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92. The payback period of this investment is closest to:
(Ignore income taxes in this problem.) The management of Melchiori Corporation is
considering the purchase of a machine that would cost $310,000, would last for 6 years, and
would have no salvage value. The machine would reduce labor and other costs by $116,000
per year. The company requires a minimum pretax return of 16% on all investment projects.
Chapter 13 Capital Budgeting Decisions
93. The present value of the annual cost savings of $116,000 is closest to:
94. The net present value of the proposed project is closest to:
Chapter 13 Capital Budgeting Decisions
(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be
rebuilt or replaced. The following information has been gathered concerning this decision:
Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting
decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years
Mr. Lichty plans to close the car wash and retire.
95. If the new equipment is purchased, the present value of all cash flows that occur now is:
Chapter 13 Capital Budgeting Decisions
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96. If the new equipment is purchased, the present value of the annual cash operating costs
associated with this alternative is:
(Ignore income taxes in this problem.) The Finney Company is reviewing the possibility of
remodeling one of its showrooms and buying some new equipment to improve sales
operations. The remodeling would cost $120,000 now and the useful life of the project is 10
years. Additional working capital needed immediately for this project would be $30,000; the
working capital would be released for use elsewhere at the end of the 10-year period. The
equipment and other materials used in the project would have a salvage value of $10,000 in
10 years. Finney’s discount rate is 16%.
Chapter 13 Capital Budgeting Decisions
97. The immediate cash outflow required for this project would be:
Chapter 13 Capital Budgeting Decisions
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98. What would the annual net cash inflows from this project have to be in order to justify
investing in remodeling?
(Ignore income taxes in this problem.) Gillaspie, Inc., is considering the purchase of a
machine that would cost $300,000 and would last for 5 years. At the end of 5 years, the
machine would have a salvage value of $51,000. The machine would reduce labor and other
costs by $86,000 per year. Additional working capital of $10,000 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 13% on all investment projects.
Chapter 13 Capital Budgeting Decisions
99. 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:
100. The net present value of the proposed project is closest to:
Chapter 13 Capital Budgeting Decisions
(Ignore income taxes in this problem.) Rushforth Manufacturing has $90,000 to invest in
either Project A or Project B. The following data are available on these projects:
Both projects will have a useful life of 6 years. At the end of 6 years, the working capital
investment will be released for use elsewhere. Rushforth’s required rate of return is 14%.
101. The net present value of Project A is:
Chapter 13 Capital Budgeting Decisions
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102. The net present value of Project B is:
(Ignore income taxes in this problem.) Meharg Corporation is considering the purchase of a
machine that would cost $120,000 and would last for 5 years. At the end of 5 years, the
machine would have a salvage value of $25,000. By reducing labor and other operating costs,
the machine would provide annual cost savings of $30,000. The company requires a minimum
pretax return of 10% on all investment projects.
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103. The present value of the annual cost savings of $30,000 is closest to:
104. The net present value of the proposed project is closest to:
(Ignore income taxes in this problem.) Trybus Corporation uses a discount rate of 16% in its
capital budgeting. Partial analysis of an investment in automated equipment with a useful life
of 5 years has thus far yielded a net present value of -$233,764. 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.
Chapter 13 Capital Budgeting Decisions
105. Ignoring any salvage value, to the nearest whole dollar how large would the additional
cash flow per year from the intangible benefits have to be to make the investment in the
automated equipment financially attractive?
106. Ignoring any cash flows from intangible benefits, to the nearest whole dollar how large
would the salvage value of the automated equipment have to be to make the investment in the
automated equipment financially attractive?
Chapter 13 Capital Budgeting Decisions
(Ignore income taxes in this problem.) The management of Gimenez Corporation is
investigating an investment in equipment that would have a useful life of 7 years. The
company uses a discount rate of 17% in its capital budgeting. Good estimates are available for
the initial investment and the annual cash operating outflows, but not for the annual cash
inflows and the salvage value of the equipment. The net present value of the initial investment
and the annual cash outflows is -$274,265.
107. Ignoring any salvage value, to the nearest whole dollar how large would the annual cash
inflow have to be to make the investment in the equipment financially attractive?
108. Ignoring the cash inflows, to the nearest whole dollar how large would the salvage value
of the equipment have to be to make the investment in the equipment financially attractive?
Chapter 13 Capital Budgeting Decisions
(Ignore income taxes in this problem.) Burchell Corporation is investigating buying a small
used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The
company uses a discount rate of 15% in its capital budgeting. The net present value of the
initial investment and the annual operating cash cost is -$594,381. Management is having
difficulty estimating the annual benefit of having the aircraft and estimating the salvage value
of the aircraft.
109. Ignoring the annual benefit, to the nearest whole dollar how large would the salvage
value of the aircraft have to be to make the investment in the aircraft financially attractive?
110. Ignoring any salvage value, to the nearest whole dollar how large would the annual
benefit have to be to make the investment in the aircraft financially attractive?
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(Ignore income taxes in this problem.) The management of Pattee Corporation is considering
three investment projects-M, N, and O. Project M would require an investment of $25,000,
Project N of $67,000, and Project O of $70,000. The present value of the cash inflows would
be $28,750 for Project M, $73,700 for Project N, and $79,100 for Project O.
111. The profitability index of investment project N is closest to:
Chapter 13 Capital Budgeting Decisions
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112. Rank the projects according to the profitability index, from most profitable to least
profitable.
(Ignore income taxes in this problem.) Altro Corporation is considering the following three
investment projects:
Chapter 13 Capital Budgeting Decisions
113. The profitability index of investment project S is closest to:
114. Rank the projects according to the profitability index, from most profitable to least
profitable.
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(Ignore income taxes in this problem.) The Crawford Company is pondering an investment in
a machine that costs $350,000, that will have a useful life of eight years, and that will have a
salvage value of $25,000. If this machine is purchased, a similar, old machine will be sold at a
salvage value of $40,000. The anticipated yearly revenues and expenses associated with the
new machine are:
All of the revenues and expenses except depreciation are for cash. The company’s required
rate of return is 12%. The annual cash flows occur uniformly throughout the year.
Chapter 13 Capital Budgeting Decisions
115. The payback period, to the nearest tenth of a year, of this investment is:
116. The simple rate of return, to the nearest tenth of a percent, of this investment is:
Chapter 13 Capital Budgeting Decisions
(Ignore income taxes in this problem.) Friden Company has just purchased a new piece of
equipment with the following characteristics:
117. Assume straight-line depreciation and no salvage value. The payback period would be:
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118. The simple rate of return would be approximately:
Essay Questions