Question 1

Jonathan, a student at Local University, has decided to major in accounting because his goal is to become an FBI agent. Jonathan knows that accounting is one of the entry programs that qualify an applicant for a special agent career. As most students do, Jonathan wants to purchase a nice car when he graduates in five years with his master’s degree. Because his expected salary will be good, he wants a high-performance sports car.  He has found the car of his dreams for $58,000. Jonathan’s parents have promised him a graduation present of $25,000 when he finishes his master’s degree.

Required:

a.	Calculate how much money Jonathan needs to deposit in his savings account today to be able to pay cash for the car upon graduation, assuming that his parents contribute what Jonathan expects. Jonathan can earn 8% on his deposit, compounded annually.

b.	Calculate how much money Jonathan needs to deposit in his savings accountant today to be able to pay cash for the car upon graduation, assuming that his parents contribute what Jonathan expects. Jonathan can earn 8% on his deposit, compounded semi-annually.

Accepted Answer

The answer of Jonathan, a student at Local University, has...

Question 2

Complete the following table by ansing "Yes" and "No" in the columns that apply to each item.First item is done for you.
 $$\begin{array}{|l|l|l|l|}
\hline & \textbf{Considers Time} & \textbf{Uses accounting} & \textbf{Considers cash flows } \
&\textbf{value of money}&\textbf{profitability}&\textbf{over life of project}\
\hline \text{Net present value} & & & \
\hline \text{Internal rate of return} & & & \
\hline \text{Present value of an annuity} & & & \
\hline \text{Payback period with uneven}\
 \text{cash flows} & & & \
\hline \text{Return of investment} & & & \
\hline \text{Simple rate of return} & & & \
\hline
\end{array}$$

Accepted Answer

The answer of Complete the following table by ansing "Yes"...

Question 3

Sycamore Industries has provided the following information on a proposed project:
 $$\begin{array} { | l | l | } 
\hline \text { Initial net investment cost of project } & \$ 140,000 \
\hline \text { Annual cash inflows } & \$ 20,000 \
\hline \text { Salvage value } & \$ 0 \
\hline \text { Useful life of project } & 10 \text { years } \
\hline \text { Required rate of return } & 10 \% \
\hline \text { Straight-line depreciation per year } & \$ 14,000 \
\hline
\end{array}$$ 
a.What is the payback period for the investment?
b.What is the simple rate of return on the investment?
c.What is the internal rate of return on the investment?

Accepted Answer

The answer of Sycamore Industries has provided the following information...

Question 4

Friendly Freddie's Furniture Store uses an 8-year old van to deliver furniture to customers within a 50-mile radius of the store.The van has an original cost of $22,000.It costs $1,000 each month to operate the van.Unfortunately,the van was in an accident last week and it will cost $5,000 for repairs.Freddie has found a new van that will cost $35,000.Freddie expects to get 10 years use from the new van and estimates that the operating costs will be $800 each month.Freddie can sell his old van as is for $2,500.
Required:

Identify the amount and timing of the cash flows relevant to Friendly Freddie’s decision to replace the van.

Accepted Answer

The answer of Friendly Freddie's Furniture Store uses an 8-year...

Question 5

Marple Industries is evaluating a capital project with a net initial investment of $120,000.The project is expected to generate net cash inflows of $15,000 each year.Calculate the payback period for the project.

Accepted Answer

The answer of Marple Industries is evaluating a capital project...

Question 6

Assume that on January 1,2012 you purchased ten shares of XYZ Corporate stock for $22 each.On September 30,2014,you sell one-half of your stock for $28 each.What is your return on your investment?

Accepted Answer

The answer of Assume that on January 1,2012 you purchased...

Question 7

If you wish to have $25,000 in five years,how much must you deposit today if you will earn 12% compounded annually on your investment?

Accepted Answer

The answer of If you wish to have $25,000 in...

Question 8

Betty's Bakery needs to purchase a new oven costing $8,000 to replace her old oven that cannot be repaired.The new oven has several features that the old oven did not have and is expected to have a useful life of 12 years.Betty does not expect the oven will have any salvage value at the end of its life.
a.If Betty's required rate of return is 8%,what level of annual cash savings must the oven generate to be considered an acceptable investment under the net present value method?
b.If Betty decides the cash savings will not be sufficient to justify the cost of the new oven,list two alternatives she might consider.

Accepted Answer

The answer of Betty's Bakery needs to purchase a new...

Question 9

Felder's manufacturing is considering the purchase of new equipment that costs $750,000 to replace equipment that is old and inefficient.Felder has found a buyer for the old equipment who will pay $8,000 for it.The new equipment is expected to produce $12,000 of additional revenue each year,but will result in additional maintenance cost of $2,000.The new equipment will have a salvage of $10,000 and will be depreciated over 10 years.
Required:

Identify the amount and timing of the cash flows relevant to Felder’s decision to purchase the new equipment.

Accepted Answer

The answer of Felder's manufacturing is considering the purchase of...

Question 10

Identify which of the following items would be classified as capital assets.

Accepted Answer

The answer of Identify which of the following items would...

Question 11

The following data pertain to an investment proposal:
 $\begin{array}{ll}
\text { Cost of investment } & \$ 45,000 \
\text { Annual cost savings } & \$ 10,000 \
\text { Estimated salvage value } & \$ 0 \
\text { Expected life of investment } & 5 \text { years } \
\text { Discount rate } & 10 \%
\end{array}$ What is the present value of the proposed investment?

Accepted Answer

The answer of The following data pertain to an investment...

Question 12

Marilyn's parents have agreed to help her purchase a new car upon graduation in four years.They have given her two choices.The first choice is that they will give her $4,000 each year for the next four years for her to invest herself.The second choice is that they will wait four years and give her $18,000.Marilyn can invest the money at a 4% rate.
a.Which option should Marilyn choose? Why?
b.If Marilyn can invest the money at 8%,which options should she choose? Why?

Accepted Answer

The answer of Marilyn's parents have agreed to help her...

Question 13

Your company is considering a capital project that will require a net initial investment of $249,972.The project is expected to have a 7-year life and will generate an annual cash inflow of $43,200.What is the internal rate of return?

Accepted Answer

The answer of Your company is considering a capital project...

Question 14

Rayburn Industries is evaluating the investment of $140,000 in a new packing machine that should provide annual cash operating inflows of $30,000 for 6 years.At the end of 6 years,the packing machine will be sold for $5,000.Rayburn's required rate of return is 8%.
a.What is the machine's net present value?
b.Based on net present value,should Rayburn purchase the new packing machine? Why or Why not?
c.List two qualitative items that Rayburn should consider in the decision to purchase the new machine.

Accepted Answer

The answer of Rayburn Industries is evaluating the investment of...

Question 15

ABC Manufacturing is evaluating two capital projects.The company's choice will be based on the profitability index.Project #1 has a present value of cash flows of $200,000 and a net initial investment of $180,000 while Project #2 has a present value of future cash flows of $820,000 and a net initial investment of $800,000.Which project will ABC choose? Why?

Accepted Answer

The answer of ABC Manufacturing is evaluating two capital projects.The...

Question 16

If you wish to have $25,000 at the end of five years,how much must your deposit each year if you earn 12% compounded annually?

Accepted Answer

The answer of If you wish to have $25,000 at...

Question 17

General Hospital is planning to add a new diagnostic machine which should improve its quality of certain blood tests.The machine under consideration has a cost of $79,189 and is expected to save the hospital $8,000 each year.The machine has an expected useful life of 14 years.
a.Calculate the internal rate of return on the diagnostic machine.
b.If the hospital uses a hurdle rate of 6%,should the diagnostic machine be purchased? Why or why not?

Accepted Answer

The answer of General Hospital is planning to add a...

Question 18

Patricia is 66 years old and is planning to retire this year.She is covered under her company's retirement policy which gives her two payment options.The first option is to receive annuity payments of $20,000 each year for the next 20 years.The second option is to receive $250,000 immediately upon retirement.The interest rate is 4%.
a.What is the present value of Patricia's first option?
b.What is the present value of Patricia's second option?
c.Which option should Patricia choose?

Accepted Answer

The answer of Patricia is 66 years old and is...

Question 19

The following data pertain to an investment proposal:
 $\begin{array}{lr}
\text { Cost of investment } & \$ 45,000 \
\text { Annual cost savings } & \$ 10,000 \
\text { Expected life of investment } & 5 \text { years } \
\text { Discount rate } & 10 \%
\end{array}$ What is the present value of the proposed investment?

Accepted Answer

The answer of The following data pertain to an investment...

Question 20

ABC Company is considering the purchase of a new piece of equipment costing $138,875. The equipment has a 7-year useful life and is expected to generate $24,000 in annual cost savings. ABC has a 4% required rate of return.

Required:

a.	What is the internal rate of return for the equipment round to nearest factor

b.	Should ABC purchase the new equipment? Why or Why not?

Accepted Answer

The answer of ABC Company is considering the purchase of...

Quiz 9: Capital Budgeting