FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 10: Capital Budgeting Decisions

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 31

True/False

Review LaterAdd Note

Review Later

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling 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%. -One of the strengths of the simple rate of return method is that it uses data about cash flows rather than accounting net income.

A) True
B) False

Correct Answer

verified

Show Answer

Question 32

Multiple Choice

Review LaterAdd Note

Review Later

$\text { Reference: } 10 - 02$ Oriental Company has gathered the following data on a proposed investment project: $\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\\hline \text { Annual net cash flows } & \$ 50,000 \\\hline \text { Life of the equipment } & 10 \text { years } \\\hline \text { Salvage value } & \$ 20 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$ The company uses straight-line depreciation on all equipment. -Stratford Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $90,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, and assuming the company's discount rate is 10%, what is the purchase price of the machine if the net present value of the investment is $170,000?

A) $170,000.
B) $268,120.
C) $438,120.
D) $221,950.

E) B) and D)
F) None of the above

Correct Answer

verified

Show Answer

Question 33

Multiple Choice

Review LaterAdd Note

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling 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%. -Which of the statements below is correct about an increase in the discount rate

$\text { Reference: } 10 - 03$ Apex Corp. is planning to buy production machinery costing $100,000. This machinery's expected useful life is five years, with no residual value. Apex uses a discount rate of 10% and has calculated the following data pertaining to the purchase and operation of this machinery: $\begin{array} { | c | c | } \hline \text { Year } & { \begin{array} { c } \text { Estimated } \\\text { annual net } \\\text { cash inflow }\end{array} } \\\hline 1 & \$ 60,000 \\\hline 2 & 30,000 \\\hline 3 & 20,000 \\\hline 4 & 20,000 \\\hline 5 & 20,000 \\\hline\end{array}$ -Some investment projects require that a company expand its working capital at the initiation of a project to service the greater volume of business that will be generated. Assuming a project in which the increased working capital will no longer be required after the end of the project, under the net present value method, these changes in working capital should be treated as:

$\text { Reference: 10-01 }$ Shields Company has gathered the following data on a proposed investment project: $\begin{array} { | l | l | } \hline \text { Investment required in equipment } & \$ 400,000 \\\hline \text { Annual cash inflows } & \$ 80,000 \\\hline \text { Salvage value } & \$ \quad 0 \\\hline \text { Life of the investment } & 10 \text { years } \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$ -The simple rate of return on the investment is closest to:

$\text { Reference: } 10 - 06$ The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: $\begin{array} { | l | l | } \hline \text { Cost of required equipment } & \$ 250,000 \\\hline \text { Working capital required } & \$ 100,000 \\\hline \text { Annual operating cash inflows } & \$ 80,000 \\\hline \text { Cash repair at end of 4 years } & \$ 40,000 \\\hline \text { Salvage value at end of 6 years } & \$ 90,000 \\\hline\end{array}$ This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%. -The present value of all future operating cash inflows is closest to:

$\text { Reference: } 10 - 09$ Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: $\begin{array} { | l | l | l | } \hline & \text { Project } A & \text { Project } B \\\hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\\hline \text { Working capital investment needed now } & - & \$ 50,000 \\\hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\\hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\\hline\end{array}$ 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 capital budgeting method that divides a project's annual incremental net income by the initial investment is the:

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling 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%. -The nominal cost of capital does not include a factor for expected inflation.

Reference: 10-14 Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $\begin{array} { | l | l | r | } \hline & \text { Truck } A & \text { Truck } B \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year } 2 & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years. -Horn Corporation is considering investing in a four-year project. Cash inflows from the project are expected to be as follows: Year 1, $2,000; Year 2, $2,200; Year 3, $2,400; Year 4, $2,600. If using a discount rate of 8%, the project has a positive net present value of $500. What was the amount of the original investment?

Reference: 10-07 UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow) : $\begin{array} { | l | l | } \hline \text { Years } 1 - 10 & \$ 90,000 \\\hline \text { Year } 11 & \$ ( 20,000 ) \\\hline \text { Year } 12 & \$ 100,000 \\\hline\end{array}$ In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%. -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 that was sold for $8,000 cash. The new equipment has a payback period of:

Reference: 10-12 Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. -Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value. 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:

Reference: 10-07 UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow) : $\begin{array} { | l | l | } \hline \text { Years } 1 - 10 & \$ 90,000 \\\hline \text { Year } 11 & \$ ( 20,000 ) \\\hline \text { Year } 12 & \$ 100,000 \\\hline\end{array}$ In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%. -An investment project that requires a present investment of $210,000 will have cash inflows of "R" dollars each year for the next five years.: If "R" is less than $42,000, the payback period exceeds the life of the project. II) If "R" is greater than $42,000, the payback period exceeds the life of the project. If "R" equals $42,000, the payback period equals the life of the project. Which statement(s) is (are) true?

$\text { Reference: } 10 - 08$ Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: $\begin{array} { | l | l | c | } \hline & \begin{array} { l } \text { Present } \\\text { System }\end{array} & \begin{array} { l } \text { Proposed New } \\\text { System }\end{array} \\\hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\\hline \text { Accumulated depreciation } & \$ 240,000 & - \\\hline \text { Overhaul costs needed now } & \$ 230,000 & - \\\hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\\hline \text { Salvage value now } & \$ 160,000 & - \\\hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\\hline \text { Working capital required } & - & \$ 200,000 \\\hline\end{array}$ Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes. -If the incremental cost approach rather than the total cost approach is used to evaluate alternatives, which statement below is true?

Reference: 10-14 Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $\begin{array} { | l | l | r | } \hline & \text { Truck A } & \text { Truck B } \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year 2 } & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years. -What is the amount of the difference in the net present values of the costs of these alternatives closest to?

Reference: 10-07 UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow) : $\begin{array} { | l | l | } \hline \text { Years } 1 - 10 & \$ 90,000 \\\hline \text { Year } 11 & \$ ( 20,000 ) \\\hline \text { Year } 12 & \$ 100,000 \\\hline\end{array}$ In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%. -The net present value of all cash flows associated with this investment (rounded to the nearest dollar) is:

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine B } \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $450,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $20,000 per year to operate and maintain, but would save $100,000 per year in labour and other costs. The old machine can be sold now for scrap for $50,000. The simple rate of return on the new machine is closest to:

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling 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%. -If pre-tax cash flow is $100,000 and the tax rate is 20%, after-tax cash flow is:

Reference: 10-14 Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $\begin{array} { | l | l | r | } \hline & \text { Truck } A & \text { Truck } B \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year } 2 & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years. -In comparing these two alternatives, which is the correct evaluation

Reference: 10-06 The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: $\begin{array} { | l | l | } \hline \text { Cost of required equipment } & \$ 250,000 \\\hline \text { Working capital required } & \$ 100,000 \\\hline \text { Annual operating cash inflows } & \$ 80,000 \\\hline \text { Cash repair at end of 4 years } & \$ 40,000 \\\hline \text { Salvage value at end of 6 years } & \$ 90,000 \\\hline\end{array}$ This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%. -The present value of the net cash flows (all cash inflows less all cash outflows) occurring during year 6 is closest to:

$\text { Reference: } 10 - 08$ Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: $\begin{array} { | l | l | c | } \hline & \begin{array} { l } \text { Present } \\\text { System }\end{array} & \begin{array} { l } \text { Proposed New } \\\text { System }\end{array} \\\hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\\hline \text { Accumulated depreciation } & \$ 240,000 & - \\\hline \text { Overhaul costs needed now } & \$ 230,000 & - \\\hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\\hline \text { Salvage value now } & \$ 160,000 & - \\\hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\\hline \text { Working capital required } & - & \$ 200,000 \\\hline\end{array}$ Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes. - $\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Cash Flow Over } \\\text { Life of Project }\end{array} & \begin{array} { l } \text { Time Value of } \\\text { Money }\end{array} \\\hline \text { A) } & \text { No } & \text { Yes } \\\hline \text { B) } & \text { No } & \text { No } \\\hline \text { C) } & \text { Yes } & \text { No } \\\hline \text { D) } & \text { Yes } & \text { Yes } \\\hline\end{array}$