Accounting Chapter 14 Chapter 14_version1 The management of Nixon Corporation is investigating purchasing equipment that would cost $540,000 and have a 7 year life with no salvage value

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Student name:__________

1) The management of Truelove Corporation is considering a project that would require an

initial investment of $349,000 and would last for 7 years. The annual net operating income from

the project would be $29,400, including depreciation of $45,800. At the end of the project, the

scrap value of the project’s assets would be $28,400.

Required:

Determine the payback period of the project. (Round your answer to 2 decimal places.)

2) Ursus, Incorporated, is considering a project that would have a five-year life and would

require a $690,000 investment in equipment. At the end of five years, the project would

terminate and the equipment would have no salvage value. The project would provide net

operating income each year as follows (Ignore income taxes.):

Sales $ 1,800,000

Variable expenses 1,250,000

Contribution margin 550,000

Fixed expenses:

Fixed out-of-pocket cash expenses $ 320,000

Depreciation 138,000 458,000

Net operating income $ 92,000

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Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

All of the above items, except for depreciation, represent cash flows. The company’s required

rate of return is 14%.

Required:

a. Compute the project’s net present value. (Round your intermediate calculations and final

answer to the nearest whole dollar amount.)

b. Compute the project’s internal rate of return. (Round your final answer to the nearest

whole percent.)

c. Compute the project’s payback period. (Round your answer to 2 decimal place.)

d. Compute the project’s simple rate of return. (Round your final answer to the nearest whole

percent.)

3) Ramson Corporation is considering purchasing a machine that would cost $554,960 and

have a useful life of 7 years. The machine would reduce cash operating costs by $99,100 per

year. The machine would have a salvage value of $107,280 at the end of the project. (Ignore

income taxes.)

Required:

a. Compute the payback period for the machine. (Round your answer to 2 decimal places.)

b. Compute the simple rate of return for the machine. (Round your intermediate calculations

to nearest whole dollar and your final answer to 2 decimal places.)

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4) Joanette, Incorporated, is considering the purchase of a machine that would cost

$590,000 and would last for 9 years, at the end of which, the machine would have a salvage

value of $59,000. The machine would reduce labor and other costs by $119,000 per year.

Additional working capital of $5,000 would be needed immediately, all of which would be

recovered at the end of 9 years. The company requires a minimum pretax return of 18% on all

investment projects. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Determine the net present value of the project. (Negative amount should be indicated by a

minus sign. Round your intermediate calculations and final answer to the nearest whole

dollar amount.)

5) (Ignore income taxes in this problem.) Bradley Corporation’s required rate of return is

14%. The company has an opportunity to be the exclusive distributor of a very popular consumer

item. No new equipment would be needed, but the company would have to use one-fourth of the

space in a warehouse it owns. The warehouse cost $200,000 new. The warehouse is currently

half-empty and there are no other plans to use the empty space. In addition, the company would

have to invest $100,000 in working capital to carry inventories and accounts receivable for the

new product line. The company would have the distributorship for only 5 years. The

distributorship would generate a $17,000 annual net cash inflow.

Required:

What is the net present value of the project?

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6) Mattice Corporation is considering investing $870,000 in a project. The life of the project

would be 6 years. The project would require additional working capital of $37,000, which would

be released for use elsewhere at the end of the project. The annual net cash inflows would be

$184,000. The salvage value of the assets used in the project would be $47,000. The company

uses a discount rate of 13%. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Compute the net present value of the project. (Negative amount should be indicated by a

minus sign. Round your intermediate calculations and final answer to the nearest whole

dollar amount.)

7) HI Corporation is considering the purchase of a machine that promises to reduce

operating costs by the same amount for every year of its 6-year useful life. The machine will cost

$207,580 and has no salvage value. The machine has a 14% internal rate of return. (Ignore

income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

What are the annual cost savings promised by the machine? (Round your intermediate

calculations and final answer to the nearest whole dollar amount.)

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8) Devon Corporation uses a discount rate of 8% 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 −$498,941. 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.

(Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

a. Ignoring any salvage value, 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?

b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the

automated equipment have to be to make the investment in the automated equipment financially

attractive?

(Round your final answers to the nearest whole dollar amount.)

9) The management of an amusement park is considering purchasing a new ride for $86,000

that would have a useful life of 10 years and a salvage value of $10,600. The ride would require

annual operating costs of $35,000 throughout its useful life. The company’s discount rate is 9%.

Management is unsure about how much additional ticket revenue the new ride would generate-

particularly since customers pay a flat fee when they enter the park that entitles them to

unlimited rides. Hopefully, the presence of the ride would attract new customers. (Ignore income

taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

How much additional revenue would the ride have to generate per year to make it an attractive

investment? (Round your intermediate calculations and final answer to the nearest whole

dollar amount.)

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10) The management of Winstead Corporation is considering the following three investment

projects (Ignore income taxes.):

Project Q Project R Project S

Investment required $ 32,000 $ 68,500 $ 116,500

Present value of cash inflows $ 34,120 $ 78,500 $ 128,465

The only cash outflows are the initial investments in the projects.

Required:

Rank the investment projects using the project profitability index.

11) The management of Nixon Corporation is investigating purchasing equipment that would

cost $540,000 and have a 7 year life with no salvage value. The equipment would allow an

expansion of capacity that would increase sales revenues by $375,000 per year and cash

operating expenses by $216,500 per year. (Ignore income taxes.)

Required:

Determine the simple rate of return on the investment. (Round your answer to 1 decimal

place.)

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12) Russnak Corporation is investigating automating a process by purchasing a new machine

for $515,000 that would have a 10 year useful life and no salvage value. By automating the

process, the company would save $115,000 per year in cash operating costs. The company’s

current equipment would be sold for scrap now, yielding $22,000. The annual depreciation on

the new machine would be $51,500. (Ignore income taxes.)

Required:

Determine the simple rate of return on the investment. (Round your answer to 1 decimal

place.)

13) Ostermeyer Corporation is considering a project that would require an initial investment

of $247,000 and would last for 7 years. The incremental annual revenues and expenses for each

of the 7 years would be as follows (Ignore income taxes.):

Sales $ 198,000

Variable expenses 46,000

Contribution margin 152,000

Fixed expenses:

Salaries $ 22,000

Rents 32,000

Depreciation 33,000

Total fixed expenses 87,000

Net operating income $ 65,000

At the end of the project, the scrap value of the project’s assets would be $16,000.

Required:

Determine the payback period of the project.

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14) The management of Truelove Corporation is considering a project that would require an

initial investment of $321,000 and would last for 7 years. The annual net operating income from

the project would be $28,000, including depreciation of $42,000. At the end of the project, the

scrap value of the project’s assets would be $27,000. (Ignore income taxes.)

Required:

Determine the payback period of the project.

15) Ursus, Incorporated, is considering a project that would have a ten-year life and would

require a $1,000,000 investment in equipment. At the end of ten years, the project would

terminate and the equipment would have no salvage value. The project would provide net

operating income each year as follows (Ignore income taxes.):

Sales $ 2,000,000

Variable expenses 1,400,000

Contribution margin 600,000

Fixed expenses:

Fixed out-of-pocket cash expenses $ 300,000

Depreciation 100,000 400,000

Net operating income $ 200,000

All of the above items, except for depreciation, represent cash flows. The company’s required

rate of return is 12%.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

a. Compute the project’s net present value.

b. Compute the project’s internal rate of return to the nearest whole percent.

c. Compute the project’s payback period.

d. Compute the project’s simple rate of return.

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16) Hady Corporation is considering purchasing a machine that would cost $688,800 and

have a useful life of 7 years. The machine would reduce cash operating costs by $118,759 per

year. The machine would have no salvage value. (Ignore income taxes.)

Required: a. Compute the payback period for the machine.

b. Compute the simple rate of return for the machine.

17) Bied’s Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost

$28,000 and will be usable for seven years. Delivery of prescriptions (which the pharmacy has

never done before) should increase revenues by at least $25,000 per year. The cost of these

prescriptions will be about $18,000 per year. The pharmacy depreciates all assets by the straight-

line method. (Ignore income taxes.)

Required:

a. Compute the payback period on the new auto.

b. Compute the simple rate of return of the new auto.

18) Cardinal Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost

$28,000 and will be usable for four years. Delivery of prescriptions (which the pharmacy has

never done before) should increase revenues by at least $40,000 per year. The cost of these

prescriptions will be about $30,000 per year. The pharmacy depreciates all assets by the straight-

line method. (Ignore income taxes.)

Required:

a. Compute the payback period on the new auto.

b. Compute the simple rate of return of the new auto.

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19) Ramson Corporation is considering purchasing a machine that would cost $756,000 and

have a useful life of 8 years. The machine would reduce cash operating costs by $132,632 per

year. The machine would have a salvage value of $151,200 at the end of the project. (Ignore

income taxes.)

Required:

a. Compute the payback period for the machine.

b. Compute the simple rate of return for the machine.

20) The following data concern an investment project (Ignore income taxes.):

Investment in equipment $ 180,000

Annual net cash inflows $ 42,000

Salvage value of the equipment $ 70,000

Working capital required $ 20,000

Life of the project 5 years

Required rate of return 12%

The working capital will be released for use elsewhere at the conclusion of the project.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Compute the project’s net present value.

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21) The management of Kinion Corporation is considering the purchase of a machine that

would cost $170,000, would last for 4 years, and would have no salvage value. The machine

would reduce labor and other costs by $60,000 per year. The company requires a minimum

pretax return of 12% on all investment projects. (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Determine the net present value of the project.

22) Bill Anders is considering investing in a franchise in a fast-food chain. He would have to

purchase equipment costing $420,000 to equip the outlet and invest an additional $30,000 for

inventories and other working capital needs. Other outlets in the fast-food chain have an annual

net cash inflow of about $120,000. Mr. Anders would close the outlet in 5 years. He estimates

that the equipment could be sold at that time for about 10% of its original cost and the working

capital would be released for use elsewhere. Mr. Anders’ required rate of return is 8%. (Ignore

income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

What is the investment’s net present value? Is this an acceptable investment?

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23) Wary Corporation is considering the purchase of a machine that would cost $240,000 and

would last for 5 years. At the end of 5 years, the machine would have a salvage value of $29,000.

The machine would reduce labor and other costs by $63,000 per year. The company requires a

minimum pretax return of 10% on all investment projects. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Determine the net present value of the project.

24) Joanette, Incorporated, is considering the purchase of a machine that would cost

$240,000 and would last for 5 years, at the end of which, the machine would have a salvage

value of $48,000. The machine would reduce labor and other costs by $62,000 per year.

Additional working capital of $7,000 would be needed immediately, all of which would be

recovered at the end of 5 years. The company requires a minimum pretax return of 17% on all

investment projects. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Determine the net present value of the project.

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25) Gallatin, Incorporated, has assembled the estimates shown below relating to a proposed

new product. These estimates are based on a 5-year project life, at the end of which the new

equipment would be sold, working capital would revert to other uses in the company, and the

product would be discontinued. Gallatin uses a discount rate of 10%. (Ignore income taxes.)

Annual cash sales $ 450,000

Annual out-of-pocket cash expenses $ 340,000

Annual depreciation on new equipment $ 52,000

Initial cost of new equipment $ 300,000

Salvage value of equipment in 5 years $ 50,000

Working capital requirement $ 60,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Compute the net present value of the new product.

26) Strausberg Incorporated is considering investing in a project that would require an initial

investment of $270,000. The life of the project would be 4 years. The annual net cash inflows

from the project would be $81,000. The salvage value of the assets at the end of the project

would be $27,000. The company uses a discount rate of 10%. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Compute the net present value of the project.

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27) Jim Bingham is considering starting a small catering business. He would invest $125,000

to purchase a delivery van and various equipment and another $60,000 for inventories and other

working capital needs. Rent for the building used by the business will be $35,000 per year. In

addition to the building rent, annual cash outflow for operating costs will amount to $40,000.

The annual cash inflow from the business will amount to $120,000. Jim wants to operate the

catering business for only six years. He estimates that the equipment could be sold at that time

for 4% of its original cost. Jim uses a 16% discount rate. All cash flows, except for the initial

investment, would occur at the ends of the years.The investment in working capital would be

returned at the end of the six years. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Compute the net present value of this investment.

28) Mattice Corporation is considering investing $440,000 in a project. The life of the project

would be 5 years. The project would require additional working capital of $34,000, which would

be released for use elsewhere at the end of the project. The annual net cash inflows would be

$123,000. The salvage value of the assets used in the project would be $49,000. The company

uses a discount rate of 11%. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Compute the net present value of the project.

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29) Consider the following three investment opportunities:

Project I would require an immediate cash outlay of $40,000 and would result in cash savings

of $9,000 each year for 5 years.

Project II would require cash outlays of $7,000 per year and would provide a cash inflow of

$40,000 at the end of 5 years.

Project III would require a cash outlay of $36,000 now and would provide a cash inflow of

$60,000 at the end of 5 years. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

The discount rate is 10%. Use the net present value method to determine which, if any, of the

three projects is acceptable.

30) Cooney Incorporated has provided the following data concerning a proposed investment

project (Ignore income taxes.):

Initial investment $ 160,000

Life of the project 4 years

Annual net cash inflows $ 70,000

Salvage value $ 16,000

The company uses a discount rate of 17%.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Compute the net present value of the project.

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31) Tiff Corporation has provided the following data concerning a proposed investment

project (Ignore income taxes.):

Initial investment $ 960,000

Life of the project 5 years

Working capital required $ 20,000

Annual net cash inflows $ 288,000

Salvage value $ 144,000

The company uses a discount rate of 16%. The working capital would be released at the end of

the project.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Compute the net present value of the project.

32) Maxcy Limos, Incorporated, is considering the purchase of a limousine that would cost

$187,335, would have a useful life of 9 years, and would have no salvage value. The limousine

would bring in cash inflows of $45,000 per year in excess of its cash operating costs. (Ignore

income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Determine the internal rate of return on the investment in the new limousine.

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33) HI Corporation is considering the purchase of a machine that promises to reduce

operating costs by the same amount for every year of its 5-year useful life. The machine will cost

$205,980 and has no salvage value. The machine has a 14% internal rate of return. (Ignore

income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

What are the annual cost savings promised by the machine?

34) The management of Zachery Corporation is considering the purchase of a automated

molding machine that would cost $203,255, would have a useful life of 5 years, and would have

no salvage value. The automated molding machine would result in cash savings of $65,000 per

year due to lower labor and other costs. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Determine the internal rate of return on the investment in the new automated molding machine.

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35) Boxton Corporation’s required rate of return is 12%. The company is considering the

purchase of a new machine that will save $20,000 per year in cash operating costs. The machine

will cost $128,360 and will have a 10-year useful life with zero salvage value. Straight-line

depreciation will be used. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Compute the machine’s internal rate of return. Would you recommend purchase of the

machine?

36) The management of Harling Corporation is considering the purchase of a machine that

would cost $90,504 and would have a useful life of 5 years. The machine would have no salvage

value. The machine would reduce labor and other operating costs by $27,000 per year. (Ignore

income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

Determine the internal rate of return on the investment in the new machine.

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37) The management of Crosson Corporation is investigating the purchase of a new satellite

routing system with a useful life of 9 years. The company uses a discount rate of 17% in its

capital budgeting. The net present value of the investment, excluding its intangible benefits, is

−$173,055. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

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?

38) Devon Corporation uses a discount rate of 8% 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 −$496,541. 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.

(Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

a. Ignoring any salvage value, 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?

b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the

automated equipment have to be to make the investment in the automated equipment financially

attractive?

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39) The management of an amusement park is considering purchasing a new ride for $80,000

that would have a useful life of 10 years and a salvage value of $10,000. The ride would require

annual operating costs of $32,000 throughout its useful life. The company’s discount rate is 9%.

Management is unsure about how much additional ticket revenue the new ride would generate-

particularly since customers pay a flat fee when they enter the park that entitles them to

unlimited rides. Hopefully, the presence of the ride would attract new customers. (Ignore income

taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

How much additional revenue would the ride have to generate per year to make it an attractive

investment?

40) Chipps Corporation uses a discount rate of 9% in its capital budgeting. Management is

considering an investment in telecommunications equipment with a useful life of 5 years.

Excluding the salvage value of the equipment, the net present value of the investment in the

equipment is −$530,985. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Required:

How large would the salvage value of the telecommunications equipment have to be to make

the investment in the telecommunications equipment financially attractive?

41) Choudhury Corporation is considering the following three investment projects (Ignore

income taxes.):

Project H Project I Project J

Investment required $ 11,000 $ 53,000 $ 89,000

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Present value of cash inflows $ 12,980 $ 61,480 $ 96,120

The only cash outflows are the initial investments in the projects.

Required:

Rank the investment projects using the profitability index.

42) The management of Winstead Corporation is considering the following three investment

projects (Ignore income taxes.):

Project Q Project R Project S

Investment required $ 14,000 $ 48,000 $ 74,000

Present value of cash inflows $ 14,140 $ 54,720 $ 82,140

The only cash outflows are the initial investments in the projects.

Required:

Rank the investment projects using the profitability index.

43) The management of Nixon Corporation is investigating purchasing equipment that would

cost $518,000 and have a 7 year life with no salvage value. The equipment would allow an

expansion of capacity that would increase sales revenues by $364,000 per year and cash

operating expenses by $211,000 per year. (Ignore income taxes.)

Required:

Determine the simple rate of return on the investment to the nearest tenth of a percent.

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44) Russnak Corporation is investigating automating a process by purchasing a new machine

for $198,000 that would have a 9 year useful life and no salvage value. By automating the

process, the company would save $68,000 per year in cash operating costs. The company’s

current equipment would be sold for scrap now, yielding $18,000. The annual depreciation on

the new machine would be $22,000. (Ignore income taxes.)

Required:

Determine the simple rate of return on the investment to the nearest tenth of a percent.

45) Ducey Corporation is contemplating purchasing equipment that would increase sales

revenues by $79,000 per year and cash operating expenses by $27,000 per year. The equipment

would cost $150,000 and have a 6 year life with no salvage value. The annual depreciation

would be $25,000. (Ignore income taxes.)

Required:

Determine the simple rate of return on the investment to the nearest tenth of a percent.

46) The management of Schenk Corporation is investigating automating a process by

replacing old equipment by a new machine. The old equipment would be sold for scrap now for

$13,000. The new machine would cost $648,000, would have a 9 year useful life, and would

have no salvage value. By automating the process, the company would save $186,000 per year in

cash operating costs. (Ignore income taxes.)

Required:

Determine the simple rate of return on the investment to the nearest tenth of a percent.

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47) Amster Corporation has not yet decided on the required rate of return to use in its capital

budgeting. This lack of information will prevent Amster from calculating a project’s:

Payback Net Present Value Internal Rate of Return

A) No No No

B) Yes Yes Yes

C) No Yes Yes

D) No Yes No

A) Choice A

B) Choice B

C) Choice C

D) Choice D

48) Rennin Dairy Corporation is considering a plant expansion decision that has an estimated

useful life of 20 years. This project has an internal rate of return of 15% and a payback period of

9.6 years. How would a decrease in the expected salvage value from this project in 20 years

affect the following for this project?

Internal Rate of Return Payback Period

A) Decrease Decrease

B) No effect Decrease

C) Decrease No effect

D) Increase No effect

E) No effect No effect

A) Choice A

B) Choice B

C) Choice C

D) Choice D

E) Choice E

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49) The profitability index and the internal rate of return:

A) will always result in the same preference ranking for investment projects.

B) will sometimes result in different preference rankings for investment projects.

C) are less dependable than the payback method in ranking investment projects.

D) are less dependable than net present value in ranking investment projects.

50) Some investment projects require that a company increase its working capital. Under the

net present value method, the investment and eventual recovery of working capital should be

treated as:

A) an initial cash outflow.

B) a future cash inflow.

C) both an initial cash outflow and a future cash inflow.

D) irrelevant to the net present value analysis.

51) A company has unlimited funds to invest at its discount rate. The company should invest

in all projects having:

A) an internal rate of return greater than zero.

B) a net present value greater than zero.

C) a simple rate of return greater than the discount rate.

D) a payback period less than the project’s estimated life.

52) If the net present value of a project is zero based on a discount rate of 16%, then the

internal rate of return is:

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A) equal to 16%.

B) less than 16%.

C) greater than 16%.

D) cannot be determined from this data.

53) The assumption that the cash flows from an investment project are reinvested at the

company’s discount rate applies to:

A) both the internal rate of return and the net present value methods.

B) only the internal rate of return method.

C) only the net present value method.

D) neither the internal rate of return nor net present value methods.

54) The internal rate of return method assumes that a project’s cash flows are reinvested at

the:

A) internal rate of return.

B) simple rate of return.

C) required rate of return.

D) payback rate of return.

55) A preference decision in capital budgeting:

A) is concerned with whether a project clears the minimum required rate of return

hurdle.

B) comes before the screening decision.

C) is concerned with determining which of several acceptable alternatives is best.

D) involves using market research to determine customers’ preferences.

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56) Jarvey Corporation is studying a project that would have a ten-year life and would require

a $450,000 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 (Ignore income taxes.):

Sales $ 500,000

Less cash variable expenses 200,000

Contribution margin 300,000

Less fixed expenses:

Fixed cash expenses $ 150,000

Depreciation expenses 45,000 195,000

Net operating income $ 105,000

The company’s required rate of return is 12%. The payback period for this project is closest to:

A) 3 years

B) 2 years

C) 4.28 years

D) 9 years

57) Olinick Corporation is considering a project that would require an investment of

$338,000 and would last for 8 years. The incremental annual revenues and expenses generated

by the project during those 8 years would be as follows (Ignore income taxes.):

Sales $ 269,000

Variable expenses 20,000

Contribution margin 249,000

Fixed expenses:

Salaries 28,000

Rents 41,000

Depreciation 36,000

Total fixed expenses 105,000

Net operating income $ 144,000

The scrap value of the project’s assets at the end of the project would be $18,000. The cash

inflows occur evenly throughout the year. The payback period of the project is closest to:

(Round your answer to 1 decimal place.)

A) 1.9 years

B) 2.3 years

C) 2.1 years

D) 1.6 years

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58) Olinick Corporation is considering a project that would require an investment of

$343,000 and would last for 8 years. The incremental annual revenues and expenses generated

by the project during those 8 years would be as follows (Ignore income taxes.):

Sales $ 227,000

Variable expenses 52,000

Contribution margin 175,000

Fixed expenses:

Salaries 27,000

Rents 41,000

Depreciation 40,000

Total fixed expenses 108,000

Net operating income $ 67,000

The scrap value of the project’s assets at the end of the project would be $23,000. The cash

inflows occur evenly throughout the year. The payback period of the project is closest to:

A) 3.0 years

B) 5.1 years

C) 3.2 years

D) 4.8 years

59) The Zingstad Corporation is considering an investment with the following data (Ignore

income taxes.):

Year 1 Year 2 Year 3 Year 4 Year 5

Investment $ 32,000 $ 12,000

Cash inflow $ 8,000 $ 8,000 $ 20,000 $ 16,000 $ 16,000

Cash inflows occur evenly throughout the year. The payback period for this investment is:

A) 3.0 years

B) 3.5 years

C) 4.0 years

D) 4.5 years

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60) The management of Lanzilotta Corporation is considering a project that would require an

investment of $218,000 and would last for 6 years. The annual net operating income from the

project would be $106,000, which includes depreciation of $31,000. The scrap value of the

project’s assets at the end of the project would be $26,000. The cash inflows occur evenly

throughout the year. The payback period of the project is closest to (Ignore income taxes.):

(Round your answer to 1 decimal place.)

A) 1.6 years

B) 2.1 years

C) 1.3 years

D) 2.8 years

61) The management of Lanzilotta Corporation is considering a project that would require an

investment of $263,000 and would last for 8 years. The annual net operating income from the

project would be $66,000, which includes depreciation of $31,000. The scrap value of the

project’s assets at the end of the project would be $15,000. The cash inflows occur evenly

throughout the year. The payback period of the project is closest to (Ignore income taxes.):

A) 3.8 years

B) 2.6 years

C) 2.7 years

D) 4.0 years

62) A company with $675,000 in operating assets is considering the purchase of a machine

that costs $77,000 and which is expected to reduce operating costs by $23,000 each year. These

reductions in cost occur evenly throughout the year. The payback period for this machine in

years is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

A) 3.3 years

B) 8.8 years

C) 0.3 years

D) 29.3 years

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63) A company with $500,000 in operating assets is considering the purchase of a machine

that costs $60,000 and which is expected to reduce operating costs by $15,000 each year. These

reductions in cost occur evenly throughout the year. The payback period for this machine in

years is closest to (Ignore income taxes.):

A) 0.25 years

B) 8.3 years

C) 4 years

D) 33.3 years

64) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was

purchased for $26,000 and will have a 6-year useful life and a $5,500 salvage value. Delivering

prescriptions (which the pharmacy has never done before) should increase gross revenues by at

least $33,500 per year. The cost of these prescriptions to the pharmacy will be about $28,000 per

year. The pharmacy depreciates all assets using the straight-line method. The payback period for

the auto is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

A) 4.7 years

B) 3.7 years

C) 5.7 years

D) 5.1 years

65) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was

purchased for $24,000 and will have a 6-year useful life and a $6,000 salvage value. Delivering

prescriptions (which the pharmacy has never done before) should increase gross revenues by at

least $28,000 per year. The cost of these prescriptions to the pharmacy will be about $22,000 per

year. The pharmacy depreciates all assets using the straight-line method. The payback period for

the auto is closest to (Ignore income taxes.):

A) 2 years

B) 1.8 years

C) 4 years

D) 1.2 years

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66) An investment project requires an initial investment of $100,000. The project is expected

to generate net cash inflows of $28,000 per year for the next five years. These cash inflows occur

evenly throughout the year. Assuming a 12% discount rate, the project’s payback period is

(Ignore income taxes.):

A) 0.28 years

B) 3.36 years

C) 3.57 years

D) 1.40 years

67) Ataxia Fitness Center is considering an investment in some additional weight training

equipment. The equipment has an estimated useful life of 7 years with no salvage value at the

end of the 7 years. Ataxia’s internal rate of return on this equipment is 10%. Ataxia’s discount

rate is also 10%. The payback period on this equipment is closest to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) 7 years

B) 4.868 years

C) 4 years

D) 5.968 years

68) 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 8%. Ataxia’s discount

rate is also 8%. The payback period on this equipment is closest to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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A) 10 years

B) 6.71 years

C) 5 years

D) 7.81 years

69) Jark Corporation has invested in a machine that cost $75,000, that has a useful life of four

years, and that has no salvage value at the end of its useful life. The machine is being depreciated

by the straight-line method, based on its useful life. It will have a payback period of two years.

Given these data, the simple rate of return on the machine is closest to (Ignore income taxes.):

(Round your answer to 1 decimal place.)

A) 21.4%

B) 22.5%

C) 25.0%

D) 75.0%

70) Jark Corporation has invested in a machine that cost $60,000, that has a useful life of six

years, and that has no salvage value at the end of its useful life. The machine is being depreciated

by the straight-line method, based on its useful life. It will have a payback period of four years.

Given these data, the simple rate of return on the machine is closest to (Ignore income taxes.):

A) 8.3%

B) 7.2%

C) 9.5%

D) 25%

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71) Parks Corporation is considering an investment proposal in which a working capital

investment of $10,000 would be required. The investment would provide cash inflows of $2,000

per year for six years. The working capital would be released for use elsewhere when the project

is completed. If the company’s discount rate is 10%, the investment’s net present value is closest

to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $1,290

B) $(1,290)

C) $2,000

D) $4,350

72) In an effort to reduce costs, Pontic Manufacturing Corporation is considering an

investment in equipment that will reduce defects. This equipment will cost $420,000, will have

an estimated useful life of 10 years, and will have an estimated salvage value of $50,000 at the

end of 10 years. The company’s discount rate is 22%. What amount of cost savings will this

equipment have to generate per year in each of the 10 years in order for it to be an acceptable

project? (Ignore income taxes.).

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.(Round your intermediate calculations to 3 decimal

places.)

A) $50,690 or more

B) $41,315 or more

C) $105,315 or more

D) $94,316 or more

73) Respass Corporation has provided the following data concerning an investment project

that it is considering:

Initial investment $ 160,000

Annual cash flow $ 54,000 per year

Salvage value at the end of the project $ 11,000

Expected life of the project 4 years

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Discount rate 15%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The net present value of the project is closest to:

A) $67,000

B) $160,516

C) $516

D) $(5,776)

74) Puello Corporation has provided the following data concerning an investment project that

it is considering:

Initial investment $ 480,000

Annual cash flow $ 145,000 per year

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The life of the project is 4 years. The company’s discount rate is 8%. The net present value of

the project is closest to:

A) $480,000

B) $480,240

C) $100,000

D) $240

75) Haroldsen Corporation is considering a capital budgeting project that would require an

initial investment of $350,000. The investment would generate annual cash inflows of $133,000

for the life of the project, which is 4 years. At the end of the project, equipment that had been

used in the project could be sold for $32,000. The company’s discount rate is 14%. The net

present value of the project is closest to:

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Version 1 34

A) $214,000

B) $37,429

C) $56,373

D) $406,373

76) Moates Corporation has provided the following data concerning an investment project

that it is considering:

Initial investment $ 380,000

Annual cash flow $ 124,000 per year

Expected life of the project 4 years

Discount rate 10%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The net present value of the project is closest to: (Round your intermediate calculations and

final answer to the nearest whole dollar amount.)

A) $380,000

B) $12,956

C) $(256,000)

D) $(12,956)

77) Moates Corporation has provided the following data concerning an investment project

that it is considering:

Initial investment $ 410,000

Annual cash flow $ 117,000 per year

Expected life of the project 4 years

Discount rate 9%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The net present value of the project is closest to:

Version 1 35

A) $378,963

B) $(31,037)

C) $410,000

D) $58,000

78) Byerly Corporation has provided the following data concerning an investment project

that it is considering:

Initial investment $ 670,000

Working capital $ 61,000

Annual cash flow $ 227,000 per year

Salvage value at the end of the project $ 20,000

Expected life of the project 3 years

Discount rate 10%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The working capital would be released for use elsewhere at the end of the project. The net

present value of the project is closest to:

A) $(151,658)

B) $(105,847)

C) $11,000

D) $(44,847)

79) Penniston Corporation is considering a capital budgeting project that would require an

initial investment of $630,000 and working capital of $73,000. The working capital would be

released for use elsewhere at the end of the project in 3 years. The investment would generate

annual cash inflows of $228,000 for the life of the project. At the end of the project, equipment

that had been used in the project could be sold for $29,000. The company’s discount rate is 12%.

The net present value of the project is closest to:

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Version 1 36

A) $(134,696)

B) $(82,720)

C) $(9,720)

D) $54,000

80) The management of Penfold Corporation is considering the purchase of a machine that

would cost $400,000, would last for 10 years, and would have no salvage value. The machine

would reduce labor and other costs by $60,000 per year. The company requires a minimum

pretax return of 13% on all investment projects.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The net present value of the proposed project is closest to (Ignore income taxes.): (Round your

intermediate calculations and final answer to the nearest whole dollar amount.)

A) $(74,440)

B) $(34,440)

C) $(86,240)

D) $(62,640)

81) The management of Penfold Corporation is considering the purchase of a machine that

would cost $440,000, would last for 7 years, and would have no salvage value. The machine

would reduce labor and other costs by $102,000 per year. The company requires a minimum

pretax return of 16% on all investment projects. The net present value of the proposed project is

closest to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $(28,022)

B) $96,949

C) $(79,196)

D) $274,000

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82) Dowlen, Incorporated, is considering the purchase of a machine that would cost $150,000

and would last for 6 years. At the end of 6 years, the machine would have a salvage value of

$23,000. The machine would reduce labor and other costs by $36,000 per year. Additional

working capital of $6,000 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 12% on all investment projects. The net present value of the proposed project is closest to

(Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $9,657

B) $(2,004)

C) $6,699

D) $13,223

83) Stomberg Corporation has provided the following data concerning an investment project

that it is considering:

Initial investment $ 550,000

Annual cash flow $ 180,000 per year

Salvage value at the end of the project 14,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The life of the project is 4 years. The company’s discount rate is 10%. The net present value of

the project is closest to:

A) $184,000

B) $579,982

C) $29,982

D) $20,420

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84) Fossa Road Paving Corporation is considering an investment in a curb-forming machine.

The machine will cost $240,000, will last 10 years, and will have a $40,000 salvage value at the

end of 10 years. The machine is expected to generate net cash inflows of $60,000 per year in

each of the 10 years. Fossa’s discount rate is 18%. The net present value of the proposed

investment is closest to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $5,840

B) $37,280

C) $(48,780)

D) $69,640

85) Charlie Corporation is considering buying a new donut maker. This machine will replace

an old donut maker that still has a useful life of 6 years. The new machine will cost $3,760 a year

to operate, as opposed to the old machine, which costs $4,200 per year to operate. Also, because

of increased capacity, an additional 21,600 donuts a year can be produced. The company makes a

contribution margin of $0.10 per donut. The old machine can be sold for $8,600 and the new

machine costs $31,600. The incremental annual net cash inflows provided by the new machine

would be (Ignore income taxes.):

A) $2,600

B) $440

C) $2,160

D) $6,440

86) Charlie Corporation is considering buying a new donut maker. This machine will replace

an old donut maker that still has a useful life of 6 years. The new machine will cost $3,600 a year

to operate, as opposed to the old machine, which costs $3,800 per year to operate. Also, because

of increased capacity, an additional 20,000 donuts a year can be produced. The company makes a

contribution margin of $0.10 per donut. The old machine can be sold for $7,000 and the new

machine costs $30,000. The incremental annual net cash inflows provided by the new machine

would be (Ignore income taxes.):

Version 1 39

A) $2,200

B) $200

C) $2,000

D) $5,000

87) The following data pertain to an investment proposal (Ignore income taxes.):

Cost of the investment $ 42,000

Annual cost savings $ 12,000

Estimated salvage value $ 4,000

Life of the project 5 years

Discount rate 11%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The net present value of the proposed investment is closest to: (Round your intermediate

calculations and final answer to the nearest whole dollar amount.)

A) $2,352

B) $4,724

C) $2,372

D) $26,000

88) The following data pertain to an investment proposal (Ignore income taxes.):

Cost of the investment $ 35,000

Annual cost savings $ 12,000

Estimated salvage value $ 6,000

Life of the project 5 years

Discount rate 18%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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

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A) $2,622

B) $5,146

C) $2,524

D) $31,000

89) Kanzler Corporation is considering a capital budgeting project that would require an

initial investment of $450,000 and working capital of $25,000. The working capital would be

released for use elsewhere at the end of the project in 4 years. The investment would generate

annual cash inflows of $143,000 for the life of the project. At the end of the project, equipment

that had been used in the project could be sold for $10,000. The company’s discount rate is 14%.

The net present value of the project is closest to:

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $(27,521)

B) $(37,721)

C) $(52,521)

D) $132,000

90) Nevland Corporation is considering the purchase of a machine that would cost $130,000

and would last for 6 years. At the end of 6 years, the machine would have a salvage value of

$18,000. By reducing labor and other operating costs, the machine would provide annual cost

savings of $44,000. The company requires a minimum pretax return of 19% on all investment

projects. The net present value of the proposed project is closest to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $38,040

B) $26,376

C) $74,902

D) $20,040

Version 1 41

91) Facio Corporation has provided the following data concerning an investment project that

it is considering:

Initial investment $ 770,000

Working capital $ 65,000

Annual cash flow $ 274,000 per year

Salvage value at the end of the project $ 20,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The working capital would be released for use elsewhere at the end of the project in 3 years.

The company’s discount rate is 8%. The net present value of the project is closest to:

A) $(113,022)

B) $(61,412)

C) $3,588

D) $52,000

92) Anthony operates a part time auto repair service. He estimates that a new diagnostic

computer system will result in increased cash inflows of $1,500 in Year 1, $2,100 in Year 2, and

$3,200 in Year 3. If Anthony’s required rate of return is 10%, then the most he would be willing

to pay for the new diagnostic computer system would be (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $4,599

B) $5,501

C) $5,638

D) $5,107

Version 1 42

93) Goergen Corporation is considering a capital budgeting project that would require an

initial investment of $700,000. The investment would generate annual cash inflows of $267,000

for the life of the project, which is 4 years. The company’s discount rate is 10%. The net present

value of the project is closest to:

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $368,000

B) $846,123

C) $146,123

D) $700,000

94) Whitton Corporation uses a discount rate of 16%. The company has an opportunity to

buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the

next three years. The machine would have no salvage value. The net present value of this

machine is closest to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $22,460

B) $4,460

C) $(9,980)

D) $12,000

95) A company has provided the following data concerning a proposed project (Ignore

income taxes.):

Initial investment $ 10,000

Annual cost savings $ ?

Salvage value $ 0

Life of the project 8 years

Discount rate 14%

Net present value $ 1,300

Version 1 43

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The annual cost savings must be closest to: (Round your intermediate calculations to 3

decimal places.)

A) $4,024

B) $2,436

C) $1,875

D) $3,704

96) Orbit Airlines is considering the purchase of a new $275,000 maintenance hangar. The

new hangar has an estimated useful life of 5 years with an expected salvage value of $50,000.

The new hangar is expected to generate cost savings of $90,000 per year in each of the 5 years.

A $20,000 increase in working capital will also be needed for this new hangar. The working

capital will be released at the end of the 5 years. Orbit’s discount rate is 18%. What is the net

present value of the new hangar? (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $8,280

B) $9,440

C) $17,020

D) $28,280

97) Basey Corporation has provided the following data concerning an investment project that

it is considering:

Initial investment $ 510,000

Working capital $ 30,000

Annual cash flow $ 173,000 per year

Salvage value at the end of the project $ 12,000

Expected life of the project $ 4 years

Discount rate 15%

Version 1 44

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The working capital would be released for use elsewhere at the end of the project. The net

present value of the project is closest to:

A) $(9,048)

B) $(39,048)

C) $(21,888)

D) $194,000

98) Cannula Vending Corporation is expanding operations and needs to purchase additional

vending machines. There are currently two companies, Viscera, Incorporated and Gullet

International, that produce and sell machines that will do the job. Information related to the

specifications of each company’s machine are as follows (Ignore income taxes.):

Viscera Gullet

Purchase price per machine $ 18,000 $ 24,000

Useful life of machine 5 years 5 years

Expected salvage value of machine in 5 years $ 2,000 $

5,000

Estimated annual operating cost per machine $ 4,000 $

3,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Cannula’s discount rate is 18%. Cannula uses the straight-line method of depreciation. Using

net present value analysis, which company’s machine should Cannula purchase and what is the

approximate difference between the net present values of the competing company’s machines?

A) Gullet, $127

B) Viscera, $1,562

C) Viscera, $1,749

D) Viscera, $3,438

99) Basta Corporation has provided the following data concerning an investment project that

it is considering:

Version 1 45

Initial investment $ 780,000

Working capital $ 94,000

Annual cash flow $ 268,000 per year

Salvage value at the end of the project $ 26,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The working capital would be released for use elsewhere at the end of the project in 4 years.

The company’s discount rate is 8%. The net present value of the project is closest to:

A) $101,816

B) $126,726

C) $32,726

D) $318,000

100) Congener Beverage Corporation is considering an investment in a project that has an

internal rate of return of 20%. The only cash outflow for this project is the initial investment. The

project is estimated to have an 8 year life and no salvage value. Cash inflows from this project

are expected to be $100,000 per year in each of the 8 years. Congener’s discount rate is 16%.

What is the net present value of this project? (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $5,215

B) $15,464

C) $50,700

D) $55,831

Version 1 46

101) Highpoint, Incorporated, is considering investing in automated equipment with a ten-year

useful life. Managers at Highpoint have estimated the cash flows associated with the tangible

costs and benefits of automation, but have been unable to estimate the cash flows associated with

the intangible benefits. Using the company’s 12% required rate of return, the net present value of

the cash flows associated with just the tangible costs and benefits is a negative $282,500. How

large would the annual net cash inflows from the intangible benefits have to be to make this a

financially acceptable investment? (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $20,000

B) $28,250

C) $35,000

D) $50,000

102) Crockin Corporation is considering a machine that will save $9,000 a year in cash

operating costs each year for the next six years. At the end of six years it would have no salvage

value. If this machine costs $33,165 now, the machine’s internal rate of return is closest to

(Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) 16%

B) 17%

C) 18%

D) 19%

103) The following data pertain to an investment project (Ignore income taxes.):

Investment required $ 34,055

Annual savings $5,000

Life of the project 15 years

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The internal rate of return is closest to:

Version 1 47

A) 12%

B) 14%

C) 10%

D) 8%

104) Heap Corporation is considering an investment in a project that will have a two year life.

The project will provide a 10% internal rate of return, and is expected to have a $40,000 cash

inflow the first year and a $50,000 cash inflow in the second year. What investment is required

in the project? (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $74,340

B) $77,660

C) $81,810

D) $90,000

105) Bau Long-Haul, Incorporated, is considering the purchase of a tractor-trailer that would

cost $296,426, would have a useful life of 7 years, and would have no salvage value. The tractor-

trailer would be used in the company’s hauling business, resulting in additional net cash inflows

of $84,500 per year. The internal rate of return on the investment in the tractor-trailer is closest

to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) 21%

B) 20%

C) 23%

D) 18%

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106) Bau Long-Haul, Incorporated, is considering the purchase of a tractor-trailer that would

cost $281,656, would have a useful life of 7 years, and would have no salvage value. The tractor-

trailer would be used in the company’s hauling business, resulting in additional net cash inflows

of $76,000 per year. The internal rate of return on the investment in the tractor-trailer is closest

to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) 19%

B) 18%

C) 21%

D) 16%

107) Welch Corporation is planning an investment with the following characteristics (Ignore

income taxes.):

Useful life 7 years

Yearly net cash inflow $ 60,000

Salvage value $ 0

Internal rate of return 14%

Required rate of return 10%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The initial cost of the equipment is closest to:

A) $360,100

B) $257,280

C) $267,630

D) Cannot be determined from the given information.

108) Welch Corporation is planning an investment with the following characteristics (Ignore

income taxes.):

Useful life 6 years

Yearly net cash inflow $ 45,000

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Salvage value $ 0

Internal rate of return 18%

Required rate of return 14%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The initial cost of the equipment is closest to:

A) $157,410

B) $175,005

C) $235,890

D) Cannot be determined from the given information.

109) Golab Roofing is considering the purchase of a crane that would cost $69,846, would

have a useful life of 6 years, and would have no salvage value. The use of the crane would result

in labor savings of $21,000 per year. The internal rate of return on the investment in the crane is

closest to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) 18%

B) 20%

C) 19%

D) 17%

110) Laws Corporation is considering the purchase of a machine costing $16,000. Estimated

cash savings from using the new machine are $4,120 per year. The machine will have no salvage

value at the end of its useful life of six years and the required rate of return for Laws Corporation

is 12%. The machine’s internal rate of return is closest to (Ignore income taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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A) 12%

B) 14%

C) 16%

D) 18%

111) Given the following data (Ignore income taxes.):

Cost of equipment $ 48,680

Annual cash inflows $ 10,000

Internal rate of return 10%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The life of the equipment must be:

A) It is impossible to determine from the data given

B) 5 years

C) 6 years

D) 7 years

112) The management of Elamin Corporation is considering the purchase of a machine that

would cost $365,695 and would have a useful life of 9 years. The machine would have no

salvage value. The machine would reduce labor and other operating costs by $61,000 per year.

The internal rate of return on the investment in the new machine is closest to (Ignore income

taxes.):

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) 9%

B) 11%

C) 12%

D) 10%

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113) The management of Byrge Corporation is investigating buying a small used aircraft to

use in making airborne inspections of its above-ground pipelines. The aircraft would have a

useful life of 5 years. The company uses a discount rate of 10% in its capital budgeting. The net

present value of the investment, excluding the intangible benefits, is −$395,750. (Ignore income

taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

How large would the annual intangible benefit have to be to make the investment in the aircraft

financially attractive? (Round your intermediate calculations and final answer to the nearest

whole dollar amount.)

A) $395,750

B) $104,392

C) $79,150

D) $39,575

114) The management of Byrge Corporation is investigating buying a small used aircraft to

use in making airborne inspections of its above-ground pipelines. The aircraft would have a

useful life of 8 years. The company uses a discount rate of 10% in its capital budgeting. The net

present value of the investment, excluding the intangible benefits, is −$448,460. To the nearest

whole dollar how large would the annual intangible benefit have to be to make the investment in

the aircraft financially attractive? (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $44,846

B) $56,058

C) $84,060

D) $448,460

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115) Croce, Incorporated, is investigating an investment in equipment that would have a useful

life of 9 years. The company uses a discount rate of 16% in its capital budgeting. The net present

value of the investment, excluding the salvage value, is −$579,623. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

How large would the salvage value of the equipment have to be to make the investment in the

equipment financially attractive? (Round your intermediate calculations and final answer to

the nearest whole dollar amount.)

A) $579,623

B) $92,740

C) $3,622,644

D) $2,203,890

116) Croce, Incorporated, is investigating an investment in equipment that would have a useful

life of 7 years. The company uses a discount rate of 8% in its capital budgeting. The net present

value of the investment, excluding the salvage value, is −$515,967. 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? (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $41,277

B) $885,021

C) $515,967

D) $6,449,588

117) The management of Osborn Corporation is investigating an investment in equipment that

would have a useful life of 6 years. The company uses a discount rate of 12% in its capital

budgeting. The net present value of the investment, excluding the annual cash inflow, is

−$408,214. 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.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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A) $48,986

B) $68,036

C) $99,298

D) $408,214

118) The management of Osborn Corporation is investigating an investment in equipment that

would have a useful life of 8 years. The company uses a discount rate of 12% in its capital

budgeting. The net present value of the investment, excluding the annual cash inflow, is

−$401,414. 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.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $48,170

B) $50,177

C) $80,800

D) $401,414

119) Boe Corporation is investigating buying a small used aircraft for the use of its executives.

The aircraft would have a useful life of 9 years. The company uses a discount rate of 10% in its

capital budgeting. The net present value of the investment, excluding the salvage value of the

aircraft, is −$439,527. Management is having difficulty estimating the salvage value of the

aircraft. 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?

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

A) $439,527

B) $43,953

C) $4,395,270

D) $1,036,620

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120) Perkins Corporation is considering several investment proposals, as shown below:

Investment Proposal

A B C D

Investment required $ 104,000 $ 130,000 $ 78,000 $ 97,500

Present value of future net cash flows $ 124,800 $ 195,000 $

109,200 $ 192,000

If the profitability index is used, the ranking of the projects from most to least profitable would

be:

A) D, B, C, A

B) B, D, C, A

C) B, D, A, C

D) A, C, B, D

121) Perkins Corporation is considering several investment proposals, as shown below:

Investment Proposal

A B C D

Investment required $ 80,000 $ 100,000 $ 60,000 $ 75,000

Present value of future net cash flows $ 96,000 $ 150,000 $

84,000 $ 120,000

If the profitability index is used, the ranking of the projects from most to least profitable would

be:

A) D, B, C, A

B) B, D, C, A

C) B, D, A, C

D) A, C, B, D

122) Ryner Corporation is considering three investment projects: S, T, and U. Project S would

require an investment of $20,000, Project T of $69,000, and Project U of $83,000. No other cash

outflows would be involved. The present value of the cash inflows would be $23,200 for Project

S, $77,970 for Project T, and $94,620 for Project U. Rank the projects according to the

profitability index, from most profitable to least profitable. (Ignore income taxes.)

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A) U, T, S

B) T, S, U

C) U, S, T

D) S, U, T

123) Trovato Corporation is considering a project that would require an investment of

$69,000. No other cash outflows would be involved. The present value of the cash inflows would

be $91,080. The profitability index of the project is closest to (Ignore income taxes.):

A) 0.68

B) 0.32

C) 1.32

D) 0.24

124) Trovato Corporation is considering a project that would require an investment of

$48,000. No other cash outflows would be involved. The present value of the cash inflows would

be $51,840. The profitability index of the project is closest to (Ignore income taxes.):

A) 0.07

B) 0.08

C) 0.92

D) 1.08

125) A project has an initial investment of $100,000 and a profitability index of 0.15. The

discount rate is 12%. The present value of cash inflows for the project is closest to:

A) $15,000

B) $115,000

C) $112,000

D) $12,000

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126) The management of Solar Corporation is considering the following three investment

projects (Ignore income taxes.):

Project L Project M Project N

Investment required $ 37,000 $ 55,000 $ 82,000

Present value of cash inflows $ 38,480 $ 62,150 $ 90,200

Rank the projects according to the profitability index, from most profitable to least profitable.

A) M, N, L

B) L, N, M

C) N, L, M

D) N, M, L

127) A project requires an initial investment of $67,000 and has a profitability index of 0.336.

The present value of the future cash inflows from this investment is:

A) $22,512

B) $89,512

C) $67,000

D) $44,488

128) A project requires an initial investment of $200,000 and has a profitability index of

0.250. The present value of the future cash inflows from this investment is:

A) $50,000

B) $25,000

C) $250,000

D) $225,000

129) A company is pondering an investment project that has an internal rate of return which is

equal to the company’s discount rate. The profitability index of this investment project is:

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A) 0.0

B) 0.5

C) 1.0

D) 1.5

130) Information on four investment proposals is given below:

Proposal Investment Net Present Value

1 $ 8,000 $ 3,200

2 $ 12,000 $ 3,600

3 $ 10,000 $ 2,500

4 $ 4,000 $ 2,000

Rank the proposals in terms of preference from highest to lowest according to the profitability

index:

A) 3, 2, 1, 4

B) 2, 3, 1, 4

C) 2, 1, 3, 4

D) 4, 1, 2, 3

131) The management of Leitheiser Corporation is considering a project that would require an

initial investment of $41,000. No other cash outflows would be required. The present value of

the cash inflows would be $52,580. The profitability index of the project is closest to (Ignore

income taxes.):

A) 1.28

B) 0.72

C) 0.28

D) 0.22

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132) The management of Leitheiser Corporation is considering a project that would require an

initial investment of $51,000. No other cash outflows would be required. The present value of

the cash inflows would be $57,630. The profitability index of the project is closest to (Ignore

income taxes.):

A) 1.13

B) 0.87

C) 0.13

D) 0.12

133) The management of Plotnik Corporation is investigating purchasing equipment that

would increase sales revenues by $269,000 per year and cash operating expenses by $156,000

per year. The equipment would cost $294,000 and have a 6 year life with no salvage value. The

simple rate of return on the investment is closest to (Ignore income taxes.):

A) 16.7%

B) 38.4%

C) 23.8%

D) 21.8%

134) A company is considering buying a machine that costs $500,000, has a useful life of ten

years, and is depreciated over its useful life by the straight-line method. The salvage value of the

machine at the end of ten years will be $40,000. This machine will replace an old machine that is

fully depreciated; the old machine has a salvage value of $75,000 now. If the simple rate of

return of this investment is 12.7%, then the anticipated annual incremental net operating income

from this machine for each of the next ten years is (Ignore income taxes.):

A) $100,000

B) $63,825

C) $53,975

D) $46,380

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135) The management of Ro Corporation is investigating automating a process. Old

equipment, with a current salvage value of $24,000, would be replaced by a new machine. The

new machine would be purchased for $426,000 and would have a 6 year useful life and no

salvage value. By automating the process, the company would save $147,000 per year in cash

operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.):

(Round your answer to 1 decimal place.)

A) 18.9%

B) 17.8%

C) 34.5%

D) 16.7%

136) The management of Ro Corporation is investigating automating a process. Old

equipment, with a current salvage value of $11,000, would be replaced by a new machine. The

new machine would be purchased for $243,000 and would have a 9 year useful life and no

salvage value. By automating the process, the company would save $69,000 per year in cash

operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.):

A) 18.1%

B) 11.1%

C) 28.4%

D) 17.3%

137) An expansion at Fey, Incorporated, would increase sales revenues by $150,000 per year

and cash operating expenses by $47,000 per year. The initial investment would be for equipment

that would cost $328,000 and have an 8 year life with no salvage value. The annual depreciation

on the equipment would be $41,000. The simple rate of return on the investment is closest to

(Ignore income taxes.):

A) 41.3%

B) 18.9%

C) 12.5%

D) 31.4%

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138) Crowl Corporation is investigating automating a process by purchasing a machine for

$796,500 that would have a 9 year useful life and no salvage value. By automating the process,

the company would save $134,500 per year in cash operating costs. The new machine would

replace some old equipment that would be sold for scrap now, yielding $21,500. The annual

depreciation on the new machine would be $88,500. The simple rate of return on the investment

is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

A) 11.15%

B) 16.75%

C) 5.94%

D) 5.15%

139) Crowl Corporation is investigating automating a process by purchasing a machine for

$792,000 that would have a 9 year useful life and no salvage value. By automating the process,

the company would save $132,000 per year in cash operating costs. The new machine would

replace some old equipment that would be sold for scrap now, yielding $21,000. The annual

depreciation on the new machine would be $88,000. The simple rate of return on the investment

is closest to (Ignore income taxes.):

A) 11.1%

B) 16.7%

C) 5.7%

D) 5.1%

140) Denny Corporation is considering replacing a technologically obsolete machine with a

new state-of-the-art numerically controlled machine. The new machine would cost $140,000 and

would have a fourteen-year useful life. Unfortunately, the new machine would have no salvage

value. The new machine would cost $18,000 per year to operate and maintain, but would save

$48,000 per year in labor and other costs. The old machine can be sold now for scrap for

$14,000. The simple rate of return on the new machine is closest to (Ignore income taxes.):

(Round your answer to 1 decimal place.)

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A) 14.29%

B) 34.29%

C) 31.75%

D) 15.87%

141) 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 labor 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 (Ignore income taxes.):

A) 8.75%

B) 20.00%

C) 7.78%

D) 22.22%

142) Slomkowski Corporation is contemplating purchasing equipment that would increase

sales revenues by $298,000 per year and cash operating expenses by $143,000 per year. The

equipment would cost $712,000 and have an 8 year life with no salvage value. The annual

depreciation would be $89,000. The simple rate of return on the investment is closest to (Ignore

income taxes.):

A) 9.3%

B) 21.8%

C) 22.1%

D) 12.5%

143) Vandezande Incorporated is considering the acquisition of a new machine that costs

$370,000 and has a useful life of 5 years with no salvage value. The incremental net operating

income and incremental net cash flows that would be produced by the machine are (Ignore

income taxes.):

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Incremental Net Operating Income Incremental Net Cash Flows

Year 1 $ 54,000 $ 128,000

Year 2 $ 31,000 $ 105,000

Year 3 $ 52,000 $ 126,000

Year 4 $ 49,000 $ 123,000

Year 5 $ 48,000 $ 122,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

Assume cash flows occur uniformly throughout a year except for the initial investment.

If the discount rate is 10%, the net present value of the investment is closest to:

A) $370,000

B) $457,479

C) $234,000

D) $87,479

144) Vandezande Incorporated is considering the acquisition of a new machine that costs

$467,000 and has a useful life of 5 years with no salvage value. The incremental net operating

income and incremental net cash flows that would be produced by the machine are (Ignore

income taxes.):

Incremental Net Operating Income Incremental Net Cash Flows

Year 1 $ 75,000 $ 152,000

Year 2 $ 81,000 $ 160,000

Year 3 $ 92,000 $ 175,000

Year 4 $ 55,000 $ 157,000

Year 5 $ 97,000 $ 159,000

Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period of this investment is closest to: (Round your answer to 1 decimal place.)

A) 2.0 years

B) 5.0 years

C) 4.1 years

D) 2.9 years

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145) Vandezande Incorporated is considering the acquisition of a new machine that costs

$370,000 and has a useful life of 5 years with no salvage value. The incremental net operating

income and incremental net cash flows that would be produced by the machine are (Ignore

income taxes.):

Incremental Net Operating Income Incremental Net Cash Flows

Year 1 $ 54,000 $ 128,000

Year 2 $ 31,000 $ 105,000

Year 3 $ 52,000 $ 126,000

Year 4 $ 49,000 $ 123,000

Year 5 $ 48,000 $ 122,000

Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period of this investment is closest to:

A) 2.9 years

B) 4.9 years

C) 3.1 years

D) 5.0 years

146) Joetz Corporation has gathered the following data on a proposed investment project

(Ignore income taxes.):

Investment required in equipment $ 30,000

Annual cash inflows $ 6,000

Salvage value of equipment $ 0

Life of the investment 15 years

Required rate of return 10%

The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

The payback period for the investment is:

A) 5 years

B) 15 years

C) 2 years

D) 7.143 years

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147) Joetz Corporation has gathered the following data on a proposed investment project

(Ignore income taxes.):

Investment required in equipment $ 39,000

Annual cash inflows $ 9,600

Salvage value of equipment $ 0

Life of the investment 15 years

Required rate of return 10%

The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

The simple rate of return for the investment (rounded to the nearest tenth of a percent) is:

(Round your answer to 1 decimal place.)

A) 31.2%

B) 17.9%

C) 26.1%

D) 12.6%

148) Joetz Corporation has gathered the following data on a proposed investment project

(Ignore income taxes.):

Investment required in equipment $ 30,000

Annual cash inflows $ 6,000

Salvage value of equipment $ 0

Life of the investment 15 years

Required rate of return 10%

The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

The simple rate of return for the investment (rounded to the nearest tenth of a percent) is:

A) 20.0%

B) 13.3%

C) 18.0%

D) 10.0%

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149) Joetz Corporation has gathered the following data on a proposed investment project

(Ignore income taxes.):

Investment required in equipment $ 30,000

Annual cash inflows $ 6,000

Salvage value of equipment $ 0

Life of the investment 15 years

Required rate of return 10%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

The net present value of the investment is:

A) $15,636

B) $24,000

C) $45,636

D) $60,000

150) Joetz Corporation has gathered the following data on a proposed investment project

(Ignore income taxes.):

Investment required in equipment $ 35,500

Annual cash inflows $ 8,200

Salvage value of equipment $ 0

Life of the investment 15 years

Required rate of return 10%

The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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

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A) 24%

B) 22%

C) 20%

D) 26%

151) Joetz Corporation has gathered the following data on a proposed investment project

(Ignore income taxes.):

Investment required in equipment $ 30,000

Annual cash inflows $ 6,000

Salvage value of equipment $ 0

Life of the investment 15 years

Required rate of return 10%

The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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

A) 16%

B) 18%

C) 20%

D) 22%

152) Oriental Corporation has gathered the following data on a proposed investment project:

Investment in depreciable equipment $ 580,000

Annual net cash flows $ 74,000

Life of the equipment 20 years

Salvage value $ 0

Discount rate 11%

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The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

The payback period for the investment would be: (Round your answer to 1 decimal place.)

A) 0.1 years

B) 1.0 years

C) 5.8 years

D) 7.8 years

153) Oriental Corporation has gathered the following data on a proposed investment project:

Investment in depreciable equipment $ 200,000

Annual net cash flows $ 50,000

Life of the equipment 10 years

Salvage value $ 0

Discount rate 10%

The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

The payback period for the investment would be:

A) 2.41 years

B) 0.25 years

C) 10 years

D) 4 years

154) Oriental Corporation has gathered the following data on a proposed investment project:

Investment in depreciable equipment $ 200,000

Annual net cash flows $ 50,000

Life of the equipment 10 years

Salvage value $ 0

Discount rate 10%

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The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

The simple rate of return on the investment would be:

A) 10%

B) 35%

C) 15%

D) 25%

155) Oriental Corporation has gathered the following data on a proposed investment project:

Investment in depreciable equipment $ 200,000

Annual net cash flows $ 50,000

Life of the equipment 10 years

Salvage value $ 0

Discount rate 10%

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The company uses straight-line depreciation on all equipment. Assume cash flows occur

uniformly throughout a year except for the initial investment.

The net present value of this investment would be:

A) $(14,350)

B) $107,250

C) $77,200

D) $200,000

156) Fast Food, Incorporated, has purchased a new donut maker. It cost $16,000 and has an

estimated life of 10 years. The following annual donut sales and expenses are projected (Ignore

income taxes.):

Sales $ 22,000

Expenses:

Flour, etc., required in making donuts $ 10,000

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Salaries 6,000

Depreciation 1,600 17,600

Net operating income $ 4,400

Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period on the new machine is closest to:

A) 5 years

B) 2.7 years

C) 3.6 years

D) 1.4 years

157) Fast Food, Incorporated, has purchased a new donut maker. It cost $16,000 and has an

estimated life of 10 years. The following annual donut sales and expenses are projected (Ignore

income taxes.):

Sales $ 22,000

Expenses:

Flour, etc., required in making donuts $ 10,000

Salaries 6,000

Depreciation 1,600 17,600

Net operating income $ 4,400

Assume cash flows occur uniformly throughout a year except for the initial investment.

The simple rate of return for the new machine is closest to:

A) 20%

B) 37.5%

C) 27.5%

D) 80.0%

158) Purvell Corporation has just acquired a new machine with the following characteristics

(Ignore income taxes.):

Cost of the equipment $ 50,000

Annual cash savings $ 15,000

Life of the machine 8 years

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The company uses straight-line depreciation and a $5,000 salvage value. Assume cash flows

occur uniformly throughout a year except for the initial investment and the salvage at the end of

the project.

The payback period is closest to:

A) 3.33 years

B) 3.0 years

C) 8.0 years

D) 2.9 years

159) Purvell Corporation has just acquired a new machine with the following characteristics

(Ignore income taxes.):

Cost of the equipment $ 50,000

Annual cash savings $ 15,000

Life of the machine 8 years

The company uses straight-line depreciation and a $5,000 salvage value. Assume cash flows

occur uniformly throughout a year except for the initial investment and the salvage at the end of

the project.

The simple rate of return would be closest to:

A) 30.0%

B) 17.5%

C) 18.75%

D) 12.5%

160) Morrel University has a small shuttle bus that is in poor mechanical condition. The bus

can be either overhauled now or replaced with a new shuttle bus. The following data have been

gathered concerning these two alternatives (Ignore income taxes.):

Present Bus New Bus

Purchase cost new $ 32,000 $ 40,000

Remaining net book value $ 21,000 0

Major repair needed now $ 9,000 0

Annual cash operating costs $ 12,000 $ 8,000

Salvage value now $ 10,000 0

Trade-in value in seven years $ 2,000 $ 5,000

Version 1 71

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The University could continue to use the present bus for the next seven years. Whether the

present bus is used or a new bus is purchased, the bus would be traded in for another bus at the

end of seven years. The University uses a discount rate of 12% and the total cost approach to net

present value analysis.

If the new bus is purchased, the present value of the annual cash operating costs associated

with this alternative is closest to:

A) $(54,800)

B) $(36,500)

C) $(16,200)

D) $(42,800)

161) Morrel University has a small shuttle bus that is in poor mechanical condition. The bus

can be either overhauled now or replaced with a new shuttle bus. The following data have been

gathered concerning these two alternatives (Ignore income taxes.):

Present Bus New Bus

Purchase cost new $ 32,000 $ 40,000

Remaining net book value $ 21,000 0

Major repair needed now $ 9,000 0

Annual cash operating costs $ 12,000 $ 8,000

Salvage value now $ 10,000 0

Trade-in value in seven years $ 2,000 $ 5,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The University could continue to use the present bus for the next seven years. Whether the

present bus is used or a new bus is purchased, the bus would be traded in for another bus at the

end of seven years. The University uses a discount rate of 12% and the total cost approach to net

present value analysis.

If the present bus is repaired, the present value of the annual cash operating costs associated

with this alternative is closest to:

A) $(36,500)

B) $(16,200)

C) $(47,200)

D) $(54,800)

Version 1 72

162) Morrel University has a small shuttle bus that is in poor mechanical condition. The bus

can be either overhauled now or replaced with a new shuttle bus. The following data have been

gathered concerning these two alternatives (Ignore income taxes.):

Present Bus New Bus

Purchase cost new $ 32,000 $ 40,000

Remaining net book value $ 21,000 0

Major repair needed now $ 9,000 0

Annual cash operating costs $ 12,000 $ 8,000

Salvage value now $ 10,000 0

Trade-in value in seven years $ 2,000 $ 5,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The University could continue to use the present bus for the next seven years. Whether the

present bus is used or a new bus is purchased, the bus would be traded in for another bus at the

end of seven years. The University uses a discount rate of 12% and the total cost approach to net

present value analysis.

If the present bus is repaired, the present value of the salvage received on sale of the bus seven

years from now is closest to:

A) $(2,260)

B) $2,260

C) $904

D) $(904)

163) 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 (Ignore income taxes.):

Present System Proposed New System

Purchase cost new $ 250,000 $ 300,000

Accumulated depreciation $ 240,000 0

Overhaul costs needed now $ 230,000 0

Annual cash operating costs $ 180,000 $ 170,000

Salvage value at the end of 8 years $ 152,000 $ 165,000

Working capital required 0 $ 200,000

Version 1 73

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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 would be released for use elsewhere when the project is completed.

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

A) $(1,279,316)

B) $(1,119,316)

C) $801,284

D) $(1,194,036)

164) 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 (Ignore income taxes.):

Present System Proposed New System

Purchase cost new $ 250,000 $ 300,000

Accumulated depreciation $ 240,000 0

Overhaul costs needed now $ 230,000 0

Annual cash operating costs $ 180,000 $ 170,000

Salvage value at the end of 8 years $ 152,000 $ 165,000

Working capital required 0 $ 200,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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

would be released for use elsewhere when the project is completed.

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

A) $(1,076,495)

B) $(1,236,495)

C) $(1,169,895)

D) $(969,895)

Version 1 74

165) Lambert Manufacturing has $100,000 to invest in either Project A or Project B. The

following data are available on these projects (Ignore income taxes.):

Project A Project B

Cost of equipment needed now $ 100,000 $ 60,000

Working capital investment needed now $ 0 $ 40,000

Annual cash operating inflows $ 40,000 $ 35,000

Salvage value of equipment in 6 years $ 10,000 $ 0

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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:

A) $51,000

B) $60,120

C) $55,560

D) $94,450

166) Lambert Manufacturing has $100,000 to invest in either Project A or Project B. The

following data are available on these projects (Ignore income taxes.):

Project A Project B

Cost of equipment needed now $ 100,000 $ 60,000

Working capital investment needed now $ 0 $ 40,000

Annual cash operating inflows $ 40,000 $ 35,000

Salvage value of equipment in 6 years $ 10,000 $ 0

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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:

A) $90,355

B) $76,115

C) $36,115

D) $54,355

Version 1 75

167) Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The

following data are available on these projects (Ignore income taxes.):

Project A Project B

Cost of equipment needed now $ 120,000 $ 70,000

Working capital investment needed now $ 0 $ 50,000

Annual net operating cash inflows $ 50,000 $ 45,000

Salvage value of equipment in 6 years $ 15,000 $ 0

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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:

A) $82,241

B) $67,610

C) $74,450

D) $81,290

168) Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The

following data are available on these projects (Ignore income taxes.):

Project A Project B

Cost of equipment needed now $ 120,000 $ 70,000

Working capital investment needed now $ 0 $ 50,000

Annual net operating cash inflows $ 50,000 $ 45,000

Salvage value of equipment in 6 years $ 15,000 $ 0

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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:

A) $77,805

B) $127,805

C) $55,005

D) $105,005

Version 1 76

169) Becker Billing Systems, Incorporated, 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 (Ignore income taxes.):

Overhaul Present System Purchase New System

Purchase cost when new $ 300,000 $ 400,000

Accumulated depreciation $ 220,000 $ 0

Overhaul costs needed now $ 250,000 $ 0

Annual cash operating costs $ 120,000 $ 90,000

Salvage value now $ 90,000 $ 0

Salvage value in ten years $ 30,000 $ 80,000

Working capital required $ 0 $ 50,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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:

A) $(750,300)

B) $(725,800)

C) $(975,800)

D) $(987,400)

170) Becker Billing Systems, Incorporated, 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 (Ignore income taxes.):

Overhaul Present System Purchase New System

Purchase cost when new $ 300,000 $ 400,000

Accumulated depreciation $ 220,000 $ 0

Overhaul costs needed now $ 250,000 $ 0

Annual cash operating costs $ 120,000 $ 90,000

Salvage value now $ 90,000 $ 0

Salvage value in ten years $ 30,000 $ 80,000

Working capital required $ 0 $ 50,000

Version 1 77

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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:

A) $(862,900)

B) $(552,900)

C) $(758,400)

D) $(987,400)

171) 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. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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

A) $763,064

B) $177,027

C) $546,000

D) $367,536

172) 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. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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

Version 1 78

A) $15,646

B) $89,588

C) $7,536

D) $186,000

173) Paragas, Incorporated, 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. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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:

A) $(3,004)

B) $0

C) $(12,080)

D) $11,816

174) Paragas, Incorporated, 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. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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

Version 1 79

A) $9,584

B) $78,530

C) $22,532

D) $19,528

175) 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. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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

A) $22,608

B) $874,298

C) $504,000

D) $274,464

176) Almendarez Corporation is considering the purchase of a machine that would cost

$230,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage

value of $22,000. By reducing labor and other operating costs, the machine would provide

annual cost savings of $47,000. The company requires a minimum pretax return of 8% on all

investment projects. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The net present value of the proposed project is closest to: (Round your intermediate

calculations and final answer to the nearest whole dollar amount.)

A) $(1,141)

B) $7,779

C) $(52,000)

D) $(14,206)

Version 1 80

177) 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. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

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

A) $(29,522)

B) $(45,536)

C) $5,464

D) $(94,042)

178) 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%. (Ignore income taxes.)

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount

factor(s) using the tables provided.

The net present value of the project is closest to:

A) $171,000

B) $136,400

C) $141,500

D) $560,000

Version 1 81

179) Treads Corporation is considering the purchase of a new machine to replace an old