40. (Ignore income taxes in this problem.) Nevland
Corporation is considering the purchase of a machine that would cost $130,000
and would last for 6 years. At the end of 6 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 $44,000. The company requires a
minimum pretax return of 19% on all investment projects. The net present value
of the proposed project is closest to:
A) $38,040
B) $26,376
C) $74,902
D) $20,040
Ans: B AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
|
|
Year(s)
|
Amount
|
19%
Factor
|
PV
|
|
Initial investment...............
|
Now
|
($130,000)
|
1.000
|
($130,000)
|
|
Annual cost savings...........
|
1-6
|
$44,000
|
3.410
|
150,040
|
|
Salvage value.....................
|
6
|
$18,000
|
0.352
|
6,336
|
|
Net present value...............
|
|
|
|
$ 26,376
|
41. (Ignore
income taxes in this problem) The management of Penfold Corporation is
considering the purchase of a machine that would cost $440,000, would last for
7 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 16% on all investment projects. The net present value of the proposed
project is closest to:
A) -$28,022
B) $96,949
C) -$79,196
D) $274,000
Ans: A AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
|
|
Year(s)
|
Amount
|
16%
Factor
|
PV
|
|
Initial investment...............
|
Now
|
($440,000)
|
1.000
|
($440,000)
|
|
Annual cost savings...........
|
1-7
|
$102,000
|
4.039
|
411,978
|
|
Net present value...............
|
|
|
|
($ 28,022)
|
42. (Ignore
income taxes in this problem.) Dowlen, Inc., is considering the purchase of a
machine that would cost $150,000 and would last for 6 years. At the end of 6 years,
the machine would have a salvage value of $23,000. The machine would reduce
labor and other costs by $36,000 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 12% on all investment projects. The net present value of the proposed
project is closest to:
A) $9,657
B) -$2,004
C) $6,699
D) $13,223
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
|
|
Year(s)
|
Amount
|
12%
Factor
|
PV
|
|
Initial investment...............
|
Now
|
($150,000)
|
1.000
|
($150,000)
|
|
Working capital needed.....
|
Now
|
($6,000)
|
1.000
|
(6,000)
|
|
Annual cost savings...........
|
1-6
|
$36,000
|
4.111
|
147,996
|
|
Working capital released...
|
6
|
$6,000
|
0.507
|
3,042
|
|
Salvage value.....................
|
6
|
$23,000
|
0.507
|
11,661
|
|
Net present value...............
|
|
|
|
$ 6,699
|
43. (Ignore
income taxes in this problem.) The Poteran Company is considering a machine
that will save $3,000 a year in cash operating costs each year for the next six
years. At the end of six years it would have no salvage value. If this machine
costs $9,060 now, the machine's internal rate of return is closest to:
A) 18%
B) 20%
C) 22%
D) 24%
Ans: D AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Factor of the internal rate of
return
= Investment required ÷ Net annual
cash inflow = $9,060 ÷ $3,000 = 3.020
The factor of 3.020 for 6 years
represents an internal rate of return of 24%.
44. (Ignore
income taxes in this problem) The management of Elamin Corporation is
considering the purchase of a machine that would cost $365,695 and would have a
useful life of 9 years. The machine would have no salvage value. The machine
would reduce labor and other operating costs by $61,000 per year. The internal
rate of return on the investment in the new machine is closest to:
A) 9%
B) 11%
C) 12%
D) 10%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Factor of the internal rate of
return
= Investment required ÷ Net annual
cash inflow = $365,695 ÷ $61,000 = 5.995
The factor of 5.995 for 9 years
represents an internal rate of return of 9%.
45. (Ignore
income taxes in this problem.) Bau Long-Haul, Inc., is considering the purchase
of a tractor-trailer that would cost $281,656, would have a useful life of 7
years, and would have no salvage value. The tractor-trailer would be used in
the company's hauling business, resulting in additional net cash inflows of
$76,000 per year. The internal rate of return on the investment in the
tractor-trailer is closest to:
A) 19%
B) 18%
C) 21%
D) 16%
Ans: A AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Factor of the internal rate of
return
= Investment required ÷ Net annual
cash inflow = $281,656 ÷ $76,000 = 3.706
The factor of 3.706 for 7 years
represents an internal rate of return of 19%.
46. (Ignore
income taxes in this problem.) Golab Roofing is considering the purchase of a
crane that would cost $69,846, would have a useful life of 6 years, and would
have no salvage value. The use of the crane would result in labor savings of
$21,000 per year. The internal rate of return on the investment in the crane is
closest to:
A) 18%
B) 20%
C) 19%
D) 17%
Ans: B AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Factor of the internal rate of
return
= Investment required ÷ Net annual
cash inflow = $69,846 ÷ $21,000 = 3.326
The factor of 3.326 for 6 years
represents an internal rate of return of 20%.
47. (Ignore
income taxes in this problem) Boe Corporation is investigating buying a small
used aircraft for the use of its executives. The aircraft would have a useful
life of 9 years. The company uses a discount rate of 10% in its capital
budgeting. The net present value of the investment, excluding the salvage value
of the aircraft, is -$439,527. Management is having difficulty estimating the
salvage value of the aircraft. 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) $439,527
B) $43,953
C) $4,395,270
D) $1,036,620
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
= $439,527 ÷ 0.424 = $1,036,613
(answer is slightly off due to rounding)
48. (Ignore
income taxes in this problem) The management of Byrge Corporation is investigating
buying a small used aircraft to use in making airborne inspections of its
above-ground pipelines. The aircraft would have a useful life of 8 years. The
company uses a discount rate of 10% in its capital budgeting. The net present
value of the investment, excluding the intangible benefits, is -$448,460. To
the nearest whole dollar how large would the annual intangible benefit have to
be to make the investment in the aircraft financially attractive?
A) $44,846
B) $56,058
C) $84,060
D) $448,460
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
= $448,460 ÷ 5.335 = $84,060
49. (Ignore
income taxes in this problem) The management of Osborn Corporation is
investigating an investment in equipment that would have a useful life of 8
years. The company uses a discount rate of 12% in its capital budgeting. The
net present value of the investment, excluding the annual cash inflow, is
-$401,414. 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) $48,170
B) $50,177
C) $80,800
D) $401,414
Ans: C AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Minimum annual cash flows
= Negative net present value to be
offset ÷ Present value factor
= $401,414 ÷ 4.968 = $80,800
50. (Ignore
income taxes in this problem.) Croce, Inc., is investigating an investment in
equipment that would have a useful life of 7 years. The company uses a discount
rate of 8% in its capital budgeting. The net present value of the investment,
excluding the salvage value, is -$515,967. 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) $41,277
B) $885,021
C) $515,967
D) $6,449,588
Ans: B 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
= $515,967 ÷ 0.583 = $885,021
51. A
project has an initial investment of $100,000 and a project profitability index
of 0.15. The discount rate is 12%. The net present value of the project is
closest to:
A) $15,000
B) $115,000
C) $112,000
D) $12,000
Ans: A AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium Source: CMA, adapted
Solution:
Project profitability index = Net
present value ÷ Investment required
0.15 = Net present value ÷ $100,000
Net present value = $15,000
52. A
company is pondering an investment project that has an internal rate of return
which is equal to the company's discount rate. The project profitability index
of this investment project is:
A) 0.0
B) 0.5
C) 1.0
D) 1.5
Ans: A AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
53. (Ignore
income taxes in this problem.) The management of Solar Corporation is
considering the following three investment projects:
|
|
|
Project
L
|
Project
M
|
Project
N
|
|
|
Investment required.......................
|
$37,000
|
$55,000
|
$82,000
|
|
|
Present value of cash inflows........
|
$38,480
|
$62,150
|
$90,200
|
Rank the projects according to the
profitability index, from most profitable to least profitable.
A) M,N,L
B) L,N,M
C) N,L,M
D) N,M,L
Ans: A AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
|
|
Project
L
|
Project
M
|
Project
N
|
|
Investment required (a)........................
|
($37,000)
|
($55,000)
|
($82,000)
|
|
Present value of cash inflows...............
|
38,480
|
62,150
|
90,200
|
|
Net present value (b)............................
|
$ 1,480
|
$ 7,150
|
$ 8,200
|
|
Project profitability index (b) ÷ (a)......
|
0.04
|
0.13
|
0.10
|
|
Ranked by project profitability index..
|
3
|
1
|
2
|
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