1. The management of Melchiori Corporation is considering the purchase of a machine that would cost $520,000, would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by $132,000 per year. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes.)
Determine the appropriate discount factor(s) using tables.
The present value of the annual cost savings of $132,000 is closest to: (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount.)
A. $191,448
B. $660,000
C. $1,215,462
D. $475,860
2. The capital budgeting method that recognizes the time value of money by discounting cash flows over the life of the project, using the company's required rate of return as the discount rate is called the:
A. the internal rate of return method.
B. the payback method.
C. simple rate of return method.
D. the net present value method.
3. The management of Serpas Corporation is considering the purchase of a machine that would cost $190,000, would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by $43,000 per year. The company requires a minimum pretax return of 10% on all investment projects. (Ignore income taxes.)
Determine the appropriate discount factor(s) using tables.
The net present value of the proposed project is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)
A. $25,000
B. -$26,987
C. -$42,334
D. $35,907
4. An investment project for which the net present value is $300 would result in which of the following conclusions?
A. The rate of return of the investment project is greater than the required rate of return.
B. The net present value is too small; the project should be rejected.
C. The investment project should only be accepted if net present value is zero; a positive net present value indicates an error in the estimates associated with the analysis of this investment.
D. The net present value method is not suitable for evaluating this project; the internal rate of return method should be used.
5. If the internal rate of return is used as the discount rate in computing net present value, the net present value will be:
A. zero.
B. negative.
C. positive.
D. unknown.
6. Deibel Corporation is considering a project that would require an investment of $63,000. No other cash outflows would be involved. The present value of the cash inflows would be $79,380. The profitability index of the project is closest to: (Ignore income taxes.) (Round your answer to 2 decimal places.)
A. 0.74
B. 0.26
C. 0.21
D. 1.26
7. Gull Inc. is considering the acquisition of equipment that costs $510,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are: (Ignore income taxes.)
Incremental net
cash flows
Year 1 $134,000
Year 2 $180,000
Year 3 $145,000
Year 4 $154,000
Year 5 $144,000
Year 6 $124,000
Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using tables.
If the discount rate is 13%, the net present value of the investment is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)
A. $82,129
B. $141,677
C. $595,261
D. $445,000
8. The Higgins Company has just purchased a piece of equipment at a cost of $310,000. This equipment will reduce operating costs by $50,000 each year for the next twelve years. This equipment replaces old equipment which was sold for $10,000 cash. The new equipment has a payback period of:
A. 6.2 years
B. 12.0 years
C. 18.0 years
D. 6.0 years
9. The length of time required to recover the initial cash outlay for a project is determined by using the:
A. the payback method.
B. discounted cash flow method.
C. the simple rate of return method.
D. the net present value method.
10. A piece of new equipment will cost $70,000. The equipment will provide a cost savings of $15,000 per year for ten years, after which it will have a $3,000 salvage value. If the required rate of return is 14%, the equipment's net present value is: (Ignore income taxes.)
A. $(8,240)
B. $9,050
C. $23,888
D. $8,240