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Exam 10: Capital Budgeting Decisions

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Question 91

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(Ignore income taxes in this problem.) Jimba's, Inc., has purchased a new donut maker. It cost $20,000 and has an estimated life of 10 years. The following annual donut sales and expenses are projected: -The simple rate of return on the new machine is closest to:

A) 15%
B) 16.7%
C) 25%
D) 23.3%

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

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Question 92

Multiple Choice

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(Ignore income taxes in this problem.) Lajeunesse Corporation uses a discount rate of 19% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -$127,991. 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. -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?

A) $24,318
B) $514,020
C) $673,637
D) $127,991

E) None of the above
F) A) and C)

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Question 93

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(Ignore income taxes in this problem.) The management of Kobler Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 10% 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 -$235,421. -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?

(Ignore income taxes in this problem.) Ataxia Fitness Center is considering an investment in some additional weight training equipment. The equipment has an estimated useful life of 10 years with no salvage value at the end of the 10 years. Ataxia's internal rate of return on this equipment is 14%. Ataxia's discount rate is also 14%. The payback period on this equipment is closest to:

(Ignore income taxes in this problem.) The management of Cantell Corporation is considering a project that would require an initial investment of $47,000. No other cash outflows would be required. The present value of the cash inflows would be $55,930. The profitability index of the project is closest to:

Bullinger Corporation has provided the following data concerning an investment project that it is considering: The net present value of the project is closest to:

(Ignore income taxes in this problem) The management of Kiefert Corporation is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 18% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is -$290,453. To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?

(Ignore income taxes in this problem.) Harrison Corporation is studying a project that would have an eight-year life and would require a $300,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project: The company's required rate of return is 10%. The payback period for this project is closest to:

(Ignore income taxes in this problem.) Tidwell Corporation is considering the purchase of a machine costing $18,000. Tidwell estimates that this machine will save $5,000 per year in cash operating expenses for the next five years. If the machine has no salvage value at the end of five years and the discount rate used by Tidwell is 8%, then the machine's internal rate of return is closest to: