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Exam 14: Capital Budgeting Decisions

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Question 201

Multiple Choice

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Waltermire Corporation has provided the following information concerning a capital budgeting project: The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The total cash flow net of income taxes in year 2 is:

A) $96,000
B) $24,000
C) $120,000
D) $80,000

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

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Question 202

Multiple Choice

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Dobrinski Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.The net present value of the project is closest to: (Round intermediate calculations and final answer to the nearest dollar amount.)

A) $144,270
B) $217,500
C) $89,450
D) $60,549

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

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Question 203

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The management of Hibert Corporation is considering three investment projects-W, X, and Y. Project W would require an investment of $21,000, Project X of $66,000, and Project Y of $95,000. The present value of the cash inflows would be $22,470 for Project W, $73,920 for Project X, and $98,800 for Project Y. (Ignore income taxes.) The profitability index of investment project X is closest to:

Almendarez Corporation is considering the purchase of a machine that would cost $150,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $14,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $35,000. The company requires a minimum pretax return of 10% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The net present value of the proposed project is closest to: (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Mesko Corporation has provided the following information concerning a capital budgeting project: The company's income tax rate is 30% and its after-tax discount rate is 15%. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.The net present value of the entire project is closest to:

The management of Hansley Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 18% 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 -$273,300. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.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?

The management of Elamin Corporation is considering the purchase of a machine that would cost $365,695 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $61,000 per year. The internal rate of return on the investment in the new machine is closest to (Ignore income taxes.) :Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

The investment in working capital at the start of an investment project can be deducted from revenues when computing taxable income.

The management of Crosson Corporation is investigating the purchase of a new satellite routing system with a useful life of 9 years. The company uses a discount rate of 17% in its capital budgeting. The net present value of the investment, excluding its intangible benefits, is -$173,055. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required: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?

Lafromboise Corporation has provided the following information concerning a capital budgeting project: The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 3 is:

Bonomo Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment.The income tax expense in year 3 is:

The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash outflows with the present value of its cash inflows.

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

Shanks Corporation is considering a capital budgeting project that involves investing $608,000 in equipment that would have a useful life of 3 years and zero salvage value. The company would also need to invest $22,000 immediately in working capital which would be released for use elsewhere at the end of the project in 3 years. The net annual operating cash inflow, which is the difference between the incremental sales revenue and incremental cash operating expenses, would be $312,000 per year. The project would require a one-time renovation expense of $63,000 at the end of year 2. The company uses straight-line depreciation and the depreciation expense on the equipment would be $202,667 per year. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The income tax rate is 30%. The after-tax discount rate is 15%.Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.Required:Determine the net present value of the project. (Negative amount must be entered with a minus sign. Round intermediate calculations and final answer to the nearest dollar amount.)

The management of Hansley Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 18% 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 -$273,300. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.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?

Byerly Corporation has provided the following data concerning an investment project that it is considering: Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The working capital would be released for use elsewhere at the end of the project. The net present value of the project is closest to:

Boynes Corporation is considering a capital budgeting project that would require investing $200,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $490,000 and annual incremental cash operating expenses would be $330,000. The project would also require an immediate investment in working capital of $10,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $70,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 14%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 2 is:

Basey Corporation has provided the following data concerning an investment project that it is considering: Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The working capital would be released for use elsewhere at the end of the project. The net present value of the project is closest to:

Coache Corporation is considering a capital budgeting project that would require an investment of $340,000 in equipment with a 4 year useful life and zero salvage value. The annual incremental sales would be $740,000 and the annual incremental cash operating expenses would be $460,000. In addition, there would be a one-time renovation expense in year 3 of $41,000. The company's income tax rate is 30%. The company uses straight-line depreciation on all equipment.The total cash flow net of income taxes in year 3 is:

Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000. The investment would generate annual cash inflows of $133,000 for the life of the project, which is 4 years. At the end of the project, equipment that had been used in the project could be sold for $32,000. The company's discount rate is 14%. The net present value of the project is closest to:Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.