Chapter 11
Capital Budgeting Decisions
True / False Questions
1. In the payback method, depreciation is deducted from net operating income when computing the
annual net cash flow.
True
False
2. In calculating the payback period where new equipment is replacing old equipment, any salvage
value to be received on disposal of the old equipment should be added to the cost of the new
equipment.
True
False
3. One criticism of the payback method is that it ignores cash flows that occur after the payback
point has been reached.
True
False
4. The payback method of making capital budgeting decisions does not give full consideration to the
time value of money.
True
False
11-1
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5. The basic premise of the payback method is that the more quickly the cost of an investment is
recovered the more desirable is the investment.
True
False
6. When considering a number of investment projects, the project that has the shortest payback
period does not necessarily have the highest net present value.
True
False
7. When discounted cash flow methods of capital budgeting are used, the working capital required
for a project is ordinarily counted as a cash inflow at the beginning of the project and as a cash
outflow at the end of the project.
True
False
8. Discounted cash flow techniques do not take into account recovery of initial investment.
True
False
9. The required rate of return is the minimum rate of return that an investment project must yield to
the acceptable.
True
False
10. For capital budgeting decisions, the simple rate of return method is superior to the net present
value method.
True
False
11-2
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11. In preference decision situations, a project with a lower net present value may be preferable to a
project with a higher net present value.
True
False
12. Preference decisions follow screening decisions and seek to rank investment proposals in order
of their desirability.
True
False
13. The project profitability index is used to compare the net present values of two investments that
require different amounts of investment funds.
True
False
14. The project profitability index is computed by dividing the present value of the cash inflows of the
project by present value of the cash outflows of the project.
True
False
15. An investment project with a project profitability index of less than one should ordinarily be
rejected.
True
False
16. If a project does not have constant incremental revenues and expenses over its useful life, the
simple rate of return will fluctuate from year to year.
True
False
11-3
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17. The simple rate of return method does not take into account the time value of money.
True
False
Multiple Choice Questions
18. Which of the following will have the largest dollar effect on the net present value of a 10 year
investment project?
A. a decrease of $20,000 in the initial investment required with no effect on the expected salvage
value in 10 years.
B. an increase of $20,000 in the expected salvage value in 10 years with no effect on the initial
investment.
C. a decrease of $20,000 in both the working capital needed to start the project and the amount
being released at the end of the 10 years.
D. an increase of $2,000 in the annual cash inflows from this project.
19. If taxes are ignored, all of the following items are included in a discounted cash flow analysis
except:
A. future operating cash savings.
B. depreciation expense.
C. future salvage value.
D. investment in working capital.
11-4
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20. In capital budgeting computations, discounted cash flow methods:
A. automatically provide for recovery of initial investment.
B. can't be used unless cash flows are uniform from year to year.
C. assume that all cash flows occur at the beginning of a period.
D. ignore all cash flows after the payback period.
21. The best capital budgeting method for ranking investment projects of different dollar amounts is
the:
A. project profitability index.
B. net present value method.
C. simple rate of return method.
D. payback period.
22. The investment required for the project profitability index should:
A. be reduced by the amount of any salvage recovered from the sale of old equipment.
B. be reduced by the amount of any salvage recovered from the sale of the new equipment at the
end of its useful life.
C. be reduced by the amount of any salvage recovered from the sale of both the old and new
equipment.
D.
not be adjusted for the salvage value of old or new equipment.
11-5
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23.
Harrison Corporation is studying a project that would have an eight-year life and would require a
$300,000 investment in equipment which has no salvage value. The project would provide net
operating income each year as follows for the life of the project:
Sales
$500,000
Less cash variable
expenses
200,000
Contribution margin
300,000
Less fixed expenses:
Fixed cash expenses
Depreciation expenses
Net operating income
$150,000
37,500 187,500
$112,500
The company's required rate of return is 10%. The payback period for this project is closest to:
A. 3 years
B. 2 years
C. 2.5 years
D. 2.67 years
11-6
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24. Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was
purchased for $28,000 and will have a 6-year useful life and a $4,000 salvage value. Delivering
prescriptions (which the pharmacy has never done before) should increase gross revenues by at
least $32,000 per year. The cost of these prescriptions to the pharmacy will be about $25,000 per
year. The pharmacy depreciates all assets using the straight-line method. The payback period for
the auto is closest to:
A. 4 years
B. 1.8 years
C. 2 years
D. 1.2 years
25. A company with $600,000 in operating assets is considering the purchase of a machine that costs
$72,000 and which is expected to reduce operating costs by $18,000 each year. These
reductions in cost occur evenly throughout the year. The payback period for this machine in years
is closest to:
A. 4 years
B. 8.3 years
C. 0.25 years
D. 33.3 years
11-7
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26.
The Zinger Corporation is considering an investment that has the following data:
Year Year Year Year Year
1
2
3
4
5
Investment $8,000 $3,000
Cash
inflow
$2,000 $2,000 $5,000 $4,000 $4,000
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
27. The management of Helberg Corporation is considering a project that would require an
investment of $203,000 and would last for 6 years. The annual net operating income from the
project would be $103,000, which includes depreciation of $30,000. 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. 1.5 years
B. 2.0 years
C. 1.4 years
D. 1.7 years
11-8
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28.
Neighbors Corporation is considering a project that would require an investment of $279,000 and
would last for 8 years. The incremental annual revenues and expenses generated by the project
during those 8 years would be as follows:
Sales
Variable expenses
Contribution margin
$224,000
22,000
202,000
Fixed expenses:
Salaries
25,000
Rents
38,000
Depreciation
33,000
Total fixed expenses
Net operating income
96,000
$106,000
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:
A. 2.0 years
B. 2.6 years
C. 2.5 years
D. 1.9 years
11-9
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29. Jason Corporation has invested in a machine that cost $80,000, that has a useful life of eight
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
five years. Given these data, the simple rate of return on the machine is closest to:
A. 6.8%
B. 7.5%
C. 9%
D. 12%
11-10
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30.
Fimbrez Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
$360,000
Annual cash flow
$118,000 per
year
Expected life of the
4 years
project
Discount rate
12%
The net present value of the project is closest to:
A. $358,484
B. $360,000
C.
($1,516)
D. $112,000
11-11
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31. Beaver Corporation is investigating the purchase of a new threading machine that costs $18,000.
The machine would save about $4,000 per year over the present method of threading component
parts, and would have a salvage value of about $3,000 in 6 years when the machine would be
replaced. The company's required rate of return is 12%. The machine's net present value is
closest to:
A. $1,556
B.
($35)
C. $11,000
D. $8,000
32. Frick Road Paving Corporation is considering an investment in a curb-forming machine. The
machine will cost $180,000, will last 10 years, and will have a $30,000 salvage value at the end of
10 years. The machine is expected to generate net cash inflows of $40,000 per year in each of
the 10 years. Frick's discount rate is 10%. The net present value of the proposed investment is
closest to:
A. $250,000
B. $65,800
C. $245,800
D. $77,380
11-12
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33. Czlapinski Corporation is considering a capital budgeting project that would require an initial
investment of $440,000 and working capital of $32,000. 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 $147,000 for the life of the project. At the end of the project, equipment that had
been used in the project could be sold for $11,000. The company's discount rate is 7%. The net
present value of the project is closest to:
A. $66,282
B. $34,282
C. $159,000
D. $58,698
11-13
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34.
Correl Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
Annual cash flow
$190,000
$75,000 per
year
Salvage value at the end of $25,000
the project
The life of the project is 4 years. The company's discount rate is 15%. The net present value of
the project is closest to:
A. $38,500
B. $228,500
C. $135,000
D. $24,200
11-14
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35.
Bullinger Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
$470,000
Annual cash flow
$134,000 per
year
Salvage value at the end
$27,000
of the project
Expected life of the project
Discount rate
4 years
14%
The net present value of the project is closest to:
A. $93,000
B. $406,326
C.
($63,674)
D.
($79,658)
11-15
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36. Naomi Corporation has a capital budgeting project that has a negative net present value of
$36,000. The life of this project is 6 years. Naomi's discount rate is 20%. By how much would the
annual cash inflows from this project have to increase in order to have a positive net present
value?
A. $1,200 or more
B. $2,412 or more
C. $6,000 or more
D. $10,824 or more
37. Peter wants to buy a computer which he expects to save him $4,000 each year in bookkeeping
costs. The computer will last for five years, and at the end of five years it will have no salvage
value. If Peter's required rate of return is 12%, what is the maximum price Peter should be willing
to pay for the computer now?
A. $20,000
B. $14,420
C. $11,340
D. $10,830
11-16
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38.
The following data on a proposed investment project have been provided:
Cost of equipment
$50,000
Working capital required
$30,000
Salvage value of equipment
Annual cash inflows from the
project
$0
$20,000
Required rate of return
Life of the project
20%
8 years
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. $3,730
B. $0
C. $32,450
D. $88,370
11-17
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39. Zabarkes Corporation is considering a capital budgeting project that would require an initial
investment of $640,000 and working capital of $79,000. 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 $205,000 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 7%. The net
present value of the project is closest to:
A.
($13,952)
B.
($92,952)
C.
($157,416)
D.
($25,000)
11-18
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40. Riveros, Inc., is considering the purchase of a machine that would cost $120,000 and would last
for 8 years. At the end of 8 years, the machine would have a salvage value of $29,000. The
machine would reduce labor and other costs by $25,000 per year. Additional working capital of
$9,000 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 18% on all investment
projects. The net present value of the proposed project is closest to:
A.
($18,050)
B.
($63,683)
C.
($10,336)
D.
($16,942)
11-19
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41.
Kingsolver Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
$450,000
Working capital
$16,000
Annual cash flow
Salvage value at the end
of the project
Expected life of the
project
Discount rate
$133,000 per
year
$6,000
3 years
8%
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.
($118,495)
B.
($51,000)
C.
($89,791)
D.
($105,791)
11-20
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42.
Schoultz Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
$700,000
Annual cash flow
$266,000 per year
The life of the project is 4 years. The company's discount rate is 12%. The net present value of
the project is closest to:
A. $700,000
B. $364,000
C. $108,108
D. $808,108
43. Sturn Corporation purchased a machine with an estimated useful life of seven years. The
machine will generate cash inflows of $9,000 each year over the next seven years. If the machine
has no salvage value at the end of seven years, if Stutz's discount rate is 10%, and if the net
present value of this investment is $17,000 then the purchase price of the machine was closest
to:
A. $43,812
B. $26,812
C. $17,000
D. $22,195
11-21
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44. Mujalli Corporation is considering a capital budgeting project that would require an initial
investment of $200,000. The investment would generate annual cash inflows of $64,000 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 $10,000. The company's discount rate is 9%. The net present value of
the project is closest to:
A. $14,376
B. $66,000
C. $214,376
D. $7,296
11-22
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45.
Dul Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
$170,000
Working capital
$64,000
Annual cash flow
$60,000 per
year
Salvage value at the end of the
$18,000
project
The working capital would be released for use elsewhere at the end of the project in 3 years. The
company's discount rate is 7%. The net present value of the project is closest to:
A.
($61,872)
B.
($9,648)
C. $10,000
D. $54,352
11-23
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46. Tangen Corporation is considering the purchase of a machine that would cost $380,000 and
would last for 6 years. At the end of 6 years, the machine would have a salvage value of $80,000.
By reducing labor and other operating costs, the machine would provide annual cost savings of
$104,000. The company requires a minimum pretax return of 14% on all investment projects. The
net present value of the proposed project is closest to:
A. $104,456
B. $24,456
C. $133,753
D. $60,936
11-24
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47.
Valotta Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
Working capital
Annual cash flow
$690,000
$70,000
$283,000 per
year
Salvage value at the end of the
$21,000
project
Expected life of the project
Discount rate
4 years
11%
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. $178,118
B. $201,988
C. $463,000
D. $131,988
11-25
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48. Baker Corporation is considering buying a new donut maker. This machine will replace an old
donut maker that still has a useful life of 4 years. The new machine will cost $3,500 a year to
operate, as opposed to the old machine, which costs $3,900 per year to operate. Also, because
of increased capacity, an additional 10,000 donuts a year can be produced. The company makes
a contribution margin of $0.15 per donut. The old machine can be sold for $6,000 and the new
machine costs $28,000. The incremental annual net cash inflows provided by the new machine
would be:
A. $1,500
B. $400
C. $1,900
D. $7,000
49. Bevans Corporation is considering a capital budgeting project that would require an initial
investment of $190,000. The investment would generate annual cash inflows of $58,000 for the
life of the project, which is 4 years. The company's discount rate is 7%. The net present value of
the project is closest to:
A. $190,000
B. $6,446
C. $196,446
D. $42,000
11-26
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50.
The following data pertain to an investment proposal:
Cost of the investment
$30,000
Annual cost savings
$9,000
Estimated salvage value
$4,000
Life of the project
5 years
Discount rate
12%
The net present value of the proposed investment is closest to:
A. $4,713
B. $2,445
C. $2,268
D. $19,000
11-27
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51. (Ignore income taxes in this problem) The management of Urbine Corporation is considering the
purchase of a machine that would cost $350,000, would last for 6 years, and would have no
salvage value. The machine would reduce labor and other costs by $79,000 per year. The
company requires a minimum pretax return of 14% on all investment projects. The net present
value of the proposed project is closest to:
A.
($42,769)
B. $124,000
C.
($93,877)
D. $56,493
11-28
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52.
Vinup Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
$100,000
Working capital
$73,000
Annual cash flow
$40,000 per
year
Salvage value at the end of the
$29,000
project
The working capital would be released for use elsewhere at the end of the project in 4 years. The
company's discount rate is 13%. The net present value of the project is closest to:
A. $8,486
B. $36,737
C. $89,000
D.
($36,263)
11-29
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53. A project requires an initial investment of $70,000 and has a project profitability index of 0.932.
The present value of the future cash inflows from this investment is:
A. $70,000
B. $36,231
C. $135,240
D. Cannot be determined from the data provided.
54. The management of Cantell Corporation is considering a project that would require an initial
investment of $47,000. No other cash outflows would be required. The present value of the cash
inflows would be $55,930. The profitability index of the project is closest to:
A. 1.19
B. 0.81
C. 0.19
D. 0.16
55. The net present value of an investment project is $28,842 and its project profitability index is
0.1518. The initial investment in this project was:
A. $190,000
B. $25,041
C. $215,800
D. $185,200
11-30
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56.
The Gomez Corporation is considering two projects, T and V. The following information has been
gathered on these projects:
Project T Project V
Initial investment needed
$112,500 $75,000
Present value of future cash
$168,000 $107,000
inflows
Useful life
10 years 10 years
Based on this information, which of the following statements is (are) true?
I. Project T has the highest ranking according to the project profitability index criterion.
II. Project V has the highest ranking according to the net present value criterion.
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II
11-31
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57. Villena 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 $52,800. The
profitability index of the project is closest to:
A. 0.90
B. 0.10
C. 1.10
D. 0.09
58.
The management of Edelmann Corporation is considering the following three investment projects:
Project R Project Project
S
T
Investment required
$13,000 $59,000 $79,000
Present value of cash
$13,520 $66,080 $87,690
inflows
Rank the projects according to the profitability index, from most profitable to least profitable.
A. T, S, R
B. R, T, S
C. S, T, R
D. T, R, S
11-32
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59. Crowley Corporation is considering three investment projects: F, G, and H. Project F would
require an investment of $21,000, Project G of $49,000, and Project H of $82,000. No other cash
outflows would be involved. The present value of the cash inflows would be $21,210 for Project F,
$57,820 for Project G, and $95,120 for Project H. Rank the projects according to the profitability
index, from most profitable to least profitable.
A. F, H, G
B. G, H, F
C. H, F, G
D. H, G, F
11-33
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60.
Bowen Corporation is considering several investment proposals, as shown below:
Investment Proposal
A
B
C
D
Investment $95,000 $120,000 $90,000 $150,000
required
Present
$107,000 $130,000 $105,000 $180,000
value of
future net
cash flows
If the project profitability index is used, the ranking of the projects from most to least profitable
would be:
A. D, C, A, B
B. D, B, A, C
C. B, A, C, D
D. D, A, B, C
11-34
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61. An expansion at Fidell, Inc., would increase sales revenues by $75,000 per year and cash
operating expenses by $38,000 per year. The initial investment would be for equipment that
would cost $135,000 and have a 5 year life with no salvage value. The annual depreciation on the
equipment would be $27,000. The simple rate of return on the investment is closest to:
A. 20.0%
B. 7.4%
C. 27.4%
D. 13.3%
62. The management of Stanforth 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 $516,000 and would have a 6 year useful life and no salvage value. By
automating the process, the company would save $173,000 per year in cash operating costs. The
simple rate of return on the investment is closest to:
A. 17.7%
B. 16.9%
C. 33.5%
D. 16.7%
11-35
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63. Mercer Corporation is considering replacing a technologically obsolete machine with a new stateof-the-art numerically controlled machine. The new machine would cost $250,000 and would
have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The
new machine would cost $12,000 per year to operate and maintain, but would save $55,000 per
year in labor and other costs. The old machine can be sold now for scrap for $10,000. The simple
rate of return on the new machine is closest to:
A. 17.9%
B. 7.5%
C. 22.0%
D. 7.2%
64. Messersmith Corporation is investigating automating a process by purchasing a machine for
$688,000 that would have an 8 year useful life and no salvage value. By automating the process,
the company would save $160,000 per year in cash operating costs. The new machine would
replace some old equipment that would be sold for scrap now, yielding $19,000. The annual
depreciation on the new machine would be $86,000. The simple rate of return on the investment
is closest to:
A. 23.3%
B. 11.1%
C. 10.8%
D. 12.5%
11-36
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65. Wombles Corporation is contemplating purchasing equipment that would increase sales revenues
by $478,000 per year and cash operating expenses by $249,000 per year. The equipment would
cost $738,000 and have a 9 year life with no salvage value. The annual depreciation would be
$82,000. The simple rate of return on the investment is closest to:
A. 19.9%
B. 30.8%
C. 31.0%
D. 11.1%
66. The management of Duker Corporation is investigating purchasing equipment that would
increase sales revenues by $130,000 per year and cash operating expenses by $39,000 per
year. The equipment would cost $328,000 and have an 8 year life with no salvage value. The
simple rate of return on the investment is closest to:
A. 12.5%
B. 27.7%
C. 38.5%
D. 15.2%
11-37
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67.
Baldock Inc. is considering the acquisition of a new machine that costs $420,000 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:
Incremental Net
Incremental
Operating Income
Net Cash Flows
Year 1
$61,000
$145,000
Year 2
$67,000
$151,000
Year 3
$78,000
$162,000
Year 4
$41,000
$125,000
Year 5
$83,000
$167,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
If the discount rate is 12%, the net present value of the investment is closest to:
A. $330,000
B. $539,365
C. $119,365
D. $420,000
11-38
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68.
Baldock Inc. is considering the acquisition of a new machine that costs $420,000 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:
Incremental Net
Incremental
Operating Income
Net Cash Flows
Year 1
$61,000
$145,000
Year 2
$67,000
$151,000
Year 3
$78,000
$162,000
Year 4
$41,000
$125,000
Year 5
$83,000
$167,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
The payback period of this investment is closest to:
A. 5.0 years
B. 3.2 years
C. 1.9 years
D. 2.8 years
11-39
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69.
Chee Corporation has gathered the following data on a proposed investment project:
Investment required in equipment
Annual cash inflows
Salvage value
Life of the investment
Required rate of return
$240,000
$50,000
$0
8 years
10%
The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a
year except for the initial investment.
The payback period for the investment is closest to:
A. 0.2 years
B. 2.5 years
C. 4.8 years
D. 5.0 years
11-40
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70.
Chee Corporation has gathered the following data on a proposed investment project:
Investment required in equipment
Annual cash inflows
Salvage value
Life of the investment
Required rate of return
$240,000
$50,000
$0
8 years
10%
The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a
year except for the initial investment.
The simple rate of return on the investment is closest to:
A. 12.5%
B. 10.0%
C. 20.8%
D. 8.3%
11-41
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71.
Chee Corporation has gathered the following data on a proposed investment project:
Investment required in equipment
Annual cash inflows
Salvage value
Life of the investment
Required rate of return
$240,000
$50,000
$0
8 years
10%
The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a
year except for the initial investment.
The net present value on this investment is closest to:
A. $160,000
B. $240,024
C. $58,800
D. $26,750
11-42
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72. The Halsey Corporation is contemplating the purchase of new equipment that would require an
initial investment of $125,000. The equipment would have a useful life of six years, with a salvage
value of $29,000. This new equipment would be depreciated over its useful life by the straight-line
method. It would replace existing equipment which is fully depreciated. The existing equipment
has a salvage value now of $38,000. The anticipated annual revenues and expenses associated
with the new equipment are:
Revenue (all cash)
$95,000
Operating expenses:
Wages (all cash)
$41,000
Depreciation
$16,000
Other (all cash)
$16,000
Assume cash flows occur uniformly throughout a year except for the initial investment and the
salvage value at the end of the project.
The payback period is closest to:
A. 5.7 years
B. 4.0 years
C. 2.3 years
D. 1.8 years
11-43
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73. The Halsey Corporation is contemplating the purchase of new equipment that would require an
initial investment of $125,000. The equipment would have a useful life of six years, with a salvage
value of $29,000. This new equipment would be depreciated over its useful life by the straight-line
method. It would replace existing equipment which is fully depreciated. The existing equipment
has a salvage value now of $38,000. The anticipated annual revenues and expenses associated
with the new equipment are:
Revenue (all cash)
$95,000
Operating expenses:
Wages (all cash)
$41,000
Depreciation
$16,000
Other (all cash)
$16,000
Assume cash flows occur uniformly throughout a year except for the initial investment and the
salvage value at the end of the project.
For this investment, the simple rate of return to the nearest tenth of a percent is:
A. 43.7%
B. 25.3%
C. 30.4%
D. 17.6%
11-44
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74.
Jimba's, Inc., has purchased a new donut maker. It cost $20,000 and has an estimated life of 10
years. The following annual donut sales and expenses are projected:
Sales
$30,000
Expenses:
Flour, etc., required in making
$15,000
donuts
Salaries
8,000
Depreciation
2,000
Net operating income
25,000
$5,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
The payback period on the new machine is closest to:
A. 6.0 years
B. 2.9 years
C. 4.0 years
D. 4.3 years
11-45
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75.
Jimba's, Inc., has purchased a new donut maker. It cost $20,000 and has an estimated life of 10
years. The following annual donut sales and expenses are projected:
Sales
$30,000
Expenses:
Flour, etc., required in making
$15,000
donuts
Salaries
8,000
Depreciation
2,000
Net operating income
25,000
$5,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
The simple rate of return on the new machine is closest to:
A. 15%
B. 16.7%
C. 25%
D. 23.3%
11-46
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76.
Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the purchase of a
machine to produce baseball bats. The machine will cost $60,000 and have a 10-year useful life.
The following annual revenues and expenses are projected:
Sales
$40,000
Less expenses:
Out-of-pocket production costs
$15,000
Selling expenses
9,000
Depreciation
6,000
Net operating income
30,000
$10,000
The machine will have no salvage value. Assume cash flows occur uniformly throughout a year
except for the initial investment.
The payback period for the new machine is about:
A. 6.0 years
B. 1.5 years
C. 5.4 years
D. 3.75 years
11-47
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77.
Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the purchase of a
machine to produce baseball bats. The machine will cost $60,000 and have a 10-year useful life.
The following annual revenues and expenses are projected:
Sales
$40,000
Less expenses:
Out-of-pocket production costs
$15,000
Selling expenses
9,000
Depreciation
6,000
Net operating income
30,000
$10,000
The machine will have no salvage value. Assume cash flows occur uniformly throughout a year
except for the initial investment.
The simple rate of return would be about:
A. 26.7%
B. 16.7%
C. 25.0%
D. 40.0%
11-48
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78.
Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following
information has been gathered relative to this decision:
Present
New
Equipment Equipment
Purchase
$50,000
$48,000
$30,000
-
$25,000
-
$8,000
$5,000
$10,000
$8,000
$3,000
$7,000
$9,000
-
cost new
Remaining
book value
Cost to
rebuild now
Major
maintenance
at the end of
3 years
Annual cash
operating
costs
Salvage
value at the
end of 5
years
Salvage
value now
Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.
Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson
Manufacturing will have no future use for the equipment.
If the new equipment is purchased, the present value of the cash flows that occur now is:
11-49
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A. ($48,000)
B.
($39,000)
C.
($41,000)
D.
($37,000)
11-50
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79.
Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following
information has been gathered relative to this decision:
Present Equipment
New Equipment
Purchase cost new
$50,000
$48,000
Remaining book value
$30,000
-
Cost to rebuild now
$25,000
-
$8,000
$5,000
$10,000
$8,000
Salvage value at the end of 5 years
$3,000
$7,000
Salvage value now
$9,000
-
Major maintenance at the end of 3 years
Annual cash operating costs
Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.
Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson
Manufacturing will have no future use for the equipment.
If the new equipment is purchased, the present value of the annual cash operating costs
associated with this alternative is:
A.
($28,840)
B.
($19,160)
C.
($14,420)
11-51
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D.
($36,050)
11-52
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80.
Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following
information has been gathered relative to this decision:
Present Equipment
New
Equipment
Purchase
$50,000
$48,000
$30,000
-
$25,000
-
$8,000
$5,000
$10,000
$8,000
$3,000
$7,000
$9,000
-
cost new
Remaining
book value
Cost to
rebuild now
Major
maintenance
at the end of
3 years
Annual cash
operating
costs
Salvage
value at the
end of 5
years
Salvage
value now
Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.
Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson
Manufacturing will have no future use for the equipment.
If the equipment is rebuilt, the present value of the cash flows that occur now is:
11-53
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A.
($55,000)
B.
($25,000)
C.
($16,000)
D.
($23,000)
81. The management of Mashiah Corporation is considering the purchase of a machine that would
cost $290,000, would last for 6 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 13% on all investment projects.
The present value of the annual cost savings of $102,000 is closest to:
A. $849,012
B. $612,000
C. $195,872
D. $407,796
11-54
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82. The management of Mashiah Corporation is considering the purchase of a machine that would
cost $290,000, would last for 6 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 13% on all investment projects.
The net present value of the proposed project is closest to:
A. $154,663
B. $322,000
C. $117,796
D. $245,246
11-55
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83.
The Sawyer Corporation has $80,000 to invest and is considering two different projects, X and Y.
The following data are available on the projects:
Project X Project Y
Cost of equipment needed now
Working capital requirement
Annual cash operating inflows
Salvage value in 5 years
$80,000
-
-
$80,000
$23,000
$18,000
$6,000
-
Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be
released for use elsewhere. Sawyer's discount rate is 12%.
The net present value of project X is closest to:
A. $2,915
B.
($11,708)
C. $5,283
D. $6,317
11-56
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84.
The Sawyer Corporation has $80,000 to invest and is considering two different projects, X and Y.
The following data are available on the projects:
Project X Project Y
Cost of equipment needed now
Working capital requirement
Annual cash operating inflows
Salvage value in 5 years
$80,000
-
-
$80,000
$23,000
$18,000
$6,000
-
Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be
released for use elsewhere. Sawyer's discount rate is 12%.
The net present value of project Y is closest to:
A. $15,110
B. $30,250
C. $11,708
D.
($11,708)
11-57
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85. Clairmont Corporation is considering the purchase of a machine that would cost $150,000 and
would last for 5 years. At the end of 5 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
$37,000. The company requires a minimum pretax return of 12% on all investment projects.
The present value of the annual cost savings of $37,000 is closest to:
A. $133,385
B. $235,070
C. $185,000
D. $20,979
86. Clairmont Corporation is considering the purchase of a machine that would cost $150,000 and
would last for 5 years. At the end of 5 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
$37,000. The company requires a minimum pretax return of 12% on all investment projects.
The net present value of the proposed project is closest to:
A.
($6,409)
B.
($11,295)
C. $1,385
D.
($16,615)
11-58
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87.
Allen College has a telephone system that is in poor condition. The system can be either
overhauled or replaced with a new system. The following data have been gathered concerning
these two alternatives:
Present
Proposed
System
New System
$100,000
$150,000
Accumulated $90,000
-
Purchase
cost when
new
depreciation
Overhaul
$80,000
-
$30,000
$20,000
$10,000
-
$2,000
$15,000
-
$50,000
cost needed
now
Annual cash
operating
costs
Salvage
value now
Salvage
value in 8
years
Working
capital
required
Allen College uses a 12% discount rate and the total cost approach to net present value
analysis. Both alternatives are expected to have a useful life of eight years.
The net present value of the alternative of overhauling the present system is closest to:
11-59
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A.
($238,232)
B.
($108,000)
C.
($228,232)
D.
($232,272)
11-60
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88.
Allen College has a telephone system that is in poor condition. The system can be either
overhauled or replaced with a new system. The following data have been gathered concerning
these two alternatives:
Present
Proposed
System
New System
$100,000
$150,000
Accumulated $90,000
-
Purchase
cost when
new
depreciation
Overhaul
$80,000
-
$30,000
$20,000
$10,000
-
$2,000
$15,000
-
$50,000
cost needed
now
Annual cash
operating
costs
Salvage
value now
Salvage
value in 8
years
Working
capital
required
Allen College uses a 12% discount rate and the total cost approach to net present value
analysis. Both alternatives are expected to have a useful life of eight years.
11-61
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The net present value of the alternative of replacing the present system with the proposed new
system is closest to:
A.
($233,300)
B.
($283,300)
C.
($263,100)
D.
($273,100)
11-62
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89.
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:
Present System
New
System
Purchase
$150,000 $200,000
cost when
new
Accumulated
$140,000
-
$130,000
-
depreciation
Overhaul
costs
needed now
Annual cash
$80,000 $70,000
operating
costs
Salvage
$60,000
-
value now
Salvage
$52,000 $65,000
value in 8
years
Working
- $100,000
capital
required
Westland College uses a 10% discount rate and the total cost approach to net present value
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
eight years.
11-63
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The net present value of overhauling the present system is closest to:
A.
($321,084)
B.
($532,516)
C.
($560,536)
D.
($592,516)
11-64
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90.
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:
Purchase
Present
New
System
System
$150,000 $200,000
cost when
new
Accumulated $140,000
-
depreciation
Overhaul
$130,000
-
costs
needed now
Annual cash
$80,000 $70,000
operating
costs
Salvage
$60,000
-
value now
Salvage
$52,000 $65,000
value in 8
years
Working
- $100,000
capital
required
Westland College uses a 10% discount rate and the total cost approach to net present value
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
eight years.
11-65
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The net present value of the new system alternative is:
A.
($483,095)
B.
($583,095)
C.
($596,395)
D.
($536,395)
11-66
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91. Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would last
for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000. The
machine would reduce labor and other costs by $96,000 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 18% on all investment
projects.
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. $16,872
B. $0
C.
($4,116)
D.
($13,111)
11-67
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92. Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would last
for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000. The
machine would reduce labor and other costs by $96,000 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 18% on all investment
projects.
The net present value of the proposed project is closest to:
A. $1,338
B.
($8,849)
C.
($14,048)
D.
($2,778)
11-68
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93.
Dube Corporation is considering the following three investment projects:
Project D Project Project
E
F
Investment required
$11,000 $41,000 $86,000
Present value of cash
$11,330 $46,330 $95,460
inflows
The profitability index of investment project E is closest to:
A. 0.13
B. 1.13
C. 0.87
D. 0.12
11-69
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94.
Dube Corporation is considering the following three investment projects:
Project D Project Project
E
F
Investment required
$11,000 $41,000 $86,000
Present value of cash
$11,330 $46,330 $95,460
inflows
Rank the projects according to the profitability index, from most profitable to least profitable.
A. F,E,D
B. D,F,E
C. F,D,E
D. E,F,D
95. The management of Keno Corporation is considering three investment projects-B, C, and D.
Project B would require an investment of $15,000, Project C of $50,000, and Project D of
$89,000. The present value of the cash inflows would be $16,350 for Project B, $56,500 for
Project C, and $96,120 for Project D.
The profitability index of investment project C is closest to:
A. 0.13
B. 0.87
C. 0.12
D. 1.13
11-70
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96. The management of Keno Corporation is considering three investment projects-B, C, and D.
Project B would require an investment of $15,000, Project C of $50,000, and Project D of
$89,000. The present value of the cash inflows would be $16,350 for Project B, $56,500 for
Project C, and $96,120 for Project D.
Rank the projects according to the profitability index, from most profitable to least profitable.
A. B, D, C
B. C, B, D
C. D, C, B
D. D, B, C
Essay Questions
11-71
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97. Flamio Corporation is considering a project that would require an initial investment of $210,000
and would last for 6 years. The incremental annual revenues and expenses for each of the 6
years would be as follows:
Sales
$203,000
Variable expenses
45,000
Contribution margin
158,000
Fixed expenses:
Salaries
$24,000
Rents
37,000
Depreciation
31,000
Total fixed expenses
92,000
Net operating income
$66,000
At the end of the project, the scrap value of the project's assets would be $24,000.
Required:
Determine the payback period of the project. Show your work!
11-72
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98. The management of Sobus Corporation is considering a project that would require an initial
investment of $458,000 and would last for 9 years. The annual net operating income from the
project would be $58,000, including depreciation of $48,000. At the end of the project, the scrap
value of the project's assets would be $26,000.
Required:
Determine the payback period of the project. Show your work!
11-73
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99. Alesi Corporation is considering purchasing a machine that would cost $243,600 and have a
useful life of 8 years. The machine would reduce cash operating costs by $76,125 per year. The
machine would have a salvage value of $60,900 at the end of the project.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
11-74
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100.Betterway Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost
$30,000 and will be usable for five years. Delivery of prescriptions (which the pharmacy has
never done before) should increase revenues by at least $29,000 per year. The cost of these
prescriptions will be about $21,000 per year. The pharmacy depreciates all assets by the
straight-line method.
Required:
a. Compute the payback period on the new auto.
b. Compute the simple rate of return of the new auto.
11-75
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101.Swaggerty Corporation is considering purchasing a machine that would cost $462,000 and have
a useful life of 7 years. The machine would reduce cash operating costs by $115,500 per year.
The machine would have no salvage value.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
11-76
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102.Consider the following three investment opportunities:
Project I would require an immediate cash outlay of $10,000 and would result in cash savings of
$3,000 each year for 5 years.
Project II would require cash outlays of $3,000 per year and would provide a cash inflow of
$30,000 at the end of 5 years.
Project III would require a cash outlay of $10,000 now and would provide a cash inflow of
$30,000 at the end of 5 years.
Required:
The discount rate is 14%. Use the net present value method to determine which, if any, of the
three projects is acceptable.
11-77
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103.The management of Basler Corporation is considering the purchase of a machine that would cost
$440,000, would last for 5 years, and would have no salvage value. The machine would reduce
labor and other costs by $128,000 per year. The company requires a minimum pretax return of
12% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
11-78
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104.Bill Anders retires in 5 years. He would have to purchase equipment costing $500,000 to equip
the outlet and invest an additional $150,000 for inventories and other working capital needs.
Other outlets in the fast-food chain have an annual net cash inflow of about $160,000. 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 16%.
Required:
What is the investment's net present value? Is this an acceptable investment?
11-79
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105.Burba Inc. is considering investing in a project that would require an initial investment of
$200,000. The life of the project would be 5 years. The annual net cash inflows from the project
would be $60,000. The salvage value of the assets at the end of the project would be $30,000.
The company uses a discount rate of 17%.
Required:
Compute the net present value of the project.
11-80
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106.Cascade, Inc., 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. Cascade uses a discount rate of 18%.
Annual cash sales
$420,000
Annual out-of-pocket cash expenses
$330,000
Annual depreciation on new equipment
Initial cost of new equipment
Salvage value of equipment in 5 years
Working capital requirement
$36,000
$200,000
$20,000
$140,000
Required:
Compute the net present value of the new product.
11-81
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107.Janes, Inc., is considering the purchase of a machine that would cost $400,000 and would last
for 5 years, at the end of which, the machine would have a salvage value of $67,000. The
machine would reduce labor and other costs by $109,000 per year. Additional working capital of
$4,000 would be needed immediately, all of which would be recovered at the end of 5 years. The
company requires a minimum pretax return of 12% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
11-82
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108.Weilbacher Corporation is considering the purchase of a machine that would cost $240,000 and
would last for 8 years. At the end of 5 years, the machine would have a salvage value of
$50,000. The machine would reduce labor and other costs by $72,000 per year. The company
requires a minimum pretax return of 16% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
11-83
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McGraw-Hill Education.
109.
Vernon Corporation has been offered a 5-year contract to supply a part for the military. After
careful study, the company has developed the following estimated data relating to the contract:
Cost of equipment needed
Working capital needed
$300,000
$50,000
Annual cash receipts from the delivery of parts, less cash operating costs $70,000
Salvage value of equipment at end of the contract
$5,000
It is not expected that the contract would be extended beyond the initial contract period. The
company's discount rate is 10%.
Required:
Use the net present value method to determine if the contract should be accepted.
11-84
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110.The following data concern an investment project:
Investment in equipment
$100,000
Annual net cash inflows
$24,000
Salvage value of the equipment
$10,000
Working capital required
$50,000
Life of the project
Required rate of return
5 years
10%
The working capital will be released for use elsewhere at the conclusion of the project.
Required:
Compute the project's net present value.
11-85
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111.Juliar Inc. has provided the following data concerning a proposed investment project:
Initial investment
$160,000
Life of the project
4 years
Annual net cash inflows
$50,000
Salvage value
$24,000
The company uses a discount rate of 12%.
Required:
Compute the net present value of the project.
11-86
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112.Mark Stevens is considering opening a hobby and craft store. He would invest $50,000 to
purchase equipment and furnishings and another $100,000 for inventories and other working
capital needs. Rent on the building used by the business will be $25,000 per year. In addition to
building rent, other annual cash outflows for operating costs will amount to $44,000. Mark
estimates that the annual cash inflow from the business will amount to $100,000. Mark plans to
operate the business for only six years. He estimates that the equipment and furnishings could
be sold at that time for about 10% of its original cost. Mark's discount rate is 16%. All cash flows,
except for the initial investment, would occur at the ends of the years.
Required:
Compute the net present value of this investment.
11-87
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113.Dunay Corporation is considering investing $510,000 in a project. The life of the project would be
4 years. The project would require additional working capital of $24,000, which would be
released for use elsewhere at the end of the project. The annual net cash inflows would be
$162,000. The salvage value of the assets used in the project would be $41,000. The company
uses a discount rate of 10%.
Required:
Compute the net present value of the project.
11-88
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114.Farah Corporation has provided the following data concerning a proposed investment project:
Initial investment
$320,000
Life of the project
5 years
Working capital required
$14,000
Annual net cash inflows
$88,000
Salvage value
$44,000
The company uses a discount rate of 11%. The working capital would be released at the end of
the project.
Required:
Compute the net present value of the project.
11-89
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115.Dimpson Corporation is considering the following three investment projects:
Investment required
Present value of cash
inflows
Project
Project
Project
P
Q
R
$15,000 $50,000 $71,000
$15,150 $54,500 $75,970
The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the project profitability index. Show your work
11-90
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116.The management of Grayer Corporation is considering the following three investment projects:
Investment required
Present value of cash
inflows
Project
Project
Project
Q
R
S
$32,000 $40,000 $76,000
$36,480 $42,400 $84,360
The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the project profitability index. Show your work
11-91
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117.The management of Kleppe Corporation is investigating automating a process by replacing old
equipment by a new machine. The old equipment would be sold for scrap now for $19,000. The
new machine would cost $180,000, would have a 9 year useful life, and would have no salvage
value. By automating the process, the company would save $30,000 per year in cash operating
costs.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
11-92
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118.The management of Moya Corporation is investigating purchasing equipment that would cost
$336,000 and have an 8 year life with no salvage value. The equipment would allow an
expansion of capacity that would increase sales revenues by $288,000 per year and cash
operating expenses by $164,000 per year.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
11-93
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119.Shiffler Corporation is contemplating purchasing equipment that would increase sales revenues
by $246,000 per year and cash operating expenses by $133,000 per year. The equipment would
cost $275,000 and have a 5 year life with no salvage value. The annual depreciation would be
$55,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
11-94
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120.Hinck Corporation is investigating automating a process by purchasing a new machine for
$520,000 that would have a 8 year useful life and no salvage value. By automating the process,
the company would save $134,000 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 $65,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
11-95
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Chapter 11 Capital Budgeting Decisions Answer Key
True / False Questions
1.
In the payback method, depreciation is deducted from net operating income when computing
the annual net cash flow.
FALSE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
11-96
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2.
In calculating the payback period where new equipment is replacing old equipment, any
salvage value to be received on disposal of the old equipment should be added to the cost of
the new equipment.
FALSE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
3.
One criticism of the payback method is that it ignores cash flows that occur after the payback
point has been reached.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
11-97
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4.
The payback method of making capital budgeting decisions does not give full consideration to
the time value of money.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
5.
The basic premise of the payback method is that the more quickly the cost of an investment is
recovered the more desirable is the investment.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
11-98
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6.
When considering a number of investment projects, the project that has the shortest payback
period does not necessarily have the highest net present value.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-01 Determine the payback period for an investment.
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
Topic Area: The Payback Method
7.
When discounted cash flow methods of capital budgeting are used, the working capital
required for a project is ordinarily counted as a cash inflow at the beginning of the project and
as a cash outflow at the end of the project.
FALSE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-99
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8.
Discounted cash flow techniques do not take into account recovery of initial investment.
FALSE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
9.
The required rate of return is the minimum rate of return that an investment project must yield
to the acceptable.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-100
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10.
For capital budgeting decisions, the simple rate of return method is superior to the net present
value method.
FALSE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
Topic Area: The Simple Rate of Return Method
11.
In preference decision situations, a project with a lower net present value may be preferable to
a project with a higher net present value.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 2 Medium
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-101
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12.
Preference decisions follow screening decisions and seek to rank investment proposals in
order of their desirability.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
13.
The project profitability index is used to compare the net present values of two investments
that require different amounts of investment funds.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 2 Medium
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-102
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14.
The project profitability index is computed by dividing the present value of the cash inflows of
the project by present value of the cash outflows of the project.
FALSE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 2 Medium
Topic Area: Preference Decisions - The Ranking of Investment Projects
15.
An investment project with a project profitability index of less than one should ordinarily be
rejected.
FALSE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 2 Medium
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-103
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16.
If a project does not have constant incremental revenues and expenses over its useful life, the
simple rate of return will fluctuate from year to year.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
17.
The simple rate of return method does not take into account the time value of money.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
Multiple Choice Questions
11-104
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18.
Which of the following will have the largest dollar effect on the net present value of a 10 year
investment project?
A. a decrease of $20,000 in the initial investment required with no effect on the expected
salvage value in 10 years.
B. an increase of $20,000 in the expected salvage value in 10 years with no effect on the
initial investment.
C. a decrease of $20,000 in both the working capital needed to start the project and the
amount being released at the end of the 10 years.
D. an increase of $2,000 in the annual cash inflows from this project.
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 3 Hard
Topic Area: The Net Present Value Method
11-105
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19.
If taxes are ignored, all of the following items are included in a discounted cash flow analysis
except:
A. future operating cash savings.
B. depreciation expense.
C. future salvage value.
D. investment in working capital.
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Source: CMA, adapted
Topic Area: The Net Present Value Method
20.
In capital budgeting computations, discounted cash flow methods:
A. automatically provide for recovery of initial investment.
B. can't be used unless cash flows are uniform from year to year.
C. assume that all cash flows occur at the beginning of a period.
D. ignore all cash flows after the payback period.
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-106
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McGraw-Hill Education.
21.
The best capital budgeting method for ranking investment projects of different dollar amounts
is the:
A. project profitability index.
B. net present value method.
C. simple rate of return method.
D. payback period.
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-107
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McGraw-Hill Education.
22.
The investment required for the project profitability index should:
A. be reduced by the amount of any salvage recovered from the sale of old equipment.
B. be reduced by the amount of any salvage recovered from the sale of the new equipment at
the end of its useful life.
C. be reduced by the amount of any salvage recovered from the sale of both the old and new
equipment.
D.
not be adjusted for the salvage value of old or new equipment.
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 2 Medium
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-108
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McGraw-Hill Education.
23.
Harrison Corporation is studying a project that would have an eight-year life and would require
a $300,000 investment in equipment which has no salvage value. The project would provide
net operating income each year as follows for the life of the project:
Sales
$500,000
Less cash variable
expenses
200,000
Contribution margin
300,000
Less fixed expenses:
Fixed cash expenses
Depreciation expenses
Net operating income
$150,000
37,500 187,500
$112,500
The company's required rate of return is 10%. The payback period for this project is closest
to:
A. 3 years
B. 2 years
C. 2.5 years
D. 2.67 years
11-109
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McGraw-Hill Education.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
24.
Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was
purchased for $28,000 and will have a 6-year useful life and a $4,000 salvage value.
Delivering prescriptions (which the pharmacy has never done before) should increase gross
revenues by at least $32,000 per year. The cost of these prescriptions to the pharmacy will be
about $25,000 per year. The pharmacy depreciates all assets using the straight-line method.
The payback period for the auto is closest to:
A. 4 years
B. 1.8 years
C. 2 years
D. 1.2 years
Annual net cash inflow = $32,000 - $25,000 = $7,000
Payback period = Investment required ÷ Annual net cash inflow
= $28,000 ÷ $7,000 per year = 4 years
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
11-110
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25.
A company with $600,000 in operating assets is considering the purchase of a machine that
costs $72,000 and which is expected to reduce operating costs by $18,000 each year. These
reductions in cost occur evenly throughout the year. The payback period for this machine in
years is closest to:
A. 4 years
B. 8.3 years
C. 0.25 years
D. 33.3 years
Payback period = Investment required ÷ Annual net cash inflow
= $72,000 ÷ $18,000 = 4 years
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
11-111
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26.
The Zinger Corporation is considering an investment that has the following data:
Year Year Year Year Year
1
2
3
4
5
Investment $8,000 $3,000
Cash
inflow
$2,000 $2,000 $5,000 $4,000 $4,000
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
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
11-112
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27.
The management of Helberg Corporation is considering a project that would require an
investment of $203,000 and would last for 6 years. The annual net operating income from the
project would be $103,000, which includes depreciation of $30,000. 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. 1.5 years
B. 2.0 years
C. 1.4 years
D. 1.7 years
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
11-113
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McGraw-Hill Education.
28.
Neighbors Corporation is considering a project that would require an investment of $279,000
and would last for 8 years. The incremental annual revenues and expenses generated by the
project during those 8 years would be as follows:
Sales
Variable expenses
Contribution margin
$224,000
22,000
202,000
Fixed expenses:
Salaries
25,000
Rents
38,000
Depreciation
33,000
Total fixed expenses
Net operating income
96,000
$106,000
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:
A. 2.0 years
B. 2.6 years
C. 2.5 years
D. 1.9 years
11-114
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McGraw-Hill Education.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
29.
Jason Corporation has invested in a machine that cost $80,000, that has a useful life of eight
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 five years. Given these data, the simple rate of return on the machine is closest to:
A. 6.8%
B. 7.5%
C. 9%
D. 12%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 3 Hard
Topic Area: The Payback Method
Topic Area: The Simple Rate of Return Method
11-115
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McGraw-Hill Education.
30.
Fimbrez Corporation has provided the following data concerning an investment project that it
is considering:
Initial investment
$360,000
Annual cash flow
$118,000 per
year
Expected life of the
4 years
project
Discount rate
12%
The net present value of the project is closest to:
A. $358,484
B. $360,000
C.
($1,516)
D. $112,000
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-116
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McGraw-Hill Education.
31.
Beaver Corporation is investigating the purchase of a new threading machine that costs
$18,000. The machine would save about $4,000 per year over the present method of
threading component parts, and would have a salvage value of about $3,000 in 6 years when
the machine would be replaced. The company's required rate of return is 12%. The machine's
net present value is closest to:
A. $1,556
B.
($35)
C. $11,000
D. $8,000
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-117
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McGraw-Hill Education.
32.
Frick Road Paving Corporation is considering an investment in a curb-forming machine. The
machine will cost $180,000, will last 10 years, and will have a $30,000 salvage value at the
end of 10 years. The machine is expected to generate net cash inflows of $40,000 per year in
each of the 10 years. Frick's discount rate is 10%. The net present value of the proposed
investment is closest to:
A. $250,000
B. $65,800
C. $245,800
D. $77,380
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-118
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McGraw-Hill Education.
33.
Czlapinski Corporation is considering a capital budgeting project that would require an initial
investment of $440,000 and working capital of $32,000. 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 $147,000 for the life of the project. At the end of the project, equipment that
had been used in the project could be sold for $11,000. The company's discount rate is 7%.
The net present value of the project is closest to:
A. $66,282
B. $34,282
C. $159,000
D. $58,698
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-119
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McGraw-Hill Education.
34.
Correl Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
Annual cash flow
$190,000
$75,000 per
year
Salvage value at the end
$25,000
of the project
The life of the project is 4 years. The company's discount rate is 15%. The net present value
of the project is closest to:
A. $38,500
B. $228,500
C. $135,000
D. $24,200
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-120
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McGraw-Hill Education.
35.
Bullinger Corporation has provided the following data concerning an investment project that it
is considering:
Initial investment
$470,000
Annual cash flow
$134,000 per
year
Salvage value at the end
$27,000
of the project
Expected life of the
4 years
project
Discount rate
14%
The net present value of the project is closest to:
A. $93,000
B. $406,326
C.
($63,674)
D.
($79,658)
11-121
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McGraw-Hill Education.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
36.
Naomi Corporation has a capital budgeting project that has a negative net present value of
$36,000. The life of this project is 6 years. Naomi's discount rate is 20%. By how much would
the annual cash inflows from this project have to increase in order to have a positive net
present value?
A. $1,200 or more
B. $2,412 or more
C. $6,000 or more
D. $10,824 or more
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 3 Hard
Topic Area: The Net Present Value Method
11-122
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McGraw-Hill Education.
37.
Peter wants to buy a computer which he expects to save him $4,000 each year in
bookkeeping costs. The computer will last for five years, and at the end of five years it will
have no salvage value. If Peter's required rate of return is 12%, what is the maximum price
Peter should be willing to pay for the computer now?
A. $20,000
B. $14,420
C. $11,340
D. $10,830
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-123
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McGraw-Hill Education.
38.
The following data on a proposed investment project have been provided:
Cost of equipment
$50,000
Working capital required
$30,000
Salvage value of equipment
$0
Annual cash inflows from the $20,000
project
Required rate of return
Life of the project
20%
8 years
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. $3,730
B. $0
C. $32,450
D. $88,370
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-124
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McGraw-Hill Education.
39.
Zabarkes Corporation is considering a capital budgeting project that would require an initial
investment of $640,000 and working capital of $79,000. 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 $205,000 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 7%.
The net present value of the project is closest to:
A.
($13,952)
B.
($92,952)
C.
($157,416)
D.
($25,000)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-125
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McGraw-Hill Education.
40.
Riveros, Inc., is considering the purchase of a machine that would cost $120,000 and would
last for 8 years. At the end of 8 years, the machine would have a salvage value of $29,000.
The machine would reduce labor and other costs by $25,000 per year. Additional working
capital of $9,000 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 18%
on all investment projects. The net present value of the proposed project is closest to:
A.
($18,050)
B.
($63,683)
C.
($10,336)
D.
($16,942)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-126
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McGraw-Hill Education.
41.
Kingsolver Corporation has provided the following data concerning an investment project that
it is considering:
Initial investment
$450,000
Working capital
$16,000
Annual cash flow
Salvage value at the
end of the project
Expected life of the
project
Discount rate
$133,000 per
year
$6,000
3 years
8%
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.
($118,495)
B.
($51,000)
C.
($89,791)
D.
($105,791)
11-127
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McGraw-Hill Education.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-128
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McGraw-Hill Education.
42.
Schoultz Corporation has provided the following data concerning an investment project that it
is considering:
Initial investment
$700,000
Annual cash flow
$266,000 per year
The life of the project is 4 years. The company's discount rate is 12%. The net present value
of the project is closest to:
A. $700,000
B. $364,000
C. $108,108
D. $808,108
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-129
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McGraw-Hill Education.
43.
Sturn Corporation purchased a machine with an estimated useful life of seven years. The
machine will generate cash inflows of $9,000 each year over the next seven years. If the
machine has no salvage value at the end of seven years, if Stutz's discount rate is 10%, and if
the net present value of this investment is $17,000 then the purchase price of the machine
was closest to:
A. $43,812
B. $26,812
C. $17,000
D. $22,195
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 3 Hard
Topic Area: The Net Present Value Method
11-130
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McGraw-Hill Education.
44.
Mujalli Corporation is considering a capital budgeting project that would require an initial
investment of $200,000. The investment would generate annual cash inflows of $64,000 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 $10,000. The company's discount rate is 9%. The net
present value of the project is closest to:
A. $14,376
B. $66,000
C. $214,376
D. $7,296
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-131
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McGraw-Hill Education.
45.
Dul Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
$170,000
Working capital
$64,000
Annual cash flow
$60,000 per
year
Salvage value at the end of the
$18,000
project
The working capital would be released for use elsewhere at the end of the project in 3 years.
The company's discount rate is 7%. The net present value of the project is closest to:
A.
($61,872)
B.
($9,648)
C. $10,000
D. $54,352
11-132
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McGraw-Hill Education.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
46.
Tangen Corporation is considering the purchase of a machine that would cost $380,000 and
would last for 6 years. At the end of 6 years, the machine would have a salvage value of
$80,000. By reducing labor and other operating costs, the machine would provide annual cost
savings of $104,000. The company requires a minimum pretax return of 14% on all investment
projects. The net present value of the proposed project is closest to:
A. $104,456
B. $24,456
C. $133,753
D. $60,936
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-133
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McGraw-Hill Education.
47.
Valotta Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
Working capital
Annual cash flow
$690,000
$70,000
$283,000 per
year
Salvage value at the end of the
$21,000
project
Expected life of the project
Discount rate
4 years
11%
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. $178,118
B. $201,988
C. $463,000
D. $131,988
11-134
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McGraw-Hill Education.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
48.
Baker Corporation is considering buying a new donut maker. This machine will replace an old
donut maker that still has a useful life of 4 years. The new machine will cost $3,500 a year to
operate, as opposed to the old machine, which costs $3,900 per year to operate. Also,
because of increased capacity, an additional 10,000 donuts a year can be produced. The
company makes a contribution margin of $0.15 per donut. The old machine can be sold for
$6,000 and the new machine costs $28,000. The incremental annual net cash inflows
provided by the new machine would be:
A. $1,500
B. $400
C. $1,900
D. $7,000
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 3 Hard
Topic Area: The Net Present Value Method
11-135
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McGraw-Hill Education.
49.
Bevans Corporation is considering a capital budgeting project that would require an initial
investment of $190,000. The investment would generate annual cash inflows of $58,000 for
the life of the project, which is 4 years. The company's discount rate is 7%. The net present
value of the project is closest to:
A. $190,000
B. $6,446
C. $196,446
D. $42,000
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-136
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McGraw-Hill Education.
50.
The following data pertain to an investment proposal:
Cost of the investment
$30,000
Annual cost savings
$9,000
Estimated salvage value
$4,000
Life of the project
5 years
Discount rate
12%
The net present value of the proposed investment is closest to:
A. $4,713
B. $2,445
C. $2,268
D. $19,000
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-137
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McGraw-Hill Education.
51.
(Ignore income taxes in this problem) The management of Urbine Corporation is considering
the purchase of a machine that would cost $350,000, would last for 6 years, and would have
no salvage value. The machine would reduce labor and other costs by $79,000 per year. The
company requires a minimum pretax return of 14% on all investment projects. The net present
value of the proposed project is closest to:
A.
($42,769)
B. $124,000
C.
($93,877)
D. $56,493
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-138
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McGraw-Hill Education.
52.
Vinup Corporation has provided the following data concerning an investment project that it is
considering:
Initial investment
$100,000
Working capital
$73,000
Annual cash flow
$40,000 per
year
Salvage value at the end of the
$29,000
project
The working capital would be released for use elsewhere at the end of the project in 4 years.
The company's discount rate is 13%. The net present value of the project is closest to:
A. $8,486
B. $36,737
C. $89,000
D.
($36,263)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-139
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McGraw-Hill Education.
53.
A project requires an initial investment of $70,000 and has a project profitability index of 0.932.
The present value of the future cash inflows from this investment is:
A. $70,000
B. $36,231
C. $135,240
D. Cannot be determined from the data provided.
Project profitability index = Net present value of the project ÷ Investment required
Project profitability index = (Present value of the future cash inflows - Investment required) ÷
Investment required
0.932 = (Present value of the future cash inflows - $70,000) ÷ $70,000
(Present value of the future cash inflows - $70,000) = 0.932 × $70,000
Present value of the future cash inflows = (0.932 × $70,000) + $70,000
= $65,240 + $70,000 = $135,240
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 3 Hard
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-140
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McGraw-Hill Education.
54.
The management of Cantell Corporation is considering a project that would require an initial
investment of $47,000. No other cash outflows would be required. The present value of the
cash inflows would be $55,930. The profitability index of the project is closest to:
A. 1.19
B. 0.81
C. 0.19
D. 0.16
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-141
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McGraw-Hill Education.
55.
The net present value of an investment project is $28,842 and its project profitability index is
0.1518. The initial investment in this project was:
A. $190,000
B. $25,041
C. $215,800
D. $185,200
Project profitability index = Net present value of the project ÷ Investment required
0.1518 = $28,842 ÷ Investment required
Investment required = $28,842 ÷ 0.1518 = $190,000
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 3 Hard
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-142
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McGraw-Hill Education.
56.
The Gomez Corporation is considering two projects, T and V. The following information has
been gathered on these projects:
Project T Project V
Initial investment needed
$112,500 $75,000
Present value of future cash
$168,000 $107,000
inflows
Useful life
10 years 10 years
Based on this information, which of the following statements is (are) true?
I. Project T has the highest ranking according to the project profitability index criterion.
II. Project V has the highest ranking according to the net present value criterion.
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 2 Medium
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-143
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McGraw-Hill Education.
57.
Villena 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
$52,800. The profitability index of the project is closest to:
A. 0.90
B. 0.10
C. 1.10
D. 0.09
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-144
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58.
The management of Edelmann Corporation is considering the following three investment
projects:
Project Project Project
R
S
T
Investment required
$13,000 $59,000 $79,000
Present value of cash
$13,520 $66,080 $87,690
inflows
Rank the projects according to the profitability index, from most profitable to least profitable.
A. T, S, R
B. R, T, S
C. S, T, R
D. T, R, S
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-145
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59.
Crowley Corporation is considering three investment projects: F, G, and H. Project F would
require an investment of $21,000, Project G of $49,000, and Project H of $82,000. No other
cash outflows would be involved. The present value of the cash inflows would be $21,210 for
Project F, $57,820 for Project G, and $95,120 for Project H. Rank the projects according to the
profitability index, from most profitable to least profitable.
A. F, H, G
B. G, H, F
C. H, F, G
D. H, G, F
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-146
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60.
Bowen Corporation is considering several investment proposals, as shown below:
Investment Proposal
A
B
C
D
Investment $95,000 $120,000 $90,000 $150,000
required
Present
$107,000 $130,000 $105,000 $180,000
value of
future net
cash flows
If the project profitability index is used, the ranking of the projects from most to least profitable
would be:
A. D, C, A, B
B. D, B, A, C
C. B, A, C, D
D. D, A, B, C
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 2 Medium
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-147
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McGraw-Hill Education.
61.
An expansion at Fidell, Inc., would increase sales revenues by $75,000 per year and cash
operating expenses by $38,000 per year. The initial investment would be for equipment that
would cost $135,000 and have a 5 year life with no salvage value. The annual depreciation on
the equipment would be $27,000. The simple rate of return on the investment is closest to:
A. 20.0%
B. 7.4%
C. 27.4%
D. 13.3%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-148
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McGraw-Hill Education.
62.
The management of Stanforth 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 $516,000 and would have a 6 year useful life and
no salvage value. By automating the process, the company would save $173,000 per year in
cash operating costs. The simple rate of return on the investment is closest to:
A. 17.7%
B. 16.9%
C. 33.5%
D. 16.7%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-149
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McGraw-Hill Education.
63.
Mercer Corporation is considering replacing a technologically obsolete machine with a new
state-of-the-art numerically controlled machine. The new machine would cost $250,000 and
would have a ten-year useful life. Unfortunately, the new machine would have no salvage
value. The new machine would cost $12,000 per year to operate and maintain, but would save
$55,000 per year in labor and other costs. The old machine can be sold now for scrap for
$10,000. The simple rate of return on the new machine is closest to:
A. 17.9%
B. 7.5%
C. 22.0%
D. 7.2%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Simple Rate of Return Method
11-150
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64.
Messersmith Corporation is investigating automating a process by purchasing a machine for
$688,000 that would have an 8 year useful life and no salvage value. By automating the
process, the company would save $160,000 per year in cash operating costs. The new
machine would replace some old equipment that would be sold for scrap now, yielding
$19,000. The annual depreciation on the new machine would be $86,000. The simple rate of
return on the investment is closest to:
A. 23.3%
B. 11.1%
C. 10.8%
D. 12.5%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-151
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65.
Wombles Corporation is contemplating purchasing equipment that would increase sales
revenues by $478,000 per year and cash operating expenses by $249,000 per year. The
equipment would cost $738,000 and have a 9 year life with no salvage value. The annual
depreciation would be $82,000. The simple rate of return on the investment is closest to:
A. 19.9%
B. 30.8%
C. 31.0%
D. 11.1%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-152
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McGraw-Hill Education.
66.
The management of Duker Corporation is investigating purchasing equipment that would
increase sales revenues by $130,000 per year and cash operating expenses by $39,000 per
year. The equipment would cost $328,000 and have an 8 year life with no salvage value. The
simple rate of return on the investment is closest to:
A. 12.5%
B. 27.7%
C. 38.5%
D. 15.2%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-153
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67.
Baldock Inc. is considering the acquisition of a new machine that costs $420,000 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:
Incremental Net
Incremental
Operating Income
Net Cash Flows
Year 1
$61,000
$145,000
Year 2
$67,000
$151,000
Year 3
$78,000
$162,000
Year 4
$41,000
$125,000
Year 5
$83,000
$167,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
If the discount rate is 12%, the net present value of the investment is closest to:
A. $330,000
B. $539,365
C. $119,365
D. $420,000
11-154
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Source: CMA, adapted
Topic Area: The Net Present Value Method
11-155
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McGraw-Hill Education.
68.
Baldock Inc. is considering the acquisition of a new machine that costs $420,000 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:
Incremental Net
Incremental
Operating Income
Net Cash Flows
Year 1
$61,000
$145,000
Year 2
$67,000
$151,000
Year 3
$78,000
$162,000
Year 4
$41,000
$125,000
Year 5
$83,000
$167,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
The payback period of this investment is closest to:
A. 5.0 years
B. 3.2 years
C. 1.9 years
D. 2.8 years
11-156
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Source: CMA, adapted
Topic Area: The Payback Method
11-157
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McGraw-Hill Education.
69.
Chee Corporation has gathered the following data on a proposed investment project:
Investment required in equipment
$240,000
Annual cash inflows
$50,000
Salvage value
$0
Life of the investment
8 years
Required rate of return
10%
The company uses straight-line depreciation. Assume cash flows occur uniformly throughout
a year except for the initial investment.
The payback period for the investment is closest to:
A. 0.2 years
B. 2.5 years
C. 4.8 years
D. 5.0 years
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
11-158
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McGraw-Hill Education.
70.
Chee Corporation has gathered the following data on a proposed investment project:
Investment required in equipment
$240,000
Annual cash inflows
$50,000
Salvage value
$0
Life of the investment
8 years
Required rate of return
10%
The company uses straight-line depreciation. Assume cash flows occur uniformly throughout
a year except for the initial investment.
The simple rate of return on the investment is closest to:
A. 12.5%
B. 10.0%
C. 20.8%
D. 8.3%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Simple Rate of Return Method
11-159
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McGraw-Hill Education.
71.
Chee Corporation has gathered the following data on a proposed investment project:
Investment required in equipment
$240,000
Annual cash inflows
Salvage value
Life of the investment
Required rate of return
$50,000
$0
8 years
10%
The company uses straight-line depreciation. Assume cash flows occur uniformly throughout
a year except for the initial investment.
The net present value on this investment is closest to:
A. $160,000
B. $240,024
C. $58,800
D. $26,750
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-160
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11-161
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McGraw-Hill Education.
72.
The Halsey Corporation is contemplating the purchase of new equipment that would require
an initial investment of $125,000. The equipment would have a useful life of six years, with a
salvage value of $29,000. This new equipment would be depreciated over its useful life by the
straight-line method. It would replace existing equipment which is fully depreciated. The
existing equipment has a salvage value now of $38,000. The anticipated annual revenues and
expenses associated with the new equipment are:
Revenue (all cash)
$95,000
Operating expenses:
Wages (all cash)
$41,000
Depreciation
$16,000
Other (all cash)
$16,000
Assume cash flows occur uniformly throughout a year except for the initial investment and the
salvage value at the end of the project.
The payback period is closest to:
A. 5.7 years
B. 4.0 years
C. 2.3 years
D. 1.8 years
Revenue (all cash)
$95,000
Cash operating expenses:
Wages (all cash)
Other (all cash)
Net cash flow
$41,000
16,000
57,000
$38,000
11-162
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Payback period = Investment required ÷ Annual net cash inflow
= ($125,000 - $38,000) ÷ $38,000 per year = 2.3 years (rounded)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
11-163
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McGraw-Hill Education.
11-164
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McGraw-Hill Education.
73.
The Halsey Corporation is contemplating the purchase of new equipment that would require
an initial investment of $125,000. The equipment would have a useful life of six years, with a
salvage value of $29,000. This new equipment would be depreciated over its useful life by the
straight-line method. It would replace existing equipment which is fully depreciated. The
existing equipment has a salvage value now of $38,000. The anticipated annual revenues and
expenses associated with the new equipment are:
Revenue (all cash)
$95,000
Operating expenses:
Wages (all cash)
$41,000
Depreciation
$16,000
Other (all cash)
$16,000
Assume cash flows occur uniformly throughout a year except for the initial investment and the
salvage value at the end of the project.
For this investment, the simple rate of return to the nearest tenth of a percent is:
A. 43.7%
B. 25.3%
C. 30.4%
D. 17.6%
Revenue (all cash)
$95,000
Operating expenses:
Wages (all cash)
$41,000
Depreciation
16,000
Other (all cash)
16,000
Net operating income
73,000
$22,000
11-165
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Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $22,000 ÷ ($125,000 - $38,000) = 25.3% (rounded)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Simple Rate of Return Method
11-166
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McGraw-Hill Education.
74.
Jimba's, Inc., has purchased a new donut maker. It cost $20,000 and has an estimated life of
10 years. The following annual donut sales and expenses are projected:
Sales
$30,000
Expenses:
Flour, etc., required in making
$15,000
donuts
Salaries
8,000
Depreciation
2,000 25,000
Net operating income
$5,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
The payback period on the new machine is closest to:
A. 6.0 years
B. 2.9 years
C. 4.0 years
D. 4.3 years
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
11-167
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McGraw-Hill Education.
75.
Jimba's, Inc., has purchased a new donut maker. It cost $20,000 and has an estimated life of
10 years. The following annual donut sales and expenses are projected:
Sales
$30,000
Expenses:
Flour, etc., required in making $15,000
donuts
Salaries
8,000
Depreciation
2,000 25,000
Net operating income
$5,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
The simple rate of return on the new machine is closest to:
A. 15%
B. 16.7%
C. 25%
D. 23.3%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-168
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76.
Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the purchase
of a machine to produce baseball bats. The machine will cost $60,000 and have a 10-year
useful life. The following annual revenues and expenses are projected:
Sales
$40,000
Less expenses:
Out-of-pocket production costs $15,000
Selling expenses
9,000
Depreciation
6,000
Net operating income
30,000
$10,000
The machine will have no salvage value. Assume cash flows occur uniformly throughout a
year except for the initial investment.
The payback period for the new machine is about:
A. 6.0 years
B. 1.5 years
C. 5.4 years
D. 3.75 years
11-169
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
11-170
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McGraw-Hill Education.
77.
Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the purchase
of a machine to produce baseball bats. The machine will cost $60,000 and have a 10-year
useful life. The following annual revenues and expenses are projected:
Sales
$40,000
Less expenses:
Out-of-pocket production
$15,000
costs
Selling expenses
9,000
Depreciation
6,000
Net operating income
30,000
$10,000
The machine will have no salvage value. Assume cash flows occur uniformly throughout a
year except for the initial investment.
The simple rate of return would be about:
A. 26.7%
B. 16.7%
C. 25.0%
D. 40.0%
11-171
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-172
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McGraw-Hill Education.
11-173
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McGraw-Hill Education.
78.
Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following
information has been gathered relative to this decision:
Present
New
Equipment Equipment
Purchase
$50,000
$48,000
$30,000
-
$25,000
-
$8,000
$5,000
$10,000
$8,000
$3,000
$7,000
$9,000
-
cost new
Remaining
book value
Cost to
rebuild now
Major
maintenance
at the end of
3 years
Annual cash
operating
costs
Salvage
value at the
end of 5
years
Salvage
value now
Carlson uses the total cost approach to net present value analysis and a discount rate of
12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson
Manufacturing will have no future use for the equipment.
If the new equipment is purchased, the present value of the cash flows that occur now is:
11-174
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A. ($48,000)
B.
($39,000)
C.
($41,000)
D.
($37,000)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-175
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McGraw-Hill Education.
11-176
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McGraw-Hill Education.
79.
Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following
information has been gathered relative to this decision:
Present Equipment
New Equipment
Purchase cost new
$50,000
$48,000
Remaining book value
$30,000
-
Cost to rebuild now
$25,000
-
$8,000
$5,000
Annual cash operating costs
$10,000
$8,000
Salvage value at the end of 5
$3,000
$7,000
$9,000
-
Major maintenance at the end of 3
years
years
Salvage value now
Carlson uses the total cost approach to net present value analysis and a discount rate of
12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson
Manufacturing will have no future use for the equipment.
If the new equipment is purchased, the present value of the annual cash operating costs
associated with this alternative is:
A.
($28,840)
B.
($19,160)
11-177
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C.
($14,420)
D.
($36,050)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-178
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McGraw-Hill Education.
11-179
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McGraw-Hill Education.
80.
Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following
information has been gathered relative to this decision:
Present Equipment
New
Equipment
Purchase
$50,000
$48,000
$30,000
-
$25,000
-
$8,000
$5,000
$10,000
$8,000
$3,000
$7,000
$9,000
-
cost new
Remaining
book value
Cost to
rebuild now
Major
maintenance
at the end of
3 years
Annual cash
operating
costs
Salvage
value at the
end of 5
years
Salvage
value now
Carlson uses the total cost approach to net present value analysis and a discount rate of
12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson
Manufacturing will have no future use for the equipment.
If the equipment is rebuilt, the present value of the cash flows that occur now is:
11-180
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A.
($55,000)
B.
($25,000)
C.
($16,000)
D.
($23,000)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-181
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McGraw-Hill Education.
81.
The management of Mashiah Corporation is considering the purchase of a machine that would
cost $290,000, would last for 6 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 13% on all investment projects.
The present value of the annual cost savings of $102,000 is closest to:
A. $849,012
B. $612,000
C. $195,872
D. $407,796
Present value = Cash flow × PV Factor
= $102,000 × 3.998 = $407,796
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-182
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82.
The management of Mashiah Corporation is considering the purchase of a machine that would
cost $290,000, would last for 6 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 13% on all investment projects.
The net present value of the proposed project is closest to:
A. $154,663
B. $322,000
C. $117,796
D. $245,246
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-183
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83.
The Sawyer Corporation has $80,000 to invest and is considering two different projects, X and
Y. The following data are available on the projects:
Project X Project Y
Cost of equipment needed
$80,000
-
-
$80,000
$23,000
$18,000
$6,000
-
now
Working capital requirement
Annual cash operating inflows
Salvage value in 5 years
Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be
released for use elsewhere. Sawyer's discount rate is 12%.
The net present value of project X is closest to:
A. $2,915
B.
($11,708)
C. $5,283
D. $6,317
11-184
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-185
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McGraw-Hill Education.
84.
The Sawyer Corporation has $80,000 to invest and is considering two different projects, X and
Y. The following data are available on the projects:
Project X Project Y
Cost of equipment needed
$80,000
-
-
$80,000
$23,000
$18,000
$6,000
-
now
Working capital requirement
Annual cash operating inflows
Salvage value in 5 years
Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be
released for use elsewhere. Sawyer's discount rate is 12%.
The net present value of project Y is closest to:
A. $15,110
B. $30,250
C. $11,708
D.
($11,708)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-186
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McGraw-Hill Education.
85.
Clairmont Corporation is considering the purchase of a machine that would cost $150,000 and
would last for 5 years. At the end of 5 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 $37,000. The company requires a minimum pretax return of 12% on all investment
projects.
The present value of the annual cost savings of $37,000 is closest to:
A. $133,385
B. $235,070
C. $185,000
D. $20,979
Present value = Cash flow × PV Factor
= $37,000 × 3.605 = $133,385
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-187
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McGraw-Hill Education.
86.
Clairmont Corporation is considering the purchase of a machine that would cost $150,000 and
would last for 5 years. At the end of 5 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 $37,000. The company requires a minimum pretax return of 12% on all investment
projects.
The net present value of the proposed project is closest to:
A.
($6,409)
B.
($11,295)
C. $1,385
D.
($16,615)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-188
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McGraw-Hill Education.
11-189
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McGraw-Hill Education.
87.
Allen College has a telephone system that is in poor condition. The system can be either
overhauled or replaced with a new system. The following data have been gathered concerning
these two alternatives:
Present
Proposed
System
New System
$100,000
$150,000
Accumulated $90,000
-
Purchase
cost when
new
depreciation
Overhaul
$80,000
-
$30,000
$20,000
$10,000
-
$2,000
$15,000
-
$50,000
cost needed
now
Annual cash
operating
costs
Salvage
value now
Salvage
value in 8
years
Working
capital
required
Allen College uses a 12% discount rate and the total cost approach to net present value
analysis. Both alternatives are expected to have a useful life of eight years.
The net present value of the alternative of overhauling the present system is closest to:
11-190
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A.
($238,232)
B.
($108,000)
C.
($228,232)
D.
($232,272)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-191
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McGraw-Hill Education.
11-192
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McGraw-Hill Education.
88.
Allen College has a telephone system that is in poor condition. The system can be either
overhauled or replaced with a new system. The following data have been gathered concerning
these two alternatives:
Present
Proposed
System
New System
$100,000
$150,000
Accumulated $90,000
-
Purchase
cost when
new
depreciation
Overhaul
$80,000
-
$30,000
$20,000
$10,000
-
$2,000
$15,000
-
$50,000
cost needed
now
Annual cash
operating
costs
Salvage
value now
Salvage
value in 8
years
Working
capital
required
Allen College uses a 12% discount rate and the total cost approach to net present value
analysis. Both alternatives are expected to have a useful life of eight years.
11-193
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The net present value of the alternative of replacing the present system with the proposed
new system is closest to:
A.
($233,300)
B.
($283,300)
C.
($263,100)
D.
($273,100)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-194
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McGraw-Hill Education.
11-195
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McGraw-Hill Education.
89.
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:
Present System
New
System
Purchase
$150,000 $200,000
cost when
new
Accumulated
$140,000
-
$130,000
-
depreciation
Overhaul
costs
needed now
Annual cash
$80,000 $70,000
operating
costs
Salvage
$60,000
-
value now
Salvage
$52,000 $65,000
value in 8
years
Working
- $100,000
capital
required
Westland College uses a 10% discount rate and the total cost approach to net present value
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 eight years.
11-196
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The net present value of overhauling the present system is closest to:
A.
($321,084)
B.
($532,516)
C.
($560,536)
D.
($592,516)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 3 Hard
Topic Area: The Net Present Value Method
11-197
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11-198
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McGraw-Hill Education.
90.
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:
Purchase
Present
New
System
System
$150,000 $200,000
cost when
new
Accumulated $140,000
-
depreciation
Overhaul
$130,000
-
costs
needed now
Annual cash
$80,000 $70,000
operating
costs
Salvage
$60,000
-
value now
Salvage
$52,000 $65,000
value in 8
years
Working
- $100,000
capital
required
Westland College uses a 10% discount rate and the total cost approach to net present value
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 eight years.
11-199
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The net present value of the new system alternative is:
A.
($483,095)
B.
($583,095)
C.
($596,395)
D.
($536,395)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 3 Hard
Topic Area: The Net Present Value Method
11-200
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McGraw-Hill Education.
91.
Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would last
for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000. The
machine would reduce labor and other costs by $96,000 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 18% on all
investment projects.
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. $16,872
B. $0
C.
($4,116)
D.
($13,111)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-201
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McGraw-Hill Education.
92.
Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would last
for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000. The
machine would reduce labor and other costs by $96,000 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 18% on all
investment projects.
The net present value of the proposed project is closest to:
A. $1,338
B.
($8,849)
C.
($14,048)
D.
($2,778)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-202
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McGraw-Hill Education.
93.
Dube Corporation is considering the following three investment projects:
Project Project Project
D
E
F
Investment required
$11,000 $41,000 $86,000
Present value of cash
$11,330 $46,330 $95,460
inflows
The profitability index of investment project E is closest to:
A. 0.13
B. 1.13
C. 0.87
D. 0.12
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-203
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94.
Dube Corporation is considering the following three investment projects:
Project Project Project
D
E
F
Investment required
$11,000 $41,000 $86,000
Present value of cash
$11,330 $46,330 $95,460
inflows
Rank the projects according to the profitability index, from most profitable to least profitable.
A. F,E,D
B. D,F,E
C. F,D,E
D. E,F,D
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-204
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McGraw-Hill Education.
95.
The management of Keno Corporation is considering three investment projects-B, C, and D.
Project B would require an investment of $15,000, Project C of $50,000, and Project D of
$89,000. The present value of the cash inflows would be $16,350 for Project B, $56,500 for
Project C, and $96,120 for Project D.
The profitability index of investment project C is closest to:
A. 0.13
B. 0.87
C. 0.12
D. 1.13
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-205
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96.
The management of Keno Corporation is considering three investment projects-B, C, and D.
Project B would require an investment of $15,000, Project C of $50,000, and Project D of
$89,000. The present value of the cash inflows would be $16,350 for Project B, $56,500 for
Project C, and $96,120 for Project D.
Rank the projects according to the profitability index, from most profitable to least profitable.
A. B, D, C
B. C, B, D
C. D, C, B
D. D, B, C
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
Essay Questions
11-206
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McGraw-Hill Education.
97.
Flamio Corporation is considering a project that would require an initial investment of
$210,000 and would last for 6 years. The incremental annual revenues and expenses for each
of the 6 years would be as follows:
Sales
$203,000
Variable expenses
45,000
Contribution margin
158,000
Fixed expenses:
Salaries
$24,000
Rents
37,000
Depreciation
31,000
Total fixed expenses
92,000
Net operating income
$66,000
At the end of the project, the scrap value of the project's assets would be $24,000.
Required:
Determine the payback period of the project. Show your work!
Net operating income
Add noncash deduction for depreciation
Annual net cash inflow
$66,000
31,000
$97,000
Payback period = Investment required ÷ Annual net cash inflow = $210,000 ÷ $97,000 = 2.16
years
11-207
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McGraw-Hill Education.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
98.
The management of Sobus Corporation is considering a project that would require an initial
investment of $458,000 and would last for 9 years. The annual net operating income from the
project would be $58,000, including depreciation of $48,000. At the end of the project, the
scrap value of the project's assets would be $26,000.
Required:
Determine the payback period of the project. Show your work!
Net operating income
$58,000
Add: Noncash deduction for depreciation
Annual net cash inflow
48,000
$106,000
Payback period = Investment required ÷ Annual net cash inflow
= $458,000 ÷ $106,000 = 4.32 years
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
11-208
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McGraw-Hill Education.
99.
Alesi Corporation is considering purchasing a machine that would cost $243,600 and have a
useful life of 8 years. The machine would reduce cash operating costs by $76,125 per year.
The machine would have a salvage value of $60,900 at the end of the project.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
a. The payback period is computed as follows:
Payback period = Investment required ÷ Annual net cash flow
= $243,600 ÷ $76,125 = 3.20 years
In this case the salvage value plays no part in the payback period because all of the
investment is recovered before the end of the project.
b. The simple rate of return is computed as follows:
Annual incremental cost savings
$76,125
Annual depreciation ($243,600 -
22,838
$60,900)/8
Annual incremental net operating income
$53,287
Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $53,287 ÷ $243,600 = 21.87% (rounded)
11-209
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McGraw-Hill Education.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 2 Medium
Topic Area: The Payback Method
Topic Area: The Simple Rate of Return Method
11-210
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McGraw-Hill Education.
100.
Betterway Pharmacy has purchased a small auto for delivery of prescriptions. The auto cost
$30,000 and will be usable for five years. Delivery of prescriptions (which the pharmacy has
never done before) should increase revenues by at least $29,000 per year. The cost of these
prescriptions will be about $21,000 per year. The pharmacy depreciates all assets by the
straight-line method.
Required:
a. Compute the payback period on the new auto.
b. Compute the simple rate of return of the new auto.
a. Payback period = Investment required ÷ Annual net cash inflow
= $30,000 ÷ ($29,000 - $21,000) per year
= $30,000 ÷ $8,000 per year = 3.75 years
b. Simple rate of return = Annual incremental net operating income ÷ Initial investment
= [$29,000 - ($21,000 + $6,000)] ÷ $30,000 = 6.67% (rounded)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
Topic Area: The Simple Rate of Return Method
11-211
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McGraw-Hill Education.
101.
Swaggerty Corporation is considering purchasing a machine that would cost $462,000 and
have a useful life of 7 years. The machine would reduce cash operating costs by $115,500 per
year. The machine would have no salvage value.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
a. The payback period is computed as follows:
Payback period = Investment required ÷ Annual net cash flow
= $462,000 ÷ $115,500 = 4.00 years
b. The simple rate of return is computed as follows:
Annual incremental cost savings
Annual depreciation ($462,000 - $0)/7
Annual incremental net operating
$115,500
66,000
$49,500
income
Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $49,500 ÷ $462,000 = 10.71%
11-212
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McGraw-Hill Education.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-01 Determine the payback period for an investment.
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Payback Method
Topic Area: The Simple Rate of Return Method
11-213
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McGraw-Hill Education.
11-214
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McGraw-Hill Education.
102.
Consider the following three investment opportunities:
Project I would require an immediate cash outlay of $10,000 and would result in cash savings
of $3,000 each year for 5 years.
Project II would require cash outlays of $3,000 per year and would provide a cash inflow of
$30,000 at the end of 5 years.
Project III would require a cash outlay of $10,000 now and would provide a cash inflow of
$30,000 at the end of 5 years.
Required:
The discount rate is 14%. Use the net present value method to determine which, if any, of the
three projects is acceptable.
Project I
Year
Now
Initial investment
Discount factor (14%)
5
($10,000)
Annual net cash flow
Total cash flows (a)
1-5
$3,000
($10,000) $3,000
1.000
$0
3.433 0.519
(b)
Present value of cash
($10,000) $10,299
$0
flows (a) × (b)
Net present value
$299
11-215
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McGraw-Hill Education.
Project II
Year
Now
Annual cash outlays
1-5
($3,000)
Cash inflow
Total cash flows (a)
Discount factor (14%)
5
$30,000
$0 ($3,000) $30,000
1.000
3.433
0.519
(b)
Present value of cash
$0 ($10,299) $15,570
flows (a) × (b)
Net present value
$5,271
Project III
Year
Now
Initial investment
1-5
($10,000)
Cash inflow
Total cash flows (a)
Discount factor (14%)
5
$30,000
($10,000)
$0 $30,000
1.000 3.433
0.519
(b)
Present value of cash
($10,000)
$0 $15,570
flows (a) × (b)
Net present value
$5,570
11-216
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McGraw-Hill Education.
Conclusion: All three projects have positive net present values and are thus acceptable.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-217
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McGraw-Hill Education.
103.
The management of Basler Corporation is considering the purchase of a machine that would
cost $440,000, would last for 5 years, and would have no salvage value. The machine would
reduce labor and other costs by $128,000 per year. The company requires a minimum pretax
return of 12% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
Year
Now
Initial investment
Discount factor (12%)
5
($440,000)
Annual net cash flow
Total cash flows (a)
1-5
$128,000
($440,000) $128,000
1.000
$0
3.605 0.567
(b)
Present value of cash ($440,000) $461,440
$0
flows (a) × (b)
Net present value
$21,440
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-218
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McGraw-Hill Education.
11-219
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104.
Bill Anders retires in 5 years. He would have to purchase equipment costing $500,000 to equip
the outlet and invest an additional $150,000 for inventories and other working capital needs.
Other outlets in the fast-food chain have an annual net cash inflow of about $160,000. 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 16%.
Required:
What is the investment's net present value? Is this an acceptable investment?
Present
Year
Now
Initial
1-5
5
($500,000)
investment
Working
($150,000)
$150,000
capital
Annual net
$160,000
cash flow
Salvage
$50,000
value
Total cash ($650,000) $160,000 $200,000
flows (a)
11-220
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Discount
1.000
3.274
0.476
factor
(16%) (b)
Present
($650,000) $523,840 $95,200
value of
cash flows
(a) × (b)
Net
($30,960)
present
value
No, the outlet is not an acceptable investment because its net present value is negative.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-221
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105.
Burba Inc. is considering investing in a project that would require an initial investment of
$200,000. The life of the project would be 5 years. The annual net cash inflows from the
project would be $60,000. The salvage value of the assets at the end of the project would be
$30,000. The company uses a discount rate of 17%.
Required:
Compute the net present value of the project.
Year
Now
Initial investment
1-5
5
($200,000)
Annual net cash
$60,000
flow
Salvage value
Total cash flows
$30,000
($200,000) $60,000 $30,000
(a)
Discount factor
1.000
3.199
0.456
(17%) (b)
Present value of
($200,000) $191,940 $13,680
cash flows (a) × (b)
Net present value
$5,620
11-222
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-223
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106.
Cascade, Inc., 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. Cascade uses a discount rate of 18%.
Annual cash sales
$420,000
Annual out-of-pocket cash expenses
$330,000
Annual depreciation on new equipment
Initial cost of new equipment
Salvage value of equipment in 5 years
Working capital requirement
$36,000
$200,000
$20,000
$140,000
Required:
Compute the net present value of the new product.
Year
Now
Initial
1-5
5
($200,000)
investment
Working
($140,000)
$140,000
capital
Annual net
cash flow
$90,000
($420,000
$330,000)
11-225
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Salvage
$20,000
value
Total cash
($340,000) $90,000 $160,000
flows (a)
Discount
1.000
3.127
0.437
factor
(18%) (b)
Present
($340,000) $281,430 $69,920
value of
cash flows
(a) × (b)
Net
$11,350
present
value
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-226
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107.
Janes, Inc., is considering the purchase of a machine that would cost $400,000 and would last
for 5 years, at the end of which, the machine would have a salvage value of $67,000. The
machine would reduce labor and other costs by $109,000 per year. Additional working capital
of $4,000 would be needed immediately, all of which would be recovered at the end of 5
years. The company requires a minimum pretax return of 12% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
Year
Now
Initial investment
Working capital
1-5
5
($400,000)
($4,000)
Annual net cash
$4,000
$109,000
flow
Salvage value
$67,000
Total cash flows (a) ($404,000) $109,000 $71,000
Discount factor
1.000
3.605
0.567
(12%) (b)
Present value of
($404,000) $392,945 $40,257
cash flows (a) × (b)
Net present value
$29,202
11-227
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-228
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108.
Weilbacher Corporation is considering the purchase of a machine that would cost $240,000
and would last for 8 years. At the end of 5 years, the machine would have a salvage value of
$50,000. The machine would reduce labor and other costs by $72,000 per year. The company
requires a minimum pretax return of 16% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
Year
Now
Initial investment
1-5
5
($240,000)
Annual net cash
$72,000
flow
Salvage value
$50,000
Total cash flows (a) ($240,000) $72,000 $50,000
Discount factor
1.000
3.274
0.476
(16%) (b)
Present value of
($240,000) $235,728 $23,800
cash flows (a) × (b)
Net present value
$19,528
11-229
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-230
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109.
Vernon Corporation has been offered a 5-year contract to supply a part for the military. After
careful study, the company has developed the following estimated data relating to the
contract:
Cost of equipment needed
$300,000
Working capital needed
$50,000
Annual cash receipts from the delivery of parts, less cash operating costs $70,000
Salvage value of equipment at end of the contract
$5,000
It is not expected that the contract would be extended beyond the initial contract period. The
company's discount rate is 10%.
Required:
Use the net present value method to determine if the contract should be accepted.
Year
Now
Initial investment
Working capital
Annual net cash
1-5
5
($300,000)
($50,000)
$50,000
$70,000
flow
Salvage value
$5,000
11-232
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Total cash flows (a) ($350,000) $70,000 $55,000
Discount factor
1.000
3.791
0.621
(10%) (b)
Present value of
($350,000) $265,370 $34,155
cash flows (a) × (b)
Net present value
($50,475)
No, the contract should not be accepted because the net present value is negative.
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-233
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110.
The following data concern an investment project:
Investment in equipment
$100,000
Annual net cash inflows
$24,000
Salvage value of the equipment
$10,000
Working capital required
$50,000
Life of the project
5 years
Required rate of return
10%
The working capital will be released for use elsewhere at the conclusion of the project.
Required:
Compute the project's net present value.
Year
Now
Initial investment
Working capital
1-5
5
($100,000)
($50,000)
Annual net cash
$50,000
$24,000
flow
Salvage value
Total cash flows (a)
Discount factor
$10,000
($150,000) $24,000 $60,000
1.000
3.791
0.621
(10%) (b)
Present value of
($150,000) $90,984 $37,260
cash flows (a) × (b)
11-235
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Net present value
($21,756)
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-236
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111.
Juliar Inc. has provided the following data concerning a proposed investment project:
Initial investment
$160,000
Life of the project
4 years
Annual net cash inflows
$50,000
Salvage value
$24,000
The company uses a discount rate of 12%.
Required:
Compute the net present value of the project.
Year
Now
Initial investment
1-4
4
($160,000)
Annual net cash
$50,000
flow
Salvage value
$24,000
Total cash flows (a) ($160,000) $50,000 $24,000
Discount factor
1.000
3.037
0.636
(12%) (b)
Present value of
($160,000) $151,850 $15,264
cash flows (a) × (b)
Net present value
$7,114
11-237
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-238
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112.
Mark Stevens is considering opening a hobby and craft store. He would invest $50,000 to
purchase equipment and furnishings and another $100,000 for inventories and other working
capital needs. Rent on the building used by the business will be $25,000 per year. In addition
to building rent, other annual cash outflows for operating costs will amount to $44,000. Mark
estimates that the annual cash inflow from the business will amount to $100,000. Mark plans
to operate the business for only six years. He estimates that the equipment and furnishings
could be sold at that time for about 10% of its original cost. Mark's discount rate is 16%. All
cash flows, except for the initial investment, would occur at the ends of the years.
Required:
Compute the net present value of this investment.
Annual cash inflows
$100,000
Annual cash outflows:
Building rent
$25,000
Other annual cash
44,000
69,000
outflows
Annual net cash inflow
$31,000
Year
Now
Initial
1-6
6
($50,000)
investment
Working
($100,000)
$100,000
capital
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Annual net
$31,000
cash flow
Salvage
$5,000
value
Total cash
($150,000) $31,000 $105,000
flows (a)
Discount
1.000
3.685
0.410
factor
(16%) (b)
Present
($150,000) $114,235 $43,050
value of
cash flows
(a) × (b)
Net
$7,285
present
value
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 2 Medium
Topic Area: The Net Present Value Method
11-241
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113.
Dunay Corporation is considering investing $510,000 in a project. The life of the project would
be 4 years. The project would require additional working capital of $24,000, which would be
released for use elsewhere at the end of the project. The annual net cash inflows would be
$162,000. The salvage value of the assets used in the project would be $41,000. The
company uses a discount rate of 10%.
Required:
Compute the net present value of the project.
Year
Now
Initial
1-4
4
($510,000)
investment
Working
($24,000)
$24,000
capital
Annual net
$162,000
cash flow
Salvage
$41,000
value
Total cash
($534,000) $162,000
$65,000
flows (a)
Discount
1.000
3.170
0.683
($534,000) $513,540
$44,395
factor
(10%) (b)
Present
value of
cash flows
(a) × (b)
11-243
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Net
$23,935
present
value
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-244
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11-245
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114.
Farah Corporation has provided the following data concerning a proposed investment project:
Initial investment
$320,000
Life of the project
5 years
Working capital required
$14,000
Annual net cash inflows
$88,000
Salvage value
$44,000
The company uses a discount rate of 11%. The working capital would be released at the end
of the project.
Required:
Compute the net present value of the project.
Year
Now
Initial
1-5
5
($320,000)
investment
Working
($14,000)
$14,000
capital
Annual net
$88,000
cash flow
Salvage
$44,000
value
Total cash ($334,000)
$88,000 $58,000
flows (a)
11-246
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Discount
1.000
3.696
0.593
factor
(11%) (b)
Present
($334,000) $325,248 $34,394
value of
cash flows
(a) × (b)
Net
$25,642
present
value
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.
Level of Difficulty: 1 Easy
Topic Area: The Net Present Value Method
11-247
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115.
Dimpson Corporation is considering the following three investment projects:
Investment required
Present value of cash
inflows
Project
Project
Project
P
Q
R
$15,000 $50,000 $71,000
$15,150 $54,500 $75,970
The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the project profitability index. Show your work
Project P Project Q Project R
Investment required (a)
Present value of cash inflows
($15,000) ($50,000) ($71,000)
15,150
54,500
75,970
Net present value (b)
$150
$4,500
$4,970
Project profitability index (b) ÷ (a)
0.01
0.09
0.07
3
1
2
Ranked by project profitability index
11-248
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-249
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116.
The management of Grayer Corporation is considering the following three investment projects:
Investment required
Present value of cash
inflows
Project
Project
Project
Q
R
S
$32,000 $40,000 $76,000
$36,480 $42,400 $84,360
The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the project profitability index. Show your work
Project Q Project R Project S
Investment required (a)
($32,000) ($40,000) ($76,000)
Present value of cash inflows
36,480
42,400
84,360
Net present value (b)
$4,480
$2,400
$8,360
0.14
0.06
0.11
1
3
2
Project profitability index (b) ÷ (a)
Ranked by project profitability index
11-250
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AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-03 Rank investment projects in order of preference.
Level of Difficulty: 1 Easy
Topic Area: Preference Decisions - The Ranking of Investment Projects
11-251
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McGraw-Hill Education.
117.
The management of Kleppe Corporation is investigating automating a process by replacing old
equipment by a new machine. The old equipment would be sold for scrap now for $19,000.
The new machine would cost $180,000, would have a 9 year useful life, and would have no
salvage value. By automating the process, the company would save $30,000 per year in cash
operating costs.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
Annual incremental cost savings
$30,000
Annual depreciation ($180,000 - $0)/9
Annual incremental net operating income
20,000
$10,000
Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $10,000 ÷ ($180,000 - $19,000)
= $10,000 ÷ $161,000 = 6.2%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-252
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118.
The management of Moya Corporation is investigating purchasing equipment that would cost
$336,000 and have an 8 year life with no salvage value. The equipment would allow an
expansion of capacity that would increase sales revenues by $288,000 per year and cash
operating expenses by $164,000 per year.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
Annual incremental revenues
$288,000
Annual incremental expenses:
Annual cash operating expenses
$164,000
Annual depreciation ($336,000 - $0)/8
42,000
206,000
Annual incremental net operating income
$82,000
Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $82,000 ÷ $336,000 = 24.4%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-253
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119.
Shiffler Corporation is contemplating purchasing equipment that would increase sales
revenues by $246,000 per year and cash operating expenses by $133,000 per year. The
equipment would cost $275,000 and have a 5 year life with no salvage value. The annual
depreciation would be $55,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
Annual incremental revenues
$246,000
Annual incremental expenses:
Annual cash operating expenses
Annual depreciation ($275,000 - $0)/5
$133,000
55,000
Annual incremental net operating income
188,000
$58,000
Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $58,000 ÷ $275,000 = 21.1%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-254
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McGraw-Hill Education.
120.
Hinck Corporation is investigating automating a process by purchasing a new machine for
$520,000 that would have a 8 year useful life and no salvage value. By automating the
process, the company would save $134,000 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 $65,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
Annual incremental cost savings
$134,000
Annual depreciation ($520,000 - $0)/8
Annual incremental net operating
65,000
$69,000
income
Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $69,000 ÷ ($520,000 - $22,000)
= $69,000 ÷ $498,000 = 13.9%
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Learning Objective: 11-04 Compute the simple rate of return for an investment.
Level of Difficulty: 1 Easy
Topic Area: The Simple Rate of Return Method
11-255
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