Question 1

(Ignore income taxes in this problem.) Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects:
  Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.
-The net present value of Project A is closest to:

Accepted Answer

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Question 2

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?

Accepted Answer

Minimum annual cash flows from the intangible benefits
= Negative net present value to be offset ÷ Present value factor
= $439,238 ÷ 3.517 = $124,890

Question 3

(Ignore income taxes in this problem.) Becker Billing Systems, Inc., has an antiquated high-capacity printer that needs to be upgraded. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:
  The company uses a 10% discount rate and the total-cost approach to capital budgeting analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of ten years.
-The net present value of the overhaul alternative is closest to:

Accepted Answer

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Question 4

(Ignore income taxes in this problem.) Paragas, Inc., is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 19% on all investment projects.
-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:

Accepted Answer

11ea7761_15c3_8729_81a5_359663c4aa53_TB2580_00 Combined present value = -$4,000 + $996 = -$3,004

Question 5

(Ignore income taxes in this problem.) Lambert Manufacturing has $100,000 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 and the total cost approach to net present value analysis. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's required rate of return is 14%.
-The net present value of Project A is:

Accepted Answer

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Question 6

(Ignore income taxes in this problem.) Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects:
  Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.
-The net present value of Project B is closest to:

Accepted Answer

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Question 7

(Ignore income taxes in this problem.) Almendarez Corporation is considering the purchase of a machine that would cost $320,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $51,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $72,000. The company requires a minimum pretax return of 18% on all investment projects.
-The net present value of the proposed project is closest to:

Accepted Answer

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Question 8

(Ignore income taxes in this problem.) Almendarez Corporation is considering the purchase of a machine that would cost $320,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $51,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $72,000. The company requires a minimum pretax return of 18% on all investment projects.
-The present value of the annual cost savings of $72,000 is closest to:

Accepted Answer

Present value = Cash flow × PV Factor
= $72,000 × 3.812 = $274,464

Question 9

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?

Accepted Answer

Minimum salvage value = Negative net present value to the offset ÷ Present value factor
= $273,300 ÷ 0.437 = $625,400

Question 10

(Ignore income taxes in this problem.) Paragas, Inc., is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 19% on all investment projects.
-The net present value of the proposed project is closest to:

Accepted Answer

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Question 11

(Ignore income taxes in this problem.) The management of Opray Corporation is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% on all investment projects.
-The net present value of the proposed project is closest to:

Accepted Answer

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Question 12

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?

Accepted Answer

Minimum annual cash flows from the intangible benefits
= Negative net present value to be offset ÷ Present value factor
= $155,606 ÷ 3.812 = $40,820

Question 13

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?

Accepted Answer

Minimum annual cash flows from the intangible benefits
= Negative net present value to be offset ÷ Present value factor
= $273,300 ÷ 3.127 = $87,400

Question 14

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?

Accepted Answer

Minimum salvage value = Negative net present value to the offset ÷ Present value factor
= $439,238 ÷ 0.543 = $808,910

Question 15

(Ignore income taxes in this problem.) The management of Opray Corporation is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% on all investment projects.
-The present value of the annual cost savings of $78,000 is closest to:

Accepted Answer

Present value = Cash flow × PV Factor
= $78,000 × 4.712 = $367,536

Question 16

(Ignore income taxes in this problem.) Treads Corporation is considering the purchase of a new machine to replace an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to buy the new machine, the old machine can be sold for $60,000. The old machine would have no salvage value in five years.
The new machine would be purchased for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, the company would benefit from annual cash savings of $300,000.
Treads Corporation uses a discount rate of 12%.
-The net present value of the project is closest to:

Accepted Answer

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Question 17

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?

Accepted Answer

Minimum salvage value = Negative net present value to the offset ÷ Present value factor
= $155,606 ÷ 0.314 = $495,561

Question 18

(Ignore income taxes in this problem.) Treads Corporation is considering the purchase of a new machine to replace an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to buy the new machine, the old machine can be sold for $60,000. The old machine would have no salvage value in five years.
The new machine would be purchased for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, the company would benefit from annual cash savings of $300,000.
Treads Corporation uses a discount rate of 12%.
-The internal rate of return of the project is closest to:

Accepted Answer

Factor of the internal rate of return = Investment required ÷ Annual net cash inflow
= $940,000 ÷ $300,000 = 3.133
This factor is closest to the present value of an annuity over 5 periods at 18%.

Question 19

(Ignore income taxes in this problem.) Lambert Manufacturing has $100,000 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 and the total cost approach to net present value analysis. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's required rate of return is 14%.
-The net present value of Project B is:

Accepted Answer

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Question 20

(Ignore income taxes in this problem.) Becker Billing Systems, Inc., has an antiquated high-capacity printer that needs to be upgraded. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:
  The company uses a 10% discount rate and the total-cost approach to capital budgeting analysis. The working capital required under the new system would be released for use elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of ten years.
-The net present value of the new system alternative is closest to:

Accepted Answer

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Quiz 13: Capital Budgeting Decisions