Cabe Corporation uses a discount rate of 18% in its capital budgeting.

Cabe Corporation uses a discount rate of 18% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 7 years has thus far yielded a net present value of -$155,606. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment.

    109. Ignoring any salvage value, to the nearest whole dollar how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

            A)      $40,820

            B)      $22,229

            C)      $28,009

            D)      $155,606

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  3     Level:  Easy

            Solution:

            Minimum annual cash flows from the intangible benefits

            = Negative net present value to be offset ÷ Present value factor

            = $155,606 ÷ 3.812 = $40,820

    110. Ignoring any cash flows from intangible benefits, to the nearest whole dollar how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

            A)      $495,561

            B)      $28,009

            C)      $155,606

            D)      $864,478

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  3     Level:  Easy

            Solution:

            Minimum salvage value

            = Negative net present value to the offset ÷ Present value factor

            = $155,606 ÷ 0.314 = $495,561

Use the following to answer questions 111-112:

(Ignore income taxes in this problem.) The management of Hansley Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 18% in its capital budgeting. Good estimates are available for the initial investment and the annual cash operating outflows, but not for the annual cash inflows and the salvage value of the equipment. The net present value of the initial investment and the annual cash outflows is -$273,300.

    111. Ignoring any salvage value, to the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?

            A)      $54,660

            B)      $49,194

            C)      $87,400

            D)      $273,300

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  3     Level:  Easy

            Solution:

            Minimum annual cash flows from the intangible benefits

            = Negative net present value to be offset ÷ Present value factor

            = $273,300 ÷ 3.127 = $87,400

    112. Ignoring the cash inflows, to the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive?

            A)      $625,400

            B)      $1,518,333

            C)      $273,300

            D)      $49,194

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  3     Level:  Easy

            Solution:

            Minimum salvage value

            = Negative net present value to the offset ÷ Present value factor

            = $273,300 ÷ 0.437 = $625,400

Use the following to answer questions 113-114:

(Ignore income taxes in this problem.) Lem Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 11% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is -$317,966. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft.

    113. Ignoring the annual benefit, to the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?

            A)      $2,890,600

            B)      $317,966

            C)      $34,976

            D)      $659,680

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  3     Level:  Easy

            Solution:

            Minimum salvage value

            = Negative net present value to the offset ÷ Present value factor

            = $317,966 ÷ 0.482 = $659,680

    114. Ignoring any salvage value, to the nearest whole dollar how large would the annual benefit have to be to make the investment in the aircraft financially attractive?

            A)      $67,480

            B)      $317,966

            C)      $34,976

            D)      $45,424

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  3     Level:  Easy

            Solution:

            Minimum annual cash flows from the intangible benefits

            = Negative net present value to be offset ÷ Present value factor

            = $317,966 ÷ 4.712 = $67,480

Use the following to answer questions 115-116:

(Ignore income taxes in this problem.) Eddie Corporation is considering the following three investment projects:

		Project C	Project D	Project E
	Investment required.......................	$36,000	$41,000	$85,000
	Present value of cash inflows........	$39,960	$47,560	$92,650

    115. The profitability index of investment project D is closest to:

            A)      0.16

            B)      0.84

            C)      0.14

            D)      1.16

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  4     Level:  Easy

            Solution:

           

	Project D
Investment required (a)........................	($41,000)
Present value of cash inflows...............	47,560
Net present value (b)............................	$  6,560
Project profitability index (b) ÷ (a)......	0.16

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

            A)      E,C,D

            B)      E,D,C

            C)      D,C,E

            D)      C,E,D

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  4     Level:  Medium

            Solution:

           

	Project C	Project D	Project E
Investment required (a)........................	($36,000)	($41,000)	($85,000)
Present value of cash inflows...............	39,960	47,560	92,650
Net present value (b)............................	$  3,960	$  6,560	$  7,650
Project profitability index (b) ÷ (a)......	0.11	0.16	0.09
Ranked by project profitability index..	2	1	3

Use the following to answer questions 117-118:

(Ignore income taxes in this problem.) The management of Hibert Corporation is considering three investment projects-W, X, and Y. Project W would require an investment of $21,000, Project X of $66,000, and Project Y of $95,000. The present value of the cash inflows would be $22,470 for Project W, $73,920 for Project X, and $98,800 for Project Y.

    117. The profitability index of investment project X is closest to:

            A)      0.11

            B)      0.88

            C)      1.12

            D)      0.12

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  4     Level:  Easy

            Solution:

           

	Project X
Investment required (a).....................	($66,000)
Present value of cash inflows............	73,920
Net present value (b).........................	$  7,920
Project profitability index (b) ÷ (a)...	0.12

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

            A)      Y,W,X

            B)      X,Y,W

            C)      X,W,Y

            D)      W,Y,X

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  4     Level:  Medium

            Solution:

           

	Project W	Project X	Project Y
Investment required (a).....................	($21,000)	($66,000)	($95,000)
Present value of cash inflows............	22,470	73,920	98,800
Net present value (b).........................	$  1,470	$  7,920	$  3,800
Project profitability index (b) ÷ (a)...	0.07	0.12	0.04
Ranked by project profitability index	2	1	3