The Finney Company is reviewing the possibility of remodeling one of its
showrooms and buying some new equipment to improve sales operations. The
remodeling would cost $120,000 now and the useful life of the project is 10
years. Additional working capital needed immediately for this project would be
$30,000; the working capital would be released for use elsewhere at the end of
the 10-year period. The equipment and other materials used in the project would
have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
|
85.
B
Easy
Refer To: 14-6
|
The immediate cash outflow required for this project would be:
a. $(120,000).
b. $(150,000).
c. $(90,000).
d. $(130,000).
|
|
86.
D
Hard
Refer To: 14-6
|
What would the annual net cash inflows from this project have to be in
order to justify investing in remodeling?
a. $14,495
b. $35,842
c. $16,147
d. $29,158
|
Reference: 14-7
(Ignore income taxes in this problem.)
The Sawyer Company 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
... $80,000 --
Working capital requirement
.... -- $80,000
Annual cash operating inflows
.. $23,000 $18,000
Salvage value in 5 years
....... $ 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%.
|
87.
D
Medium
Refer To: 14-7
|
The net present value of project X is:
a. $2,915.
b. $(11,708).
c. $5,283.
d. $6,317.
|
|
88.
B
Medium
Refer To: 14-7
|
The net present value of project Y is closest to:
a. $15,110.
b. $30,250.
c. $11,708.
d. $(11,708).
|
Reference: 14-8
(Ignore income taxes in this problem.) The Becker Company is interested
in buying a piece of equipment that it needs. The following data have been
assembled concerning this equipment:
Cost of required equipment
.......... $250,000
Working capital required
............ $100,000
Annual operating cash
inflows........ $ 80,000
Cash repair at end of 4 years
....... $ 40,000
Salvage value at end of 6
years ..... $ 90,000
This equipment is expected to have a useful life of 6 years. At the end
of the sixth year the working capital would be released for use elsewhere. The
company's discount rate is 10%.
|
89.
C
Easy
Refer To: 14-8
|
The present value of all future operating cash inflows is closest to:
a. $480,000.
b. $452,300.
c. $348,400.
d. $278,700.
|
|
90.
B
Easy
Refer To: 14-8
|
The present value of the net cash flows (all cash inflows less all cash
outflows) occurring during year 4 is:
a. $40,000.
b. $27,320.
c. $54,640.
d. $42,790.
|
|
91.
D
Medium
Refer To: 14-8
|
The present value of the net cash flows (all cash inflows less all cash
outflows) occurring during year 6 is closest to:
a. $270,000.
b. $195,900.
c. $107,200.
d. $152,300.
|
Reference: 14-9
(Ignore income taxes in this problem.) UR Company is considering
rebuilding and selling used alternators for automobiles. The company estimates
that the net operating cash flows (sales less cash operating expenses) arising from
the rebuilding and sale of the used alternators would be as follows (numbers in
parentheses indicate an outflow):
Years 1 - 10 ... $ 90,000
Year 11 ........ (20,000)
Year 12 ........ 100,000
In addition to the above net operating cash flows, UR Company would
purchase production equipment costing $200,000 now to use in the rebuilding of
the alternators. The equipment would have a 12-year life and a $15,000 salvage
value. The company's discount rate is 10%.
|
92.
C
Medium
Refer To: 14-9
|
The present value of the net operating cash flows (sales less cash
operating expenses) arising from the rebuilding and sale of the alternators
(rounded to the nearest dollar) is:
a. $582,735.
b. $596,735.
c. $577,950.
d. $591,950.
|
|
93.
B
Medium
Refer To: 14-9
|
The net present value of all
cash flows associated with this investment (rounded to the nearest dollar)
is:
a. $377,950.
b. $382,735.
c. $392,950.
d. $362,950.
|
Reference: 14-10
(Ignore income taxes in this problem.) 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 Proposed New
System System
Purchase cost new ....................... $250,000 $300,000
Accumulated depreciation ................ $240,000 -
Overhaul costs needed now ............... $230,000 -
Annual cash operating costs ............. $180,000 $170,000
Salvage value now ....................... $160,000 -
Salvage value at the end of 8 years ..... $152,000 $165,000
Working capital required ................ -
$200,000
Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both
alternatives are expected to have a useful life of eight years.
|
94.
B
Hard
Refer To: 14-10
|
The net present value of the alternative of overhauling the present
system is:
a. $(1,279,316).
b. $(1,119,316).
c. $801,284.
d. $(1,194,036).
|
|
95.
A
Hard
Refer To: 14-10
|
The net present value of the alternative of purchasing the new system
is:
a. $(1,076,495).
b. $(1,236,495).
c. $(1,169,895).
d. $(969,895).
|
Reference: 14-11
(Ignore income taxes in this problem.) Lambert Manufacturing has $60,000
to invest in either Project A or Project B. The following data are available on
these projects:
Project
A Project B
Cost of equipment needed now .............. $120,000 $70,000
Working capital investment needed now ..... -
$50,000
Annual net operating cash inflows ......... $ 50,000 $45,000
Salvage value of equipment in 6 years ..... $ 15,000 -
Both projects have a useful life of 6 years. At the end of 6 years, the
working capital investment will be released for use elsewhere. Lambert's
discount rate is 14%.
|
96.
D
Medium
Refer To: 14-11
|
The net present value of Project A is closest to:
a. $82,241.
b. $67,610.
c. $74,450.
d. $81,290.
|
|
97.
A
Medium
Refer To: 14-11
|
The net present value of Project B is closest to:
a. $77,805.
b. $127,805.
c. $55,005.
d. $105,005.
|
|
98.
C
Medium
Refer To: 14-11
|
Which of the following statements is (are) correct?
I. Project A is acceptable
according to the net present value
method.
II. Project A has an internal
rate of return greater than 14%.
a. Only I.
b. Only II.
c. Both I and II.
d. Neither I nor II.
|
Reference: 14-12
(Ignore income taxes in this problem.) Fast Food, Inc., has purchased a
new donut maker. It cost $16,000 and has an estimated life of 10 years. The
following annual donut sales and expenses are projected:
Sales
..................... $22,000
Expenses:
Flour, etc., required
in making donuts ...
$10,000
Salaries
............... 6,000
Depreciation
........... 1,600
17,600
Net income
................ $ 4,400
|
99.
B
Medium
Refer To: 14-12
|
The payback period on the new machine is closest to:
a. 5 years.
b. 2.7 years.
c. 3.6 years.
d. 1.4 years.
|
|
100.
C
Easy
Refer To: 14-12
|
The simple rate of return for the new machine is closest to:
a. 20%.
b. 37.5%.
c. 27.5%.
d. 80.0%.
|
Reference: 14-13
(Ignore income taxes in this problem.) Purvell Company has just acquired
a new machine. Data on the machine follow:
Purchase cost ............
$50,000
Annual cost savings ...... 15,000
Life of the machine ...... 8
years
The company uses straight-line depreciation and a $5,000 salvage value.
(The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout
a year.
|
101.
A
Easy
Refer To: 14-13
|
The payback period would be closest to:
a. 3.33 years.
b. 3.0 years.
c. 8.0 years.
d. 2.9 years.
|
|
102.
C
Medium
Refer To: 14-13
|
The simple rate of return would be closest to:
a. 30.0%.
b. 17.5%.
c. 18.75%.
d. 12.5%.
|
Reference: 14-14
(Ignore income taxes in this problem.) Hanley Company purchased a machine
for $125,000 that will be depreciated on the straight-line basis over a
five-year period with no salvage value. The related cash flow from operations
is expected to be $45,000 a year. These cash flows from operations occur
uniformly throughout the year.
|
103.
C
Easy
CPA adapted
Refer To: 14-14
|
What is the payback period?
a. 2.1 years.
b. 2.3 years.
c. 2.8 years.
d. 4.2 years.
|
|
104.
A
Easy
CPA adapted
Refer To: 14-14
|
What is the simple rate of return on the initial investment?
a. 16%.
b. 24%.
c. 28%.
d. 36%.
|
Essay
|
105.
Medium
|
(Ignore income taxes in this problem.) Prince Company’s required rate
of return is 10%. The company is considering the purchase of three machines,
as indicated below. Consider each machine independently.
Required:
a. Machine A will cost $25,00 and have a life of 15 years. Its salvage value will be $1,000, and cost
savings are projected at $3,500 per
year. Compute the machine’s net present value.
b. How much will Prince Company be willing to pay for Machine B if the machine promises annual cash inflows
of $5,000 per year for 8 years?
c. Machine C has a projected life of 10 years. What is the machine's internal rate of return if it
costs $30,000 and will save $6,000
annually in cash operating costs? Interpolate
to the nearest tenth of a percent. Would you recommend
purchase? Explain.
|
|
|
Answer:
a.
10% Present
Year Amount Factor
Value
Investment required now
($25,000) 1.000 ($25,000)
Annual cost savings 1-15
3,500 7.606 26,621
Salvage value ..... 15
1,000 0.239 239
Net present value $ 1,860
|
|
|
b.
10% Present
Year Amount
Factor Value
Annual cash inflows 1-8
$ 5,000 5.335 $26,675
Since the present value of the cash inflows is $26,675, the company
should be willing to pay up to this amount to acquire the machine.
|
|
|
c. Investment required ÷ Net annual cash
flow = Factor of the
internal rate of return
$30,000 ÷ %6,000 = 5.000
14% factor ............
5.216 5.216
True factor ........... 5.000
16% factor ............ 4.833
0.216 0.383
14% + 2%(0.216 ÷ 0.383) = 15.1%
The machine should be purchased, since the
internal rate of return is greater than the required rate of return.
|
|
106.
Medium
|
Ignore income taxes in this problem.) Ursus, Inc., is considering a
project that would have a ten-year life and would require a $1,000,000
investment in equipment. At the end of ten years, the project would terminate
and the equipment would have no salvage value. The project would provide net
income each year as follows:
Sales
................................ $2,000,000
Less variable expenses
............... 1,400,000
Contribution margin
.................. 600,000
Less fixed expenses
.................. 400,000
Net income
........................... $ 200,000
All of the above items, except for depreciation of $100,000 a year,
represent cash flows. The depreciation is included in the fixed expenses. The
company's required rate of return is 12%.
|
|
|
Required:
a. Compute the project's net present value.
b. Compute the project's internal rate of return, interpolating to the nearest tenth of a percent.
c. Compute the project's payback period.
d. Compute the project's simple rate of return.
|
|
|
Answer:
a. Since depreciation is the only noncash
item on the income
statement,
the net annual cash flow can be computed by adding back depreciation to net income.
Net income .............
$200,000
Depreciation ........... 100,000
Net annual cash flow ... $300,000
12% Present
Years Amount Factor Value
Initial investment .. Now
$(1,000,000) 1.000 $(1,000,000)
Net annual cash
flows ............. 1-10
300,000 5.650 1,695,000
Net present value $
695,000
|
|
|
b. The formula for computing the factor of the internal rate of return (IRR) is:
Investment required ÷ Net
annual cash inflow = Factor of the IRR
$1,000,000 ÷ $300,000 = 3.333
26% factor ........
3.465 3.465
True factor ....... 3.333
28% factor ........ 3.269
0.132 0.196
26% + 2%(0.132 ÷0.196) =
27.3%
|
|
|
c. The formula for the payback period is:
Investment required ÷ Net
annual cash inflow = Payback
period
$1,000,000 ÷ $300,000 = 3.33
years
d. The formula for the simple rate of return is:
Net income ÷ Initial
investment = Simple rate of return
$200,000 ÷ $1,000,000 = 20.0%
|
|
107.
Medium
|
(Ignore income taxes in this problem.)
The following data concern an investment project:
Investment in equipment
........... $16,000
Net annual cash inflows
........... $ 3,600
Working capital required .......... $ 4,500
Salvage value of the
equipment .... $ 2,000
Life of the project
............... 12 years
Discount rate
..................... 14%
The working capital will be released for use elsewhere at the
conclusion of the project.
|
|
|
Required:
Compute the project's net present value.
Answer:
14% Present
Item
Years Amount Factor
Value
Investment
now ($16,000) 1.000
($16,000)
Annual cash
inflows ...............
1-12 3,600 5.660
20,376
Working capital
required .............. now
(4,500) 1.000 (4,500)
Working capital
released .............. 12
4,500 0.208 936
Salvage value
equipment ............. 12
2,000 0.208 416
Net present value ....... $ 1,228
|
|
108.
Medium
|
(Ignore income taxes in this problem.) Bradley Company's required rate
of return is 14%. The company has an opportunity to be the exclusive
distributor of a very popular consumer item. No new equipment would be
needed, but the company would have to use one-fourth of the space in a
warehouse it owns. The warehouse cost $200,000 new. The warehouse is currently
half-empty and there are no other plans to use the empty space. In addition,
the company would have to invest $100,000 in working capital to carry
inventories and accounts receivable for the new product line. The company
would have the distributorship for only 5 years. The distributorship would
generate a $17,000 net annual cash inflow.
Required:
What is the net present value of the project at a discount rate of 14%?
Should the project be accepted?
Answer:
14% Present
Years Amount
Factor Value
Working capital investment Now
$(100,000) 1.000 $(100,000)
Annual cash inflows ...... 1-5
17,000 3.433 58,361
Working capital released 5
100,000 0.519
51,900
Net present value ........ $ 10,261
Yes, the distributorship should be accepted since the project has a
positive net present value.
|
|
109.
Medium
|
(Ignore income taxes in this problem.) Monson Company is considering
three investment opportunities with cash flows as described below:
Project A: Cash investment now
..................... $15,000
Cash inflow at the
end of 5 years ....... $21,000
Cash inflow at the
end of 8 years ....... $21,000
Project B: Cash investment now
..................... $11,000
Annual cash outflow
for 5 years ......... $ 3,000
Additional cash
inflow at the end
of 5 years
............................ $21,000
Project C: Cash investment now
..................... $21,000
Annual cash inflow
for 4 years .......... $11,000
Cash outflow at the
end of 3 years ...... $ 5,000
Additional cash
inflow at the end
of 4 years ............................
$15,000
|
|
|
Required:
Compute the net present value of each
project assuming Monson Company uses a 12% discount rate.
Answer:
Project A:
12% Present
Amount Factor Value
Cash investment now.............. ($15,000)
1.000 ($15,000)
Cash inflow at the end of 5 years $21,000
0.567 $11,907
Cash inflow at the end of 8 years $21,000
0.404 $ 8,484
Net present value................ $ 5,391
|
|
|
Project B:
12% Present
Amount Factor Value
Cash investment now.............. ($11,000)
1.000 ($11,000)
Annual cash outflow for 5 years.. ($ 3,000)
3.605 ($10,815)
Additional cash inflow at the
end of 5 years...............
$21,000 0.567 $11,907
Net present value................ ($ 9,908)
Project C:
12% Present
Amount Factor Value
Cash investment now.............. ($21,000)
1.000 ($21,000)
Annual cash inflow for 4 years... $11,000
3.037 $33,407
Cash outflow at the end of
3
years........................ ($
5,000) 0.712 ($ 3,560)
Additional cash inflow at the
end
of 4 years.................
$15,000 0.636 $ 9,540
Net present value................ $18,387
|
|
110.
Medium
|
(Ignore income taxes in this problem.) Jim Bingham is considering
starting a small catering business. He would need to purchase a delivery van
and various equipment costing $125,000 to equip the business and another
$60,000 for inventories and other working capital needs. Rent for the
building used by the business will be $35,000 per year. Jim's marketing
studies indicate that the annual cash inflow from the business will amount to
$120,000. In addition to the building rent, annual cash outflow for operating
costs will amount to $40,000. Jim wants to operate the catering business for
only six years. He estimates that the equipment could be sold at that time
for 4% of its original cost. Jim uses a 16% discount rate.
Required:
Would you advise Jim to make this
investment?
|
|
|
Answer:
16% Present
Description Years Amount Factor Value
Van & equipment ..... 0
($125,000) 1.000 ($125,000)
Working capital ..... 0
($ 60,000) 1.000
($ 60,000)
Building rent ....... 1-6
($ 35,000) 3.685 ($128,975)
Net annual cash
inflow ............ 1-6 $ 80,000 3.685
$294,800
Salvage value,
equipment ......... 6 $
5,000 0.410 $
2,050
Release of working
capital ........... 6 $ 60,000 0.410
$ 24,600
Net present value $ 7,475
|
No comments:
Post a Comment