Question 1

The net present value of Project A is closest to:

Accepted Answer

11ea7998_5c46_6b43_911b_75dc41b0eee6_TB2627_00_TB2627_00

Question 2

The net present value of the proposed project is closest to:

Accepted Answer

11ea7998_5c47_55a8_911b_b108ec56dfc0_TB2627_00_TB2627_00 Reference: CH12-Ref12
(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.

Question 3

The net present value of the proposed project is closest to:

Accepted Answer

11ea7998_5c47_cada_911b_21fd8c6282fe_TB2627_00_TB2627_00 Reference: CH12-Ref13
(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.

Question 4

The net present value of the project is closest to:

Accepted Answer

11ea7998_5c48_400c_911b_afaeb2311605_TB2627_00_TB2627_00

Question 5

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
Reference: CH12-Ref18
(Ignore income taxes in this problem.)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.

Question 6

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%.
Reference: CH12-Ref15
(Ignore income taxes in this problem.)Jojola Corporation is investigating buying a small used aircraft for the use of its executives.The aircraft would have a useful life of 5 years.The company uses a discount rate of 13% in its capital budgeting.The net present value of the initial investment and the annual operating cash cost is -$439,238.Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft.

Question 7

The net present value of Project A is:

Accepted Answer

The project with the highest net present value (NPV) is the best choice. In this case, Project B has the highest NPV of $60,120, so it should be chosen. Project A has a lower NPV of $51,000 and Project C has an even lower NPV of $55,560. Project D has the highest absolute NPV, but it also requires the highest initial investment and has a longer payback period. Therefore, it may not be the best choice for the company. 11ea7998_5c46_1d20_911b_15aefd5cd31c_TB2627_00_TB2627_00

Question 8

The net present value of Project B is closest to:

Accepted Answer

11ea7998_5c46_9254_911b_b7c2c84b2ba7_TB2627_00_TB2627_00 Reference: CH12-Ref10
(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: 11ea7998_5c46_b965_911b_b51cbf79eb0e_TB2627_00_TB2627_00 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.

Question 9

The net present value of the new system alternative is closest to:

Accepted Answer

11ea7998_5c47_0787_911b_3bd869b2f48a_TB2627_00_TB2627_00 Reference: CH12-Ref11
(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.

Question 10

The net present value of the overhaul alternative is closest to:

Accepted Answer

11ea7998_5c46_e076_911b_9be69682616d_TB2627_00_TB2627_00

Question 11

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 12

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

11ea7998_5c47_a3c9_911b_ef2bd0174ebc_TB2627_00_TB2627_00 Combined present value = -$4,000 + $996 = -$3,004

Question 13

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 14

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 15

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

To determine the annual cash inflow needed to make the investment financially attractive, we need to calculate the present value of the future cash inflows and compare it to the cost of the equipment. This can be done using the formula:

PV = CF / (1 + r)^n

Where PV is the present value, CF is the annual cash inflow, r is the discount rate, and n is the number of years.

In this scenario, the cost of the equipment is $500,000 and the useful life is 5 years. We'll assume a discount rate of 10%. Using the formula, we get:

PV = 500,000 = CF / (1 + 0.1)^5
CF = 87,400

So the annual cash inflow would need to be $87,400 to make the investment financially attractive. Therefore, the best choice is C. 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 16

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

To determine the salvage value needed, we need to calculate the Present Value (PV) of the future cash flows from the investment, which includes the initial cost and annual benefits. Since the annual benefit is being ignored, the PV is simply the initial cost, which is $5,000,000. To make the investment financially attractive, the salvage value must at least equal the PV of the initial cost. Therefore, the salvage value must be at least $5,000,000. The closest option is D, $808,910. Minimum salvage value = Negative net present value to the offset ÷ Present value factor
= $439,238 ÷ 0.543 = $808,910

Question 17

The net present value of Project B is:

Accepted Answer

11ea7998_5c46_4431_911b_81c2d2590fa0_TB2627_00_TB2627_00 Reference: CH12-Ref9
(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: 11ea7998_5c46_4432_911b_99a92ee1ba8e_TB2627_00_TB2627_00 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%.

Question 18

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
Reference: CH12-Ref17
(Ignore income taxes in this problem.)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.

Question 19

The net present value of the proposed project is closest to:

Accepted Answer

11ea7998_5c48_18fb_911b_ad33640e9732_TB2627_00_TB2627_00 Reference: CH12-Ref14
(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%.

Question 20

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
Reference: CH12-Ref16
(Ignore income taxes in this problem.)Cabe Corporation uses a discount rate of 18% in its capital budgeting.Partial analysis of an investment in automated equipment with a useful life of 7 years has thus far yielded a net present value of -$155,606.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.

Quiz 12: Capital Budgeting Decisions

The net present value of Project A is closest to:

The net present value of the proposed project is closest to:

The net present value of the proposed project is closest to:

The net present value of the project is closest to:

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?

The internal rate of return of the project is closest to:

The net present value of Project A is:

The net present value of Project B is closest to:

The net present value of the new system alternative is closest to:

The net present value of the overhaul alternative is closest to:

The present value of the annual cost savings of $72,000 is closest to:

The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:

The present value of the annual cost savings of $78,000 is closest to:

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?

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?

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?

The net present value of Project B is:

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?

The net present value of the proposed project is closest to:

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?