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Exam 11: Capital Budgeting

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Question 31

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When deciding between mutually exclusive investments,a manager should choose the option with the lowest depreciation.

A) True
B) False

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Question 32

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Fargo Corp.is considering the purchase of a new piece of equipment.The equipment costs $50,000 and will have a salvage value of $5,000 after nine years.Using the new piece of equipment will increase Fargo's annual cash flows by $6,000.Fargo has a hurdle rate of 12%. a.How much is Fargo's annual depreciation on the equipment? b.What is Fargo's projected annual increase in net income? c.What is the accounting rate of return for purchasing the new piece of equipment? d.Based on financial factors,should Fargo purchase the new equipment? Why or why not?

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a.$5,000 = ($50,000 − $5,000)/9
b.$1,000...

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Question 33

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Newport Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $200,000.The equipment will have an initial cost of $900,000 and have a 6-year life.There is no salvage value for the equipment.What is the accounting rate of return? Ignore income taxes.

You will need at least $5,000 in four years and your friend says she can either loan you $5,000 all at once four years from now or she can deposit $1,200 in your savings account at the end of each year for the next four years.Your savings account earns 7% interest,compounded annually.Which option would be worth more to you four years from now,and how much more? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

Which of the following would be included in net income but not in annual cash flows?

Lawrence Corp.is considering the purchase of a new piece of equipment.When discounted at a hurdle rate of 8%,the project has a net present value of $24,580.When discounted at a hurdle rate of 10%,the project has a net present value of ($28,940) .The internal rate of return of the project is:

You invest $13,420 in an annuity contract that earns 8% interest,compounded annually.You are to receive annual payments for the next ten years.How much will each of the payments be? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

The payback period method ignores the time value of money.

Grady Corp.is considering the purchase of a new piece of equipment.The equipment costs $50,000,and will have a salvage value of $5,000 after nine years.Using the new piece of equipment will increase Grady's annual cash flows by $6,000.Grady has a hurdle rate of 12%. a.What is the present value of the increase in annual cash flows? b.What is the present value of the salvage value? c.What is the net present value of the equipment purchase? d.Based on financial factors,should Grady purchase the equipment? Why?

Frank Inc.is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years.The equipment would cost $45,000 to purchase,and maintenance costs would be $5,000 per year.After ten years,Frank estimates it could sell the equipment for $20,000.If Frank leased the equipment,it would pay a set annual fee that would include all maintenance costs.Frank has determined after a net present value analysis that at its hurdle rate of 10%,it would be better off by $5,700 if it buys the equipment.What would the approximate annual cost be if Frank were to lease the equipment? (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Do not round intermediate calculations.Round your final answer to the nearest hundred. )

The payback method:

Nelson Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $100,000.The equipment will have an initial cost of $400,000 and have a 5-year life.If the salvage value of the equipment is estimated to be $75,000,what is the accounting rate of return? Ignore income taxes.

Olive Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $250,000.The equipment will have an initial cost of $1,300,000 and have an 8-year life.There is no salvage value for the equipment.If the hurdle rate is 10%,what is the internal rate of return? Ignore income taxes.(Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. ) (Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

To find the present value of a single amount,you only need to know the amount to be received in the future,the interest rate,and the number of periods until the amount will be received.

The payback period is defined as the average net income divided by the initial investment.

Carol,Inc.is considering three different independent investment opportunities.The present value of future cash flows,initial investment,and net present value for each of the projects are as follows: In what order should Carol prioritize investment in the projects?

A problem in which you must calculate the value now of a series of equal amounts to be received for some specified number of periods in the future is a:

A problem in which you must calculate how much money you will have in the future as a result of depositing a fixed amount of money each period is a:

The accounting rate of return is the only method that focuses on net income rather than cash flow.

Fletcher Corp.is considering the purchase of a new piece of equipment.The equipment will have an initial cost of $400,000,a 5-year life,and a salvage value of $75,000.If the accounting rate of return for the project is 10%,what is the annual increase in net cash flow? Ignore income taxes.