be released for use elsewhere. Compute the net present value of the project, using a discount rate of 10%: A. $606 B. $8,271 C. $(1,729) D. $1,729
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44. (Ignore income taxes in this problem.) The following data pertain to an investment
proposal: The working capital would be released for use elsewhere when the project is completed. What is the net present value of the project, using a discount rate of 8 percent? A. $2,566 B. $(251) C. $251 D. $5,251
45. (Ignore income taxes in this problem.) The Valentine Company has decided to buy a machine costing $14,750. Estimated cash savings from using the new machine amount to $4,500 per year. The machine will have no salvage value at the end of its useful life of five years. If Valentine's required rate of return is 10%, the machine's internal rate of return is closest to: A. 10% B. 12% C. 14% D. 16%
46. (Ignore income taxes in this problem.) If an investment of $14,760 now will yield $18,000 at the end of one year, then the internal rate of return for this investment to the nearest whole percentage is: A. 14% B. 18% C. 22% D. 28%
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47. (Ignore income taxes in this problem.) Duhl Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $126,175, would have a useful life of 5 years, and would have no salvage value. The tractor-trailer would be used in the company's hauling business, resulting in additional net cash inflows of $35,000 per year. The internal rate of return on the investment in the tractor-trailer is closest to: A. 10% B. 15% C. 13% D. 12%
48. (Ignore income taxes in this problem.) Mongon Roofing is considering the purchase of a crane that would cost $40,224, would have a useful life of 5 years, and would have no salvage value. The use of the crane would result in labor savings of $12,000 per year. The internal rate of return on the investment in the crane is closest to: A. 17% B. 14% C. 15% D. 18%
49. (Ignore income taxes in this problem) The management of Mazor Corporation is considering the purchase of a machine that would cost $144,144 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 $39,000 per year. The internal rate of return on the investment in the new machine is closest to: A. 14% B. 13% C. 12% D. 11%
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50. (Ignore income taxes in this problem) Lett Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is -$578,739. 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. $578,739 B. $86,811 C. $3,858,260 D. $1,539,199
51. (Ignore income taxes in this problem) The management of Hirsh Corporation is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 13% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is -$666,493. To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive? A. $86,644 B. $666,493 C. $74,055 D. $129,870
52. (Ignore income taxes in this problem) The management of Londo Corporation is investigating buying a small used aircraft to use in making airborne inspections of its aboveground pipelines. The aircraft would have a useful life of 6 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is -$474,060. 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. $474,060 B. $125,280 C. $79,010 D. $71,109
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53. (Ignore income taxes in this problem.) Cottrell, Inc., is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the investment, excluding the salvage value, is -$230,392. 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? A. $1,535,947 B. $34,559 C. $811,239 D. $230,392
54. (Ignore income taxes in this problem.) Girman Corporation is considering three investment projects: K, L, and M. Project K would require an investment of $27,000, Project L of $59,000, and Project M of $88,000. No other cash outflows would be involved. The present value of the cash inflows would be $31,860 for Project K, $66,080 for Project L, and $95,040 for Project M. Rank the projects according to the profitability index, from most profitable to least profitable. A. K, M, L B. K, L, M C. L, M, K D. L, K, M
55. Logan Company is considering two projects, A and B. The following information has been gathered on these projects:
Based on this information, which of the following statements is (are) true? I. Project A has the highest ranking according to the project profitability index criterion. II. Project B has the highest ranking according to the net present value criterion. A. Only I B. Only II C. Both I and II D. Neither I nor II
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56. (Ignore income taxes in this problem.) The management of Dewitz Corporation is considering a project that would require an initial investment of $65,000. No other cash outflows would be required. The present value of the cash inflows would be $72,800. The profitability index of the project is closest to: A. 0.12 B. 1.12 C. 0.88 D. 0.11
57. (Ignore income taxes in this problem.) The management of Dittrick Corporation is considering the following three investment projects:
Rank the projects according to the profitability index, from most profitable to least profitable. A. I, J, K B. K, J, I C. J, K, I D. I, K, J
58. A project requires an initial investment of $60,000 and has a project profitability index of 0.329. The present value of the future cash inflows from this investment is: A. $79,740 B. $45,147 C. $60,000 D. Cannot be determined with available data.
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59. Blanding Company is considering several investment proposals, as shown below:
Using the project profitability index, the ranking would be: A. D, B, A, C B. D, C, A, B C. C, D, A, B D. C, A, D, B
60. (Ignore income taxes in this problem.) Deibel Corporation is considering a project that would require an investment of $59,000. No other cash outflows would be involved. The present value of the cash inflows would be $66,080. The profitability index of the project is closest to: A. 0.88 B. 0.12 C. 1.12 D. 0.11
61. Perkins Company is considering several investment proposals, as shown below:
Rank the proposals in terms of preference using the project profitability index: A. D, B, C, A B. B, D, C, A C. B, D, A, C D. A, C, B, D
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62. (Ignore income taxes in this problem.) The Jackson Company has invested in a machine that cost $70,000, that has a useful life of seven years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of four years. Given these data, the simple rate of return on the machine is closest to: A. 7.1% B. 8.2% C. 10.7% D. 39.3%
63. (Ignore income taxes in this problem.) Czaplinski Corporation is considering a project that would require an investment of $323,000 and would last for 7 years. The incremental annual revenues and expenses generated by the project during those 7 years would be as follows:
The scrap value of the project's assets at the end of the project would be $22,000. The payback period of the project is closest to: A. 9.7 years B. 4.4 years C. 4.1 years D. 10.4 years
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64. (Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $5,000 per year. The cost of these prescriptions to the pharmacy will be about $2,000 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is: A. 3.0 years B. 1.8 years C. 2.0 years D. 1.2 years
65. (Ignore income taxes in this problem.) The Higgins Company has just purchased a piece of equipment at a cost of $120,000. This equipment will reduce operating costs by $40,000 each year for the next eight years. This equipment replaces old equipment which was sold for $8,000 cash. The new equipment has a payback period of: A. 8.0 years B. 2.8 years C. 10.0 years D. 3.0 years
66. (Ignore income taxes in this problem.) The management of Rusell Corporation is considering a project that would require an investment of $282,000 and would last for 6 years. The annual net operating income from the project would be $107,000, which includes depreciation of $43,000. The scrap value of the project's assets at the end of the project would be $24,000. The payback period of the project is closest to: A. 1.9 years B. 2.4 years C. 1.7 years D. 2.6 years
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67. (Ignore income taxes in this problem.) Rogers Company is studying a project that would have a ten-year life and would require an $800,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project:
The company's required rate of return is 8%. What is the payback period for this project? A. 3 years B. 6.67 years C. 2 years D. 4 years
68. (Ignore income taxes in this problem.) The Jason Company is considering the purchase of a machine that will increase revenues by $32,000 each year. Cash outflows for operating this machine will be $6,000 each year. The cost of the machine is $65,000. It is expected to have a useful life of five years with no salvage value. For this machine, the simple rate of return is: A. 20% B. 40% C. 49.2% D. 9.2%
69. (Ignore income taxes in this problem.) Blaine Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $180,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $12,000 per year to operate and maintain, but would save $48,000 per year in labor and other costs. The old machine can be sold now for scrap for $20,000. What is the simple rate of return on the new machine (round off your answer to the nearest one-hundredth of a percent)? A. 10.00% B. 26.67% C. 22.50% D. 11.25%
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70. (Ignore income taxes in this problem.) The management of Burney Corporation is investigating purchasing equipment that would increase sales revenues by $74,000 per year and cash operating expenses by $32,000 per year. The equipment would cost $115,000 and have a 5 year life with no salvage value. The simple rate of return on the investment is closest to: A. 36.5% B. 25.7% C. 20.0% D. 16.5%
71. (Ignore income taxes in this problem.) Tu Corporation is investigating automating a process by purchasing a machine for $423,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $112,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $27,000. The annual depreciation on the new machine would be $47,000. The simple rate of return on the investment is closest to: A. 15.4% B. 16.4% C. 26.5% D. 11.1%
72. (Ignore income taxes in this problem.) Hartong Corporation is contemplating purchasing equipment that would increase sales revenues by $185,000 per year and cash operating expenses by $89,000 per year. The equipment would cost $416,000 and have a 8 year life with no salvage value. The annual depreciation would be $52,000. The simple rate of return on the investment is closest to: A. 23.8% B. 12.5% C. 10.6% D. 23.1%
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73. (Ignore income taxes in this problem.) An expansion at Fenstermacher, Inc., would increase sales revenues by $315,000 per year and cash operating expenses by $186,000 per year. The initial investment would be for equipment that would cost $405,000 and have a 5 year life with no salvage value. The annual depreciation on the equipment would be $81,000. The simple rate of return on the investment is closest to: A. 31.9% B. 15.2% C. 20.0% D. 11.9%
74. (Ignore income taxes in this problem.) The management of Rouleau Corporation is investigating automating a process. Old equipment, with a current salvage value of $10,000, would be replaced by a new machine. The new machine would be purchased for $240,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $64,000 per year in cash operating costs. The simple rate of return on the investment is closest to: A. 10.0% B. 26.7% C. 10.4% D. 16.7%
(Ignore income taxes in this problem.) Shields Company has gathered the following data on a proposed investment project:
75. The payback period for the investment is closest to: A. 0.2 years B. 1.0 years C. 3.0 years D. 5.0 years
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76. The simple rate of return on the investment is closest to: A. 5% B. 10% C. 15% D. 20%
77. The net present value on this investment is closest to: A. $400,000 B. $80,000 C. $91,600 D. $76,750
78. The internal rate of return on the investment is closest to: A. 11% B. 13% C. 15% D. 17%
(Ignore income taxes in this problem.) Chow Company has gathered the following data on a proposed investment project:
79. The payback period for the investment is closest to: A. 8.00 years B. 1.42 years C. 4.75 years D. 0.21 years
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80. The simple rate of return on the investment is closest to: A. 8.55% B. 10.00% C. 21.05% D. 33.55%
82. The internal rate of return on the investment is closest to: A. 13% B. 15% C. 14% D. 12%
(Ignore income taxes in this problem.) Bugle's Bagel Bakery is investigating the purchase of a new bagel making machine. This machine would provide an annual operating cost savings of $3,650 for each of the next 4 years. In addition, this new machine would allow the production of one new type of bagel which would result in selling 1,500 dozen more bagels each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450 and it will have a 4 year useful life. Bugle's discount rate is 14%.
83. The total annual cash inflow from this machine for capital budgeting purposes is: A. $3,650 B. $5,150 C. $4,750 D. $5,000
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84. The internal rate of return for this investment is closest to: A. 14% B. 16% C. 18% D. 20%
85. The net present value of this investment is closest to: A. $1,120 B. $6,550 C. $13,450 D. $20,000
(Ignore income taxes in this problem.) Oriental Company has gathered the following data on a proposed investment project:
The company uses straight-line depreciation on all equipment.
86. The payback period for the investment would be: A. 2.41 years B. 0.25 years C. 10 years D. 4 years
87. The simple rate of return on the investment would be: A. 10% B. 35% C. 15% D. 25%
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88. The net present value of this investment would be: A. $(14,350) B. $107,250 C. $77,200 D. $200,000
(Ignore income taxes in this problem.) Houis Inc. is considering the acquisition of a new machine that costs $300,000 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:
89. If the discount rate is 11%, the net present value of the investment is closest to: A. $77,315 B. $210,000 C. $377,315 D. $300,000
90. The payback period of this investment is closest to: A. 1.8 years B. 5.0 years C. 2.1 years D. 2.9 years
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(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment that costs $480,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are:
(Ignore income taxes in this problem.) The management of Melchiori Corporation is considering the purchase of a machine that would cost $310,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $116,000 per year. The company requires a minimum pretax return of 16% on all investment projects.
93. The present value of the annual cost savings of $116,000 is closest to: A. $427,460 B. $696,000 C. $175,448 D. $1,041,462
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94. The net present value of the proposed project is closest to: A. $286,179 B. $386,000 C. $117,460 D. $158,431
(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision:
Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years Mr. Lichty plans to close the car wash and retire.
95. If the new equipment is purchased, the present value of all cash flows that occur now is: A. $(45,000) B. $(39,000) C. $(37,000) D. $(34,000)
96. If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is: A. $(26,537) B. $(15,164) C. $(18,463) D. $(37,901)
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(Ignore income taxes in this problem.) The Finney Company is reviewing the possibility of remodeling one of its showrooms and buying some new equipment to improve sales operations. The remodeling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
97. The immediate cash outflow required for this project would be: A. $(120,000) B. $(150,000) C. $(90,000) D. $(130,000)
98. What would the annual net cash inflows from this project have to be in order to justify investing in remodeling? A. $14,495 B. $35,842 C. $16,147 D. $29,158
(Ignore income taxes in this problem.) Gillaspie, Inc., is considering the purchase of a machine that would cost $300,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $51,000. The machine would reduce labor and other costs by $86,000 per year. Additional working capital of $10,000 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 13% on all investment projects.
99. 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: A. -$8,420 B. $25,170 C. -$4,570 D. $0
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(Ignore income taxes in this problem.) Rushforth Manufacturing has $90,000 to invest in either Project A or Project B. The following data are available on these projects:
Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Rushforth's required rate of return is 14%.
101. The net present value of Project A is: A. $27,341 B. $94,000 C. $71,000 D. $117,341
102. The net present value of Project B is: A. $57,225 B. $30,025 C. $7,225 D. $13,350
(Ignore income taxes in this problem.) Meharg Corporation is considering the purchase of a machine that would cost $120,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $25,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $30,000. The company requires a minimum pretax return of 10% on all investment projects.
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103. The present value of the annual cost savings of $30,000 is closest to: A. $18,630 B. $183,163 C. $150,000 D. $113,730
104. The net present value of the proposed project is closest to: A. $14,905 B. -$6,270 C. $9,255 D. $18,730
(Ignore income taxes in this problem.) Trybus Corporation uses a discount rate of 16% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 5 years has thus far yielded a net present value of -$233,764. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment.
105. Ignoring any salvage value, to the nearest whole dollar 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? A. $71,400 B. $37,402 C. $233,764 D. $46,753
106. Ignoring any cash flows from intangible benefits, to the nearest whole dollar how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive? A. $491,101 B. $1,461,025 C. $233,764 D. $37,402
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(Ignore income taxes in this problem.) The management of Gimenez Corporation is investigating an investment in equipment that would have a useful life of 7 years. The company uses a discount rate of 17% 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 -$274,265.
107. 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? A. $39,181 B. $274,265 C. $46,625 D. $69,930
108. Ignoring the cash inflows, 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? A. $274,265 B. $46,625 C. $1,613,324 D. $823,619
(Ignore income taxes in this problem.) Burchell Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is -$594,381. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft.
109. Ignoring the annual benefit, 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. $3,962,540 B. $89,157 C. $594,381 D. $1,580,801
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110. Ignoring any salvage value, to the nearest whole dollar how large would the annual benefit have to be to make the investment in the aircraft financially attractive? A. $594,381 B. $89,157 C. $84,912 D. $142,880
(Ignore income taxes in this problem.) The management of Pattee Corporation is considering three investment projects-M, N, and O. Project M would require an investment of $25,000, Project N of $67,000, and Project O of $70,000. The present value of the cash inflows would be $28,750 for Project M, $73,700 for Project N, and $79,100 for Project O.
111. The profitability index of investment project N is closest to: A. 0.10 B. 0.90 C. 0.09 D. 1.10
112. Rank the projects according to the profitability index, from most profitable to least profitable. A. O, M, N B. O, N, M C. M, O, N D. N, M, O
(Ignore income taxes in this problem.) Altro Corporation is considering the following three investment projects:
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113. The profitability index of investment project S is closest to: A. 0.15 B. 1.17 C. 0.83 D. 0.17
114. Rank the projects according to the profitability index, from most profitable to least profitable. A. S, T, R B. R, T, S C. T, R, S D. T, S, R
(Ignore income taxes in this problem.) The Crawford Company is pondering an investment in a machine that costs $350,000, that will have a useful life of eight years, and that will have a salvage value of $25,000. If this machine is purchased, a similar, old machine will be sold at a salvage value of $40,000. The anticipated yearly revenues and expenses associated with the new machine are:
All of the revenues and expenses except depreciation are for cash. The company's required rate of return is 12%. The annual cash flows occur uniformly throughout the year.
115. The payback period, to the nearest tenth of a year, of this investment is: A. 6.2 years B. 3.2 years C. 3.6 years D. 4.0 years
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116. The simple rate of return, to the nearest tenth of a percent, of this investment is: A. 18.2% B. 16.1% C. 31.3% D. 27.7%
(Ignore income taxes in this problem.) Friden Company has just purchased a new piece of equipment with the following characteristics:
117. Assume straight-line depreciation and no salvage value. The payback period would be: A. 4.5 years B. 10 years C. 2.7 years D. 8.2 years
118. The simple rate of return would be approximately: A. 22.2% B. 12.2% C. 11.1% D. 10%
Essay Questions
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119. (Ignore income taxes in this problem.) Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,200,000 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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120. (Ignore income taxes in this problem.) Farah Corporation has provided the following data concerning a proposed investment project:
The company uses a discount rate of 11%. The working capital would be released at the end of the project. Required: Compute the net present value of the project.
121. (Ignore income taxes in this problem.) Dunay Corporation is considering investing $810,000 in a project. The life of the project would be 9 years. The project would require additional working capital of $24,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $162,000. The salvage value of the assets used in the project would be $41,000. The company uses a discount rate of 17%. Required: Compute the net present value of the project.
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122. (Ignore income taxes in this problem.) Whatley Inc. is considering investing in a project that would require an initial investment of $460,000. The life of the project would be 5 years. The annual net cash inflows from the project would be $138,000. The salvage value of the assets at the end of the project would be $69,000. The company uses a discount rate of 15%. Required: Compute the net present value of the project.
123. (Ignore income taxes in this problem.) Bill Anders retires in 8 years. He has $650,000 to invest and is considering a franchise for a fast-food outlet. He would have to purchase equipment costing $500,000 to equip the outlet and invest an additional $150,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $160,000. Mr. Anders would close the outlet in 8 years. He estimates that the equipment could be sold at that time for about 10% of its original cost. Mr. Anders' required rate of return is 16%. Required: What is the investment's net present value when the discount rate is 16 percent? Is this an acceptable investment?
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124. (Ignore income taxes in this problem.) Weilbacher Corporation is considering the purchase of a machine that would cost $240,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $50,000. The machine would reduce labor and other costs by $62,000 per year. The company requires a minimum pretax return of 16% on all investment projects. Required: Determine the net present value of the project. Show your work!
125. (Ignore income taxes in this problem.) Jim Bingham is considering starting a small catering business. He would need to purchase a delivery van and various equipment costing $125,000 to equip the business 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. Jim's marketing studies indicate that the annual cash inflow from the business will amount to $120,000. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. 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. Required: Would you advise Jim to make this investment?
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126. (Ignore income taxes in this problem.) Jane Summers has just inherited $600,000 from her mother's estate. She is considering investing part of these funds in a small catering business. She would need to purchase a delivery van and various equipment costing $100,000 to equip the business and another $50,000 for inventories and other working capital needs. Rent on the building used by the business will be $24,000 per year. Jane's marketing studies indicate that the annual cash inflow from the business will amount to $90,000. In addition to the building rent, other annual cash outflows for operating costs will amount to $30,000. Jane wants to operate the catering business for only six years. She estimates that the equipment could be sold at that time for about 10% of its original cost. Jane's required rate of return is 16%. Required: Compute the net present value of this investment.
127. (Ignore income taxes in this problem.) The management of Basler Corporation is considering the purchase of a machine that would cost $440,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $88,000 per year. 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!
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128. (Ignore income taxes in this problem.) A newly developed device is being considered by Fairway Foods for use in processing and canning peaches. The device, which is available only on a royalty basis, is reported to be a great labor saver. Fairway's production manager has gathered the following data:
The new device must be obtained through a licensing arrangement with the developer. The license period lasts for only 8 years. Fairway Foods' required rate of return is 10%. Required: By use of the incremental cost approach, compute the net present value of the proposed licensing of the new device. Show all computations in good form. Should the company enter into a licensing arrangement to use the new device?
129. (Ignore income taxes in this problem.) Janes, Inc., is considering the purchase of a machine that would cost $430,000 and would last for 6 years, at the end of which, the machine would have a salvage value of $47,000. 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 6 years. The company requires a minimum pretax return of 17% on all investment projects. Required: Determine the net present value of the project. Show your work!
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130. (Ignore income taxes in this problem.) Juliar Inc. has provided the following data concerning a proposed investment project:
The company uses a discount rate of 12%. Required: Compute the net present value of the project.
131. (Ignore income taxes in this problem.) The management of Peregoy Corporation is considering the purchase of an automated molding machine that would cost $255,552, would have a useful life of 5 years, and would have no salvage value. The automated molding machine would result in cash savings of $64,000 per year due to lower labor and other costs. Required: Determine the internal rate of return on the investment in the new automated molding machine. Show your work!
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132. (Ignore income taxes in this problem.) Hayner Limos, Inc., is considering the purchase of a limousine that would cost $149,868, would have a useful life of 9 years, and would have no salvage value. The limousine would bring in cash inflows of $36,000 per year in excess of its cash operating costs. Required: Determine the internal rate of return on the investment in the new limousine. Show your work!
133. (Ignore income taxes in this problem.) The management of Eastridge Corporation is considering the purchase of a machine that would cost $50,470 and would have a useful life of 7 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $14,000 per year. Required: Determine the internal rate of return on the investment in the new machine. Show your work!
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134. (Ignore income taxes in this problem.) Rosenholm Corporation uses a discount rate of 18% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 5 years has thus far yielded a net present value of -$327,960. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. Required: a. Ignoring any salvage value, 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? b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?
135. (Ignore income taxes in this problem.) Verdin Corporation uses a discount rate of 16% in its capital budgeting. Management is considering an investment in telecommunications equipment with a useful life of 6 years. Excluding the salvage value of the equipment, the net present value of the investment in the equipment is -$166,194. Required: How large would the salvage value of the telecommunications equipment have to be to make the investment in the telecommunications equipment financially attractive?
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136. (Ignore income taxes in this problem.) The management of an amusement park is considering purchasing a new ride for $40,000 that would have a useful life of 10 years and a salvage value of $4,000. The ride would require annual operating costs of $19,000 throughout its useful life. The company's discount rate is 8%. 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?
137. (Ignore income taxes in this problem.) The management of Rosengarten Corporation is investigating the purchase of a new satellite routing system with 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 its intangible benefits, is -$607,020. 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?
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138. (Ignore income taxes in this problem.) Ahlman Corporation is considering the following three investment projects:
Required: Rank the investment projects using the project profitability index. Show your work
139. (Ignore income taxes in this problem.) The management of Suddreth Corporation is considering the following three investment projects:
The only cash outflows are the initial investments in the projects. Required: Rank the investment projects using the project profitability index. Show your work
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140. (Ignore income taxes in this problem.) Brewer Company is considering purchasing a machine that would cost $537,600 and have a useful life of 9 years. The machine would reduce cash operating costs by $82,708 per year. The machine would have a salvage value of $107,520 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.
141. (Ignore income taxes in this problem.) Gocke Company is considering purchasing a machine that would cost $478,800 and have a useful life of 5 years. The machine would reduce cash operating costs by $114,000 per year. The machine would have no salvage value. Required: a. Compute the payback period for the machine. b. Compute the simple rate of return for the machine.
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142. (Ignore income taxes in this problem.) Limon Corporation is considering a project that would require an initial investment of $204,000 and would last for 6 years. The incremental annual revenues and expenses for each of the 6 years would be as follows:
At the end of the project, the scrap value of the project's assets would be $12,000. Required: Determine the payback period of the project. Show your work!
143. (Ignore income taxes in this problem.) The management of Fowkes Corporation is considering a project that would require an initial investment of $331,000 and would last for 8 years. The annual net operating income from the project would be $54,000, including depreciation of $40,000. At the end of the project, the scrap value of the project's assets would be $11,000. Required: Determine the payback period of the project. Show your work!
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144. (Ignore income taxes in this problem.) Sheridon Corporation is investigating automating a process by purchasing a new machine for $483,000 that would have a 7 year useful life and no salvage value. By automating the process, the company would save $140,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $29,000. The annual depreciation on the new machine would be $69,000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
145. (Ignore income taxes in this problem.) The management of Orebaugh Corporation is investigating automating a process by replacing old equipment by a new machine. The old equipment would be sold for scrap now for $15,000. The new machine would cost $445,000, would have a 5 year useful life, and would have no salvage value. By automating the process, the company would save $165,000 per year in cash operating costs. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
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146. (Ignore income taxes in this problem.) Pal Corporation is contemplating purchasing equipment that would increase sales revenues by $438,000 per year and cash operating expenses by $258,000 per year. The equipment would cost $504,000 and have a 9 year life with no salvage value. The annual depreciation would be $56,000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
147. (Ignore income taxes in this problem.) The management of Ossenfort Corporation is investigating purchasing equipment that would cost $440,000 and have a 8 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $192,000 per year and cash operating expenses by $61,000 per year. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
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Chapter 13 Capital Budgeting Decisions Answer Key
True / False Questions
1. If the internal rate of return exceeds the required rate of return for a project, then the net present value of that project is positive. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Level: Medium
2. In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Level: Medium
3. The simple rate of return is the same as the internal rate of return. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Medium
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4. The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Level: Easy
5. If two projects require the same amount of investment, then the preference ranking computed using either the project profitability index or the net present value will be the same. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-04 Rank investment projects in order of preference Level: Hard
6. In preference decisions, the profitability index and internal rate of return methods may produce conflicting rankings of projects. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-04 Rank investment projects in order of preference Level: Medium
7. The project profitability index is used to compare the internal rates of return of two companies with different investment amounts. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-04 Rank investment projects in order of preference Level: Medium
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8. Preference decisions attempt to determine which of many alternative investment projects would be the best for the company to accept. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-04 Rank investment projects in order of preference Level: Easy
9. Projects with shorter payback periods are always more profitable than projects with longer payback periods. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-05 Determine the payback period for an investment Level: Medium
10. One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-05 Determine the payback period for an investment Level: Easy
11. A very useful guide for making investment decisions is: The shorter the payback period, the more profitable the project. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-05 Determine the payback period for an investment Level: Medium
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12. If new equipment is replacing old equipment, any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-05 Determine the payback period for an investment Level: Easy
13. The simple rate of return focuses on accounting net operating income rather than on cash flows. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Easy
14. The simple rate of return method places its focus on cash flows instead of on accounting net operating income. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Easy
Multiple Choice Questions
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15. If a company has computed the project profitability index of an investment project as 0.15, then: A. the project's internal rate of return is less than the discount rate. B. the project's internal rate of return is greater than the discount rate. C. the project's internal rate of return is equal to the discount rate. D. the relation between the rate of return and the discount rate is impossible to determine from the given data.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Learning Objective: 13-04 Rank investment projects in order of preference Level: Medium
16. Spring Company has invested $20,000 in a project. Spring's discount rate is 12% and the project profitability index on the project is zero. Which of the following statements would be true? I. The net present value of the project is $20,000. II. The project's internal rate of return is equal to 12%. A. Only I. B. Only II. C. Both I and II. D. Neither I nor II.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Learning Objective: 13-04 Rank investment projects in order of preference Level: Medium
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17. If the internal rate of return is used as the discount rate in computing net present value, the net present value will be: A. positive. B. negative. C. zero. D. unknown.
18. The discount rate must be specified in advance for which of the following methods?
A. Option A B. Option B C. Option C D. Option D
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19. An investment project for which the net present value is $300 would result in which of the following conclusions? A. The net present value is too small; the project should be rejected. B. The rate of return of the investment project is greater than the required rate of return. C. The net present value method is not suitable for evaluating this project; the internal rate of return method should be used. D. The investment project should only be accepted if net present value is zero; a positive net present value indicates an error in the estimates associated with the analysis of this investment.
20. In capital budgeting, what will be the effect on the following if there is an increase in the working capital needed for a project?
A. Option A B. Option B C. Option C D. Option D E. Option E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Level: Hard
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21. The capital budgeting method that recognizes the time value of money by discounting cash flows over the life of the project, using the company's required rate of return as the discount rate is called the: A. simple rate of return method. B. the net present value method. C. the internal rate of return method. D. the payback method.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Level: Easy Source: CMA, adapted
22. The internal rate of return of an investment project is the: A. discount rate that results in a zero net present value for the project. B. minimum acceptable rate of return. C. weighted average rate of return generated by internal funds. D. company's cost of capital.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Level: Easy Source: CMA, adapted
23. If an investment has a project profitability index of 0.15, then the: A. project's internal rate of return is 15%. B. discount rate is greater than the project's internal rate of return. C. net present value of the project is positive. D. the discount rate is 15%.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 13-04 Rank investment projects in order of preference Level: Medium Source: CMA, adapted
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24. If investment A has a payback period of 3 years and investment B has a payback period of 4 years, then: A. A has a higher net present value than B. B. A has a lower net present value than B. C. A and B have the same net present value. D. the relation between investment A's net present value and investment B's net present value cannot be determined from the given information.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-05 Determine the payback period for an investment Level: Medium
25. Which one of the following statements about the payback method of capital budgeting is correct? A. The payback method does not consider the time value of money. B. The payback method considers cash flows after the payback has been reached. C. The payback method uses discounted cash flow techniques. D. The payback method will lead to the same decision as other methods of capital budgeting.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-05 Determine the payback period for an investment Level: Easy Source: CMA, adapted
26. The length of time required to recover the initial cash outlay for a project is determined by using the: A. discounted cash flow method. B. the payback method. C. the net present value method. D. the simple rate of return method.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 13-05 Determine the payback period for an investment Level: Easy Source: CMA, adapted
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27. (Ignore income taxes in this problem.) An investment of P dollars now will yield cash inflows of $3,000 at the end of the first year and $2,000 at the end of the fourth year. If the internal rate of return for this investment is 20%, then the value of P is: A. $3,463 B. $2,499 C. $964 D. $4,185
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Level: Hard
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28. (Ignore income taxes in this problem.) The Baker Company purchased a piece of equipment with the following expected results:
The initial cost of the equipment was: A. $300,100 B. $180,250 C. $190,600 D. Cannot be determined from the given information.
The internal rate of return is the rate of return at which the net present value of the project is zero.
-X + $180,250 = $0 X = $180,250
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29. (Ignore income taxes in this problem.) The Yates Company purchased a piece of equipment which is expected to have a useful life of 7 years with no salvage value at the end of the 7-year period. This equipment is expected to generate a cash inflow of $32,000 each year of its useful life. If this investment has a internal rate of return of 14%, then the initial cost of the equipment is: A. $150,000 B. $137,216 C. $12,800 D. $343,360 The internal rate of return is the rate of return at which the net present value of the project is zero.
-X + $137,216 = $0 X = $137,216
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30. (Ignore income taxes in this problem.) The following information is available on a new piece of equipment:
The life of the equipment is approximately: A. 6 years B. 4.3 years C. 8 years D. It is impossible to determine from the data given. Factor of the internal rate of return = Investment required Annual net cash inflow = $21,720 $5,000 = 4.344 The factor of 4.344 for 8 years represents an internal rate of return of 16%.
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31. (Ignore income taxes in this problem.) Mercredi, 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 14% required rate of return, the net present value of the cash flows associated with just the tangible costs and benefits is a negative $182,560. How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment? A. $18,256 B. $26,667 C. $35,000 D. $38,000 Minimum annual cash flows required = Negative net present value to be offset Present value factor = $182,560 5.216 = $35,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Learning Objective: 13-03 Evaluate an investment project that has uncertain cash flows Level: Medium
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32. (Ignore income taxes in this problem.) A piece of new equipment will cost $70,000. The equipment will provide a cost savings of $15,000 per year for ten years, after which it will have a $3,000 salvage value. If the required rate of return is 14%, the equipment's net present value is: A. $8,240 B. $(8,240) C. $23,888 D. $9,050
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Level: Medium
13-65
33. (Ignore income taxes in this problem.) Sibble Corporation is considering the purchase of a machine that would cost $330,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $50,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $76,000. The company requires a minimum pretax return of 12% on all investment projects. The net present value of the proposed project is closest to: A. -$56,020 B. -$6,020 C. -$48,764 D. -$27,670
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Level: Easy
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34. (Ignore income taxes in this problem.) Benz Company is considering the purchase of a machine that costs $100,000, has a useful life of 18 years, and no salvage value. The company's discount rate is 12%. If the machine's net present value is $5,850, then the annual cash inflows associated with the machine must be (round to the nearest whole dollar): A. $42,413 B. $14,600 C. $13,760 D. It is impossible to determine from the data given.
-$100,000 + 7.250X = $5,850 7.250X = $100,000 + $5,850 X = ($100,000 + $5,850) 7.250 = $14,600
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Level: Hard
13-67
35. (Ignore income taxes in this problem.) Sam Weller is thinking of investing $70,000 to start a bookstore. Sam plans to withdraw $15,000 from the business at the end of each year for the next five years. At the end of the fifth year, Sam plans to sell the business for $110,000 cash. At a 12% discount rate, what is the net present value of the investment? A. $54,075 B. $62,370 C. $46,445 D. $70,000
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36. (Ignore income taxes in this problem.) The following data pertain to an investment proposal:
The net present value of the proposed investment is: A. $1,720 B. $6,064 C. $2,154 D. $2,025
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37. (Ignore income taxes in this problem) The management of Serpas Corporation is considering the purchase of a machine that would cost $180,000, would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by $46,000 per year. The company requires a minimum pretax return of 13% on all investment projects. The net present value of the proposed project is closest to: A. $27,138 B. $50,000 C. -$18,218 D. -$33,565
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38. (Ignore income taxes in this problem.) The Gage Company purchased a machine which will be depreciated by the straight-line method over its estimated 6 year life. The machine will have no salvage value. It will generate cash inflows of $7,000 each year over the next 6 years. Gage Company's required rate of return is 14%. If the net present value of this investment is $12,016, the purchase price of the machine was: A. $30,016 B. $15,207 C. $17,916 D. $18,000
-X + $27,223 = $12,016 X = $27,223 - $12,016 = $15,207

13-71
39. (Ignore income taxes in this problem.) Stutz Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $8,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, if Stutz's discount rate is 12%, and if the net present value of this investment is $15,000, then the purchase price of the machine was: A. $17,888 B. $36,512 C. $15,000 D. $21,512
-X + $36,512= $15,000 X = $36,512- $15,000 = $21,512

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40. (Ignore income taxes in this problem.) Mcclam, Inc., is considering the purchase of a machine that would cost $100,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $23,000. The machine would reduce labor and other costs by $19,000 per year. Additional working capital of $2,000 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 13% on all investment projects. The net present value of the proposed project is closest to: A. $3,833 B. $5,167 C. -$2,492 D. $11,514
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41. (Ignore income taxes in this problem.) Charley has a typing service. He estimates that a new computer will result in increased cash inflow $1,600 in Year 1, $2,000 in Year 2 and $3,000 in Year 3. If Charley's required rate of return is 12%, the most that Charley would be willing to pay for the new computer would be: A. $4,623 B. $5,159 C. $3,294 D. $4,804
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42. (Ignore income taxes in this problem.) A piece of equipment has a cost of $20,000. The equipment will provide cost savings of $3,500 each year for ten years, after which time it will have a salvage value of $2,500. If the company's discount rate is 12%, the equipment's net present value is: A. $580 B. $(225) C. $17,500 D. $2,275
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43. (Ignore income taxes in this problem.) The following data pertain to an investment in
equipment: At the completion of the project, the working capital will be released for use elsewhere. Compute the net present value of the project, using a discount rate of 10%: A. $606 B. $8,271 C. $(1,729) D. $1,729
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44. (Ignore income taxes in this problem.) The following data pertain to an investment
proposal: The working capital would be released for use elsewhere when the project is completed. What is the net present value of the project, using a discount rate of 8 percent? A. $2,566 B. $(251) C. $251 D. $5,251
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45. (Ignore income taxes in this problem.) The Valentine Company has decided to buy a machine costing $14,750. Estimated cash savings from using the new machine amount to $4,500 per year. The machine will have no salvage value at the end of its useful life of five years. If Valentine's required rate of return is 10%, the machine's internal rate of return is closest to: A. 10% B. 12% C. 14% D. 16% Factor of the internal rate of return = Investment required Annual net cash inflow = $14,750 $4,500 = 3.278 The factor of 3.278 for 5 years represents an internal rate of return of 16%.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Level: Medium
46. (Ignore income taxes in this problem.) If an investment of $14,760 now will yield $18,000 at the end of one year, then the internal rate of return for this investment to the nearest whole percentage is: A. 14% B. 18% C. 22% D. 28% Factor of the internal rate of return = Investment required Annual net cash inflow = $14,760 $18,000 = 0.820 The factor of .820 for 1 year represents an internal rate of return of 22%.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Level: Easy
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47. (Ignore income taxes in this problem.) Duhl Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $126,175, would have a useful life of 5 years, and would have no salvage value. The tractor-trailer would be used in the company's hauling business, resulting in additional net cash inflows of $35,000 per year. The internal rate of return on the investment in the tractor-trailer is closest to: A. 10% B. 15% C. 13% D. 12% Factor of the internal rate of return = Investment required Annual net cash inflow = $126,175 $35,000 = 3.605 The factor of 3.605 for 5 years represents an internal rate of return of 12%.
48. (Ignore income taxes in this problem.) Mongon Roofing is considering the purchase of a crane that would cost $40,224, would have a useful life of 5 years, and would have no salvage value. The use of the crane would result in labor savings of $12,000 per year. The internal rate of return on the investment in the crane is closest to: A. 17% B. 14% C. 15% D. 18% Factor of the internal rate of return = Investment required Annual net cash inflow = $40,224 $12,000 = 3.352 The factor of 3.352 for 5 years represents an internal rate of return of 15%.
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49. (Ignore income taxes in this problem) The management of Mazor Corporation is considering the purchase of a machine that would cost $144,144 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 $39,000 per year. The internal rate of return on the investment in the new machine is closest to: A. 14% B. 13% C. 12% D. 11% Factor of the internal rate of return = Investment required Annual net cash inflow = $144,144 $39,000 = 3.696 The factor of 3.696 for 5 years represents an internal rate of return of 11%.
50. (Ignore income taxes in this problem) Lett Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is -$578,739. 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. $578,739 B. $86,811 C. $3,858,260 D. $1,539,199 Minimum salvage value = Negative net present value to the offset Present value factor = $578,739 0.376 = $1,539,199
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-03 Evaluate an investment project that has uncertain cash flows Level: Easy
13-80
51. (Ignore income taxes in this problem) The management of Hirsh Corporation is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 13% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is -$666,493. To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive? A. $86,644 B. $666,493 C. $74,055 D. $129,870 Minimum annual cash flows from the intangible benefits = Negative net present value to be offset Present value factor = $666,493 5.132 = $129,870
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52. (Ignore income taxes in this problem) The management of Londo Corporation is investigating buying a small used aircraft to use in making airborne inspections of its aboveground pipelines. The aircraft would have a useful life of 6 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is -$474,060. 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. $474,060 B. $125,280 C. $79,010 D. $71,109 Minimum annual cash flows from the intangible benefits = Negative net present value to be offset Present value factor = $474,060 3.784 = $125,280
53. (Ignore income taxes in this problem.) Cottrell, Inc., is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the investment, excluding the salvage value, is -$230,392. 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? A. $1,535,947 B. $34,559 C. $811,239 D. $230,392 Minimum salvage value = Negative net present value to the offset Present value factor = $230,392 0.284 = $811,239
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54. (Ignore income taxes in this problem.) Girman Corporation is considering three investment projects: K, L, and M. Project K would require an investment of $27,000, Project L of $59,000, and Project M of $88,000. No other cash outflows would be involved. The present value of the cash inflows would be $31,860 for Project K, $66,080 for Project L, and $95,040 for Project M. Rank the projects according to the profitability index, from most profitable to least profitable. A. K, M, L B. K, L, M C. L, M, K D. L, K, M
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-04 Rank investment projects in order of preference Level: Easy
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55. Logan Company is considering two projects, A and B. The following information has been gathered on these projects:
Based on this information, which of the following statements is (are) true? I. Project A has the highest ranking according to the project profitability index criterion. II. Project B has the highest ranking according to the net present value criterion. A. Only I B. Only II C. Both I and II D. Neither I nor II
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-04 Rank investment projects in order of preference Level: Medium
13-84
56. (Ignore income taxes in this problem.) The management of Dewitz Corporation is considering a project that would require an initial investment of $65,000. No other cash outflows would be required. The present value of the cash inflows would be $72,800. The profitability index of the project is closest to: A. 0.12 B. 1.12 C. 0.88 D. 0.11
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57. (Ignore income taxes in this problem.) The management of Dittrick Corporation is considering the following three investment projects:
Rank the projects according to the profitability index, from most profitable to least profitable. A. I, J, K B. K, J, I C. J, K, I D. I, K, J
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58. A project requires an initial investment of $60,000 and has a project profitability index of 0.329. The present value of the future cash inflows from this investment is: A. $79,740 B. $45,147 C. $60,000 D. Cannot be determined with available data. Project profitability index = Net present value of the project Investment required 0.329 = Net present value of the project $60,000 Net present value of the project = 0.329 $60,000 = $19,740 Net present value of the project = Present value of the future cash inflows - Investment required $19,740 = Present value of the future cash inflows - $60,000 Present value of the future cash inflows = $19,740 + $60,000 = $79,740
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59. Blanding Company is considering several investment proposals, as shown below:
Using the project profitability index, the ranking would be: A. D, B, A, C B. D, C, A, B C. C, D, A, B D. C, A, D, B
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60. (Ignore income taxes in this problem.) Deibel Corporation is considering a project that would require an investment of $59,000. No other cash outflows would be involved. The present value of the cash inflows would be $66,080. The profitability index of the project is closest to: A. 0.88 B. 0.12 C. 1.12 D. 0.11
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61. Perkins Company is considering several investment proposals, as shown below:
Rank the proposals in terms of preference using the project profitability index: A. D, B, C, A B. B, D, C, A C. B, D, A, C D. A, C, B, D
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62. (Ignore income taxes in this problem.) The Jackson Company has invested in a machine that cost $70,000, that has a useful life of seven years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of four years. Given these data, the simple rate of return on the machine is closest to: A. 7.1% B. 8.2% C. 10.7% D. 39.3%
*Payback period = Investment required Annual net cash inflow 4 years = $70,000 Annual net cash inflow Annual net cash inflow = $70,000 4 years = $17,500 yearly cash flow Simple rate of return = Annual incremental net operating income Initial investment = $7,500 $70,000 = 10.70%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-05 Determine the payback period for an investment Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Hard
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63. (Ignore income taxes in this problem.) Czaplinski Corporation is considering a project that would require an investment of $323,000 and would last for 7 years. The incremental annual revenues and expenses generated by the project during those 7 years would be as follows:
The scrap value of the project's assets at the end of the project would be $22,000. The payback period of the project is closest to: A. 9.7 years B. 4.4 years C. 4.1 years D. 10.4 years
Payback period = Investment required Annual net cash inflow = $323,000 $74,000 per year = 4.4 years
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-05 Determine the payback period for an investment Level: Easy
13-92
64. (Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $5,000 per year. The cost of these prescriptions to the pharmacy will be about $2,000 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is: A. 3.0 years B. 1.8 years C. 2.0 years D. 1.2 years Annual net cash inflow = $5,000 - $2,000 = $3,000 Payback period = Investment required Annual net cash inflow = $9,000 $3,000 per year = 3.0 years
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-05 Determine the payback period for an investment Level: Medium
65. (Ignore income taxes in this problem.) The Higgins Company has just purchased a piece of equipment at a cost of $120,000. This equipment will reduce operating costs by $40,000 each year for the next eight years. This equipment replaces old equipment which was sold for $8,000 cash. The new equipment has a payback period of: A. 8.0 years B. 2.8 years C. 10.0 years D. 3.0 years Payback period = Investment required Annual net cash inflow = ($120,000 - $8,000) $40,000 per year = 2.8 years
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66. (Ignore income taxes in this problem.) The management of Rusell Corporation is considering a project that would require an investment of $282,000 and would last for 6 years. The annual net operating income from the project would be $107,000, which includes depreciation of $43,000. The scrap value of the project's assets at the end of the project would be $24,000. The payback period of the project is closest to: A. 1.9 years B. 2.4 years C. 1.7 years D. 2.6 years
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67. (Ignore income taxes in this problem.) Rogers Company is studying a project that would have a ten-year life and would require an $800,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project:
The company's required rate of return is 8%. What is the payback period for this project? A. 3 years B. 6.67 years C. 2 years D. 4 years
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68. (Ignore income taxes in this problem.) The Jason Company is considering the purchase of a machine that will increase revenues by $32,000 each year. Cash outflows for operating this machine will be $6,000 each year. The cost of the machine is $65,000. It is expected to have a useful life of five years with no salvage value. For this machine, the simple rate of return is: A. 20% B. 40% C. 49.2% D. 9.2%
Simple rate of return = Annual incremental net operating income Initial investment = $13,000 $65,000 = 20%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Medium
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69. (Ignore income taxes in this problem.) Blaine Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $180,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $12,000 per year to operate and maintain, but would save $48,000 per year in labor and other costs. The old machine can be sold now for scrap for $20,000. What is the simple rate of return on the new machine (round off your answer to the nearest one-hundredth of a percent)? A. 10.00% B. 26.67% C. 22.50% D. 11.25%
Simple rate of return = Annual incremental net operating income Initial investment = $18,000 ($180,000 - $20,000) = 11.25%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Hard
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70. (Ignore income taxes in this problem.) The management of Burney Corporation is investigating purchasing equipment that would increase sales revenues by $74,000 per year and cash operating expenses by $32,000 per year. The equipment would cost $115,000 and have a 5 year life with no salvage value. The simple rate of return on the investment is closest to: A. 36.5% B. 25.7% C. 20.0% D. 16.5%
Simple rate of return = Annual incremental net operating income Initial investment = $19,000 $115,000 = 16.5%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Easy
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71. (Ignore income taxes in this problem.) Tu Corporation is investigating automating a process by purchasing a machine for $423,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $112,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $27,000. The annual depreciation on the new machine would be $47,000. The simple rate of return on the investment is closest to: A. 15.4% B. 16.4% C. 26.5% D. 11.1%
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72. (Ignore income taxes in this problem.) Hartong Corporation is contemplating purchasing equipment that would increase sales revenues by $185,000 per year and cash operating expenses by $89,000 per year. The equipment would cost $416,000 and have a 8 year life with no salvage value. The annual depreciation would be $52,000. The simple rate of return on the investment is closest to: A. 23.8% B. 12.5% C. 10.6% D. 23.1%
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73. (Ignore income taxes in this problem.) An expansion at Fenstermacher, Inc., would increase sales revenues by $315,000 per year and cash operating expenses by $186,000 per year. The initial investment would be for equipment that would cost $405,000 and have a 5 year life with no salvage value. The annual depreciation on the equipment would be $81,000. The simple rate of return on the investment is closest to: A. 31.9% B. 15.2% C. 20.0% D. 11.9%
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74. (Ignore income taxes in this problem.) The management of Rouleau Corporation is investigating automating a process. Old equipment, with a current salvage value of $10,000, would be replaced by a new machine. The new machine would be purchased for $240,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $64,000 per year in cash operating costs. The simple rate of return on the investment is closest to: A. 10.0% B. 26.7% C. 10.4% D. 16.7%
(Ignore income taxes in this problem.) Shields Company has gathered the following data on a proposed investment project:
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75. The payback period for the investment is closest to: A. 0.2 years B. 1.0 years C. 3.0 years D. 5.0 years Payback period = Investment required Annual net cash inflow = $400,000 $80,000 = 5 years
76. The simple rate of return on the investment is closest to: A. 5% B. 10% C. 15% D. 20%
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78. The internal rate of return on the investment is closest to: A. 11% B. 13% C. 15% D. 17% Factor of the internal rate of return = Investment required Annual net cash inflow = $400,000 $80,000 = 5.000 The factor of 5.000 for 10 years represents an internal rate of return of 15%.
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(Ignore income taxes in this problem.) Chow Company has gathered the following data on a proposed investment project:
79. The payback period for the investment is closest to: A. 8.00 years B. 1.42 years C. 4.75 years D. 0.21 years Payback period = Investment required Annual net cash inflow = $142,500 $30,000 = 4.75 years
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80. The simple rate of return on the investment is closest to: A. 8.55% B. 10.00% C. 21.05% D. 33.55%
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82. The internal rate of return on the investment is closest to: A. 13% B. 15% C. 14% D. 12% Factor of the internal rate of return = Investment required Annual net cash inflow = $142,500 $30,000 = 4.75 The factor of 4.75 for 8 years represents an internal rate of return of 13%.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Level: Hard
(Ignore income taxes in this problem.) Bugle's Bagel Bakery is investigating the purchase of a new bagel making machine. This machine would provide an annual operating cost savings of $3,650 for each of the next 4 years. In addition, this new machine would allow the production of one new type of bagel which would result in selling 1,500 dozen more bagels each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450 and it will have a 4 year useful life. Bugle's discount rate is 14%.
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83. The total annual cash inflow from this machine for capital budgeting purposes is: A. $3,650 B. $5,150 C. $4,750 D. $5,000
84. The internal rate of return for this investment is closest to: A. 14% B. 16% C. 18% D. 20% Factor of the internal rate of return = Investment required Annual net cash inflow = $13,450 $5,000 = 2.69 The factor of 2.69 for 4 years represents an internal rate of return of 18%.
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85. The net present value of this investment is closest to: A. $1,120 B. $6,550 C. $13,450 D. $20,000
(Ignore income taxes in this problem.) Oriental Company has gathered the following data on a proposed investment project:
The company uses straight-line depreciation on all equipment.
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86. The payback period for the investment would be: A. 2.41 years B. 0.25 years C. 10 years D. 4 years Payback period = Investment required Annual net cash inflow = $200,000 $50,000 = 4 years
87. The simple rate of return on the investment would be: A. 10% B. 35% C. 15% D. 25%
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88. The net present value of this investment would be: A. $(14,350) B. $107,250 C. $77,200 D. $200,000
(Ignore income taxes in this problem.) Houis Inc. is considering the acquisition of a new machine that costs $300,000 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:
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Level: Medium Source: CMA, adapted
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Year 3: $103,000 $110,000 = 0.9 Payback = 2.9 years

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-05 Determine the payback period for an investment Level: Medium Source: CMA, adapted
(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment that costs $480,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are:
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Level: Easy Source: CMA, adapted
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Year 3: $15,000 $157,000 = 0.1 Payback = 3.1 years

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-05 Determine the payback period for an investment Level: Easy Source: CMA, adapted
(Ignore income taxes in this problem.) The management of Melchiori Corporation is considering the purchase of a machine that would cost $310,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $116,000 per year. The company requires a minimum pretax return of 16% on all investment projects.
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93. The present value of the annual cost savings of $116,000 is closest to: A. $427,460 B. $696,000 C. $175,448 D. $1,041,462
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(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision:
Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years Mr. Lichty plans to close the car wash and retire.
95. If the new equipment is purchased, the present value of all cash flows that occur now is: A. $(45,000) B. $(39,000) C. $(37,000) D. $(34,000)
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96. If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is: A. $(26,537) B. $(15,164) C. $(18,463) D. $(37,901)
(Ignore income taxes in this problem.) The Finney Company is reviewing the possibility of remodeling one of its showrooms and buying some new equipment to improve sales operations. The remodeling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
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97. The immediate cash outflow required for this project would be: A. $(120,000) B. $(150,000) C. $(90,000) D. $(130,000)
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98. What would the annual net cash inflows from this project have to be in order to justify investing in remodeling? A. $14,495 B. $35,842 C. $16,147 D. $29,158
Minimum annual cash flows from the intangible benefits = Negative net present value to be offset Present value factor = $140,920 4.833 = $29,158
(Ignore income taxes in this problem.) Gillaspie, Inc., is considering the purchase of a machine that would cost $300,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $51,000. The machine would reduce labor and other costs by $86,000 per year. Additional working capital of $10,000 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 13% on all investment projects.
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99. 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: A. -$8,420 B. $25,170 C. -$4,570 D. $0
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(Ignore income taxes in this problem.) Rushforth Manufacturing has $90,000 to invest in either Project A or Project B. The following data are available on these projects:
Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Rushforth's required rate of return is 14%.
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101. The net present value of Project A is: A. $27,341 B. $94,000 C. $71,000 D. $117,341
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102. The net present value of Project B is: A. $57,225 B. $30,025 C. $7,225 D. $13,350
(Ignore income taxes in this problem.) Meharg Corporation is considering the purchase of a machine that would cost $120,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $25,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $30,000. The company requires a minimum pretax return of 10% on all investment projects.
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103. The present value of the annual cost savings of $30,000 is closest to: A. $18,630 B. $183,163 C. $150,000 D. $113,730
104. The net present value of the proposed project is closest to: A. $14,905 B. -$6,270 C. $9,255 D. $18,730
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(Ignore income taxes in this problem.) Trybus Corporation uses a discount rate of 16% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 5 years has thus far yielded a net present value of -$233,764. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment.
105. Ignoring any salvage value, to the nearest whole dollar 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? A. $71,400 B. $37,402 C. $233,764 D. $46,753 Minimum annual cash flows from the intangible benefits = Negative net present value to be offset Present value factor = $233,764 3.274 = $71,400
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106. Ignoring any cash flows from intangible benefits, to the nearest whole dollar how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive? A. $491,101 B. $1,461,025 C. $233,764 D. $37,402 Minimum salvage value = Negative net present value to the offset Present value factor = $233,764 0.476 = $491,101
(Ignore income taxes in this problem.) The management of Gimenez Corporation is investigating an investment in equipment that would have a useful life of 7 years. The company uses a discount rate of 17% 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 -$274,265.
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107. 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? A. $39,181 B. $274,265 C. $46,625 D. $69,930 Minimum annual cash flows from the intangible benefits = Negative net present value to be offset Present value factor = $274,265 3.922 = $69,930
108. Ignoring the cash inflows, 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? A. $274,265 B. $46,625 C. $1,613,324 D. $823,619 Minimum salvage value = Negative net present value to the offset Present value factor = $274,265 0.333 = $823,619
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(Ignore income taxes in this problem.) Burchell Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is -$594,381. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft.
109. Ignoring the annual benefit, 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. $3,962,540 B. $89,157 C. $594,381 D. $1,580,801 Minimum salvage value = Negative net present value to the offset Present value factor = $594,381 0.376 = $1,580,801
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110. Ignoring any salvage value, to the nearest whole dollar how large would the annual benefit have to be to make the investment in the aircraft financially attractive? A. $594,381 B. $89,157 C. $84,912 D. $142,880 Minimum annual cash flows from the intangible benefits = Negative net present value to be offset Present value factor = $594,381 4.160 = $142,880
(Ignore income taxes in this problem.) The management of Pattee Corporation is considering three investment projects-M, N, and O. Project M would require an investment of $25,000, Project N of $67,000, and Project O of $70,000. The present value of the cash inflows would be $28,750 for Project M, $73,700 for Project N, and $79,100 for Project O.
111. The profitability index of investment project N is closest to: A. 0.10 B. 0.90 C. 0.09 D. 1.10
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112. Rank the projects according to the profitability index, from most profitable to least profitable. A. O, M, N B. O, N, M C. M, O, N D. N, M, O
(Ignore income taxes in this problem.) Altro Corporation is considering the following three investment projects:
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113. The profitability index of investment project S is closest to: A. 0.15 B. 1.17 C. 0.83 D. 0.17
114. Rank the projects according to the profitability index, from most profitable to least profitable. A. S, T, R B. R, T, S C. T, R, S D. T, S, R
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(Ignore income taxes in this problem.) The Crawford Company is pondering an investment in a machine that costs $350,000, that will have a useful life of eight years, and that will have a salvage value of $25,000. If this machine is purchased, a similar, old machine will be sold at a salvage value of $40,000. The anticipated yearly revenues and expenses associated with the new machine are:
All of the revenues and expenses except depreciation are for cash. The company's required rate of return is 12%. The annual cash flows occur uniformly throughout the year.
115. The payback period, to the nearest tenth of a year, of this investment is: A. 6.2 years B. 3.2 years C. 3.6 years D. 4.0 years
Payback period = Investment required Annual net cash inflow = ($350,000 - $40,000) $97,000 per year = 3.2 years
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116. The simple rate of return, to the nearest tenth of a percent, of this investment is: A. 18.2% B. 16.1% C. 31.3% D. 27.7% Simple rate of return = Annual incremental net operating income Initial investment = $56,375 $310,000 = 18.2%
(Ignore income taxes in this problem.) Friden Company has just purchased a new piece of equipment with the following characteristics:
117. Assume straight-line depreciation and no salvage value. The payback period would be: A. 4.5 years B. 10 years C. 2.7 years D. 8.2 years Payback period = Investment required Annual net cash inflow = $27,000 $6,000 = 4.5 years
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118. The simple rate of return would be approximately: A. 22.2% B. 12.2% C. 11.1% D. 10%
Essay Questions
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119. (Ignore income taxes in this problem.) Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,200,000 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. a. Because depreciation is the only noncash item on the income statement, the annual net cash flow can be computed by adding back depreciation to net operating income.
b. The formula for computing the factor of the internal rate of return (IRR) is: Factor of the IRR = Investment required Annual net cash inflow $1,200,000 $300,000 = 4.00 Factor To the nearest whole percent, the internal rate of return is 21% c. The formula for the payback period is: Payback period = Investment required Annual net cash inflow $1,200,000 $300,000 per year = 4.0 years d. The formula for the simple rate of return is: Simple rate of return = Annual incremental net operating income Initial investment $180,000 $1,200,000 = 15%
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method Learning Objective: 13-05 Determine the payback period for an investment Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Medium
120. (Ignore income taxes in this problem.) Farah Corporation has provided the following data concerning a proposed investment project:
The company uses a discount rate of 11%. The working capital would be released at the end of the project. Required: Compute the net present value of the project.
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121. (Ignore income taxes in this problem.) Dunay Corporation is considering investing $810,000 in a project. The life of the project would be 9 years. The project would require additional working capital of $24,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $162,000. The salvage value of the assets used in the project would be $41,000. The company uses a discount rate of 17%. Required: Compute the net present value of the project.
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122. (Ignore income taxes in this problem.) Whatley Inc. is considering investing in a project that would require an initial investment of $460,000. The life of the project would be 5 years. The annual net cash inflows from the project would be $138,000. The salvage value of the assets at the end of the project would be $69,000. The company uses a discount rate of 15%. Required: Compute the net present value of the project.
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123. (Ignore income taxes in this problem.) Bill Anders retires in 8 years. He has $650,000 to invest and is considering a franchise for a fast-food outlet. He would have to purchase equipment costing $500,000 to equip the outlet and invest an additional $150,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $160,000. Mr. Anders would close the outlet in 8 years. He estimates that the equipment could be sold at that time for about 10% of its original cost. Mr. Anders' required rate of return is 16%. Required: What is the investment's net present value when the discount rate is 16 percent? Is this an acceptable investment? Present
Yes, the outlet is an acceptable investment because its net present value is positive.
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124. (Ignore income taxes in this problem.) Weilbacher Corporation is considering the purchase of a machine that would cost $240,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $50,000. The machine would reduce labor and other costs by $62,000 per year. The company requires a minimum pretax return of 16% on all investment projects. Required: Determine the net present value of the project. Show your work!
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125. (Ignore income taxes in this problem.) Jim Bingham is considering starting a small catering business. He would need to purchase a delivery van and various equipment costing $125,000 to equip the business 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. Jim's marketing studies indicate that the annual cash inflow from the business will amount to $120,000. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. 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. Required: Would you advise Jim to make this investment?
Bingham should make this investment because the NPV is positive.
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126. (Ignore income taxes in this problem.) Jane Summers has just inherited $600,000 from her mother's estate. She is considering investing part of these funds in a small catering business. She would need to purchase a delivery van and various equipment costing $100,000 to equip the business and another $50,000 for inventories and other working capital needs. Rent on the building used by the business will be $24,000 per year. Jane's marketing studies indicate that the annual cash inflow from the business will amount to $90,000. In addition to the building rent, other annual cash outflows for operating costs will amount to $30,000. Jane wants to operate the catering business for only six years. She estimates that the equipment could be sold at that time for about 10% of its original cost. Jane's required rate of return is 16%. Required: Compute the net present value of this investment.
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127. (Ignore income taxes in this problem.) The management of Basler Corporation is considering the purchase of a machine that would cost $440,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $88,000 per year. 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!
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128. (Ignore income taxes in this problem.) A newly developed device is being considered by Fairway Foods for use in processing and canning peaches. The device, which is available only on a royalty basis, is reported to be a great labor saver. Fairway's production manager has gathered the following data:
The new device must be obtained through a licensing arrangement with the developer. The license period lasts for only 8 years. Fairway Foods' required rate of return is 10%. Required: By use of the incremental cost approach, compute the net present value of the proposed licensing of the new device. Show all computations in good form. Should the company enter into a licensing arrangement to use the new device?
The company should not license the new device, because it has a negative net present value at a 10% discount rate.
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129. (Ignore income taxes in this problem.) Janes, Inc., is considering the purchase of a machine that would cost $430,000 and would last for 6 years, at the end of which, the machine would have a salvage value of $47,000. 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 6 years. The company requires a minimum pretax return of 17% on all investment projects. Required: Determine the net present value of the project. Show your work!
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130. (Ignore income taxes in this problem.) Juliar Inc. has provided the following data concerning a proposed investment project:
The company uses a discount rate of 12%. Required: Compute the net present value of the project.
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131. (Ignore income taxes in this problem.) The management of Peregoy Corporation is considering the purchase of an automated molding machine that would cost $255,552, would have a useful life of 5 years, and would have no salvage value. The automated molding machine would result in cash savings of $64,000 per year due to lower labor and other costs. Required: Determine the internal rate of return on the investment in the new automated molding machine. Show your work! Factor of the internal rate of return = Investment required Annual net cash inflow = $255,552 $64,000 = 3.993 The factor of 3.993 for 5 years represents an internal rate of return of 8%.
132. (Ignore income taxes in this problem.) Hayner Limos, Inc., is considering the purchase of a limousine that would cost $149,868, would have a useful life of 9 years, and would have no salvage value. The limousine would bring in cash inflows of $36,000 per year in excess of its cash operating costs. Required: Determine the internal rate of return on the investment in the new limousine. Show your work! Factor of the internal rate of return = Investment required Annual net cash inflow = $149,868 $36,000 = 4.163 The factor of 4.163 for 9 years represents an internal rate of return of 19%.
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133. (Ignore income taxes in this problem.) The management of Eastridge Corporation is considering the purchase of a machine that would cost $50,470 and would have a useful life of 7 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $14,000 per year. Required: Determine the internal rate of return on the investment in the new machine. Show your work! Factor of the internal rate of return = Investment required Annual net cash inflow = $50,470 $14,000 = 3.605 The factor of 3.605 for 7 years represents an internal rate of return of 20%.
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134. (Ignore income taxes in this problem.) Rosenholm Corporation uses a discount rate of 18% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 5 years has thus far yielded a net present value of -$327,960. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. Required: a. Ignoring any salvage value, 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? b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive? a. Minimum annual cash flows from the intangible benefits = Negative net present value to be offset Present value factor = $327,960 3.127 = $104,880 b. Minimum salvage value = Negative net present value to the offset Present value factor = $327,960 0.437 = $750,481
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135. (Ignore income taxes in this problem.) Verdin Corporation uses a discount rate of 16% in its capital budgeting. Management is considering an investment in telecommunications equipment with a useful life of 6 years. Excluding the salvage value of the equipment, the net present value of the investment in the equipment is -$166,194. Required: How large would the salvage value of the telecommunications equipment have to be to make the investment in the telecommunications equipment financially attractive? Minimum salvage value = Negative net present value to the offset Present value factor = $166,194 0.410 = $405,351
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136. (Ignore income taxes in this problem.) The management of an amusement park is considering purchasing a new ride for $40,000 that would have a useful life of 10 years and a salvage value of $4,000. The ride would require annual operating costs of $19,000 throughout its useful life. The company's discount rate is 8%. 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?
Minimum annual cash flows required = Negative net present value to be offset Present value factor $165,638 6.710 = $24,685 This much additional revenue would result in a zero net present value. Any less than this and the net present value would be negative. Any more than this and the net present value would be positive.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-03 Evaluate an investment project that has uncertain cash flows Level: Hard
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137. (Ignore income taxes in this problem.) The management of Rosengarten Corporation is investigating the purchase of a new satellite routing system with 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 its intangible benefits, is -$607,020. 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? Minimum annual cash flows from the intangible benefits = Negative net present value to be offset Present value factor = $607,020 5.206 = $116,600
138. (Ignore income taxes in this problem.) Ahlman Corporation is considering the following three investment projects:
Required: Rank the investment projects using the project profitability index. Show your work
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139. (Ignore income taxes in this problem.) The management of Suddreth Corporation is considering the following three investment projects:
The only cash outflows are the initial investments in the projects. Required: Rank the investment projects using the project profitability index. Show your work
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140. (Ignore income taxes in this problem.) Brewer Company is considering purchasing a machine that would cost $537,600 and have a useful life of 9 years. The machine would reduce cash operating costs by $82,708 per year. The machine would have a salvage value of $107,520 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. a. The payback period is computed as follows: Payback period = Investment required Annual net cash flow = $537,600 $82,708 = 6.50 years In this case the salvage value plays no part in the payback period because all of the investment is recovered before the end of the project. b. The simple rate of return is computed as follows:
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-05 Determine the payback period for an investment Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Medium
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141. (Ignore income taxes in this problem.) Gocke Company is considering purchasing a machine that would cost $478,800 and have a useful life of 5 years. The machine would reduce cash operating costs by $114,000 per year. The machine would have no salvage value. Required: a. Compute the payback period for the machine. b. Compute the simple rate of return for the machine. a. The payback period is computed as follows:Payback period = Investment required Annual net cash flow = $478,800 $114,000 = 4.20 years b. The simple rate of return is computed as follows:
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 13-05 Determine the payback period for an investment Learning Objective: 13-06 Compute the simple rate of return for an investment Level: Easy
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142. (Ignore income taxes in this problem.) Limon Corporation is considering a project that would require an initial investment of $204,000 and would last for 6 years. The incremental annual revenues and expenses for each of the 6 years would be as follows:
At the end of the project, the scrap value of the project's assets would be $12,000. Required: Determine the payback period of the project. Show your work!
Payback period = Investment required Annual net cash inflow = $204,000 $111,000 = 1.84 years
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143. (Ignore income taxes in this problem.) The management of Fowkes Corporation is considering a project that would require an initial investment of $331,000 and would last for 8 years. The annual net operating income from the project would be $54,000, including depreciation of $40,000. At the end of the project, the scrap value of the project's assets would be $11,000. Required: Determine the payback period of the project. Show your work!
Payback period = Investment required Annual net cash inflow = $331,000 $94,000 = 3.52 years
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144. (Ignore income taxes in this problem.) Sheridon Corporation is investigating automating a process by purchasing a new machine for $483,000 that would have a 7 year useful life and no salvage value. By automating the process, the company would save $140,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $29,000. The annual depreciation on the new machine would be $69,000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
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145. (Ignore income taxes in this problem.) The management of Orebaugh Corporation is investigating automating a process by replacing old equipment by a new machine. The old equipment would be sold for scrap now for $15,000. The new machine would cost $445,000, would have a 5 year useful life, and would have no salvage value. By automating the process, the company would save $165,000 per year in cash operating costs. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
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146. (Ignore income taxes in this problem.) Pal Corporation is contemplating purchasing equipment that would increase sales revenues by $438,000 per year and cash operating expenses by $258,000 per year. The equipment would cost $504,000 and have a 9 year life with no salvage value. The annual depreciation would be $56,000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
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147. (Ignore income taxes in this problem.) The management of Ossenfort Corporation is investigating purchasing equipment that would cost $440,000 and have a 8 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $192,000 per year and cash operating expenses by $61,000 per year. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
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Chapter 13 Managerial Accounting

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What are some methods of evaluating capital budgeting projects discussed in the document?

What are some methods of evaluating capital budgeting projects discussed in the document?

What factors are considered when calculating the payback period for a project?

What factors are considered when calculating the payback period for a project?

Chapter 13 - Capital Budgeting

Professional Exam Adapted

LO2: Internal rate of return

LO3: Uncertain cash flows

LO6: Simple rate of return

LO4: Preference ranking

LO1: Net present value

Single MC Single MC Single MC Single MC

Chapter 13 - Capital Budgeting

Chapter 13 Capital Budgeting Decisions

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Multiple Choice Questions

Chapter 13 - Capital Budgeting

A. Option A B. Option B C. Option C D. Option D

A. Option A B. Option B C. Option C D. Option D E. Option E

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

59. Blanding Company is considering several investment proposals, as shown below:

Using the project profitability index, the ranking would be: A. D, B, A, C B. D, C, A, B C. C, D, A, B D. C, A, D, B

61. Perkins Company is considering several investment proposals, as shown below:

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

The company uses straight-line depreciation on all equipment.

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting