Trovato Corporation is considering a project that would require an investment of

54. (Ignore income taxes in this problem.) Trovato 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 $51,840. The profitability index of the project is closest to:

            A)      0.07

            B)      0.08

            C)      0.92

            D)      1.08

           

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

            Solution:

           

	Project Q
Investment required (a)........................	($48,000)
Present value of cash inflows...............	51,840
Net present value (b)............................	$  3,840
Project profitability index (b) ÷ (a)......	0.08

      55. (Ignore income taxes in this problem.) Ryner Corporation is considering three investment projects-S, T, and U. Project S would require an investment of $20,000, Project T of $69,000, and Project U of $83,000. No other cash outflows would be involved. The present value of the cash inflows would be $23,200 for Project S, $77,970 for Project T, and $94,620 for Project U. Rank the projects according to the profitability index, from most profitable to least profitable.

            A)      U,T,S

            B)      T,S,U

            C)      U,S,T

            D)      S,U,T

           

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

            Solution:

           

	Project S	Project T	Project U
Investment required (a)........................	($20,000)	($69,000)	($83,000)
Present value of cash inflows...............	23,200	77,970	94,620
Net present value (b)............................	$  3,200	$  8,970	$11,620
Project profitability index (b) ÷ (a)......	0.16	0.13	0.14
Ranked by project profitability index..	1	3	2

      56. (Ignore income taxes in this problem.) The management of Leitheiser Corporation is considering a project that would require an initial investment of $51,000. No other cash outflows would be required. The present value of the cash inflows would be $57,630. The profitability index of the project is closest to:

            A)      1.13

            B)      0.87

            C)      0.13

            D)      0.12

           

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

            Solution:

           

	Project Q
Investment required (a)........................	($51,000)
Present value of cash inflows...............	57,630
Net present value (b)............................	$  6,630
Project profitability index (b) ÷ (a)......	0.13

      57. (Ignore income taxes in this problem.) Olinick Corporation is considering a project that would require an investment of $343,000 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...................................	$227,000
	Variable expenses..............	52,000
	Contribution margin..........	175,000
	Fixed expenses:
	Salaries...........................	27,000
	Rents...............................	41,000
	Depreciation...................	40,000
	Total fixed expenses..........	108,000
	Net operating income........	$  67,000

            The scrap value of the project's assets at the end of the project would be $23,000. The payback period of the project is closest to:

            A)      3.0 years

            B)      5.1 years

            C)      3.2 years

            D)      4.8 years

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  5     Level:  Easy

            Solution:

            Net annual cash flow = Net operating income + Depreciation

            = $67,000 + $40,000 = $107,000

            Payback period = Investment required ÷ Net annual cash flow

            = $343,000 ÷ $107,000 = 3.2 years

           

            In this case the salvage value plays no part in the payback period since all of the investment is recovered before the end of the project.

      58. (Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $263,000 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The payback period of the project is closest to:

            A)      3.8 years

            B)      2.6 years

            C)      2.7 years

            D)      4.0 years

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  5     Level:  Easy

            Solution:

            Net annual cash flow = Net operating income + Depreciation

            = $66,000 + $31,000 = $97,000

            Payback period = Investment required ÷ Net annual cash flow

            = $263,000 ÷ $97,000 = 2.7 years

           

            In this case the salvage value plays no part in the payback period since all of the investment is recovered before the end of the project.

      59. (Ignore income taxes in this problem.) Slomkowski Corporation is contemplating purchasing equipment that would increase sales revenues by $298,000 per year and cash operating expenses by $143,000 per year. The equipment would cost $712,000 and have a 8 year life with no salvage value. The annual depreciation would be $89,000. The simple rate of return on the investment is closest to:

            A)      9.3%

            B)      21.8%

            C)      22.1%

            D)      12.5%

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  6     Level:  Easy

            Solution:

           

            The simple rate of return is computed as follows:

	Cost of machine, net of salvage value (a)..........	$712,000
	Useful life (b).....................................................	8 years
	Annual depreciation (a) ÷ (b).............................	$89,000
	Annual incremental revenue ($298,000 − $143,000)........................................................	$155,000
	Less annual depreciation....................................	89,000
	Annual incremental net operating income.........	$  66,000

Simple rate of return = Annual incremental net operating income ÷ Initial investment = $66,000 ÷ $712,000 = 9.3%

      60. (Ignore income taxes in this problem.) The management of Plotnik Corporation is investigating purchasing equipment that would increase sales revenues by $269,000 per year and cash operating expenses by $156,000 per year. The equipment would cost $294,000 and have a 6 year life with no salvage value. The simple rate of return on the investment is closest to:

            A)      16.7%

            B)      38.4%

            C)      23.8%

            D)      21.8%

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  6     Level:  Easy

            Solution:

           

            The simple rate of return is computed as follows:

	Cost of machine, net of salvage value (a).........................	$294,000
	Useful life (b)....................................................................	6 years
	Annual depreciation (a) ÷ (b)............................................	$49,000
	Annual incremental revenue ($269,000 − $156,000)........	$113,000
	Less annual depreciation...................................................	49,000
	Annual incremental net operating income........................	$  64,000

Simple rate of return = Annual incremental net operating income ÷ Initial investment = $64,000 ÷ $294,000 = 21.8%

      61. (Ignore income taxes in this problem.) An expansion at Fey, Inc., would increase sales revenues by $150,000 per year and cash operating expenses by $47,000 per year. The initial investment would be for equipment that would cost $328,000 and have a 8 year life with no salvage value. The annual depreciation on the equipment would be $41,000. The simple rate of return on the investment is closest to:

            A)      41.3%

            B)      18.9%

            C)      12.5%

            D)      31.4%

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  6     Level:  Easy

            Solution:

           

            The simple rate of return is computed as follows:

	Annual incremental revenue ($150,000 − $47,000)............	$103,000
	Less annual depreciation......................................................	41,000
	Annual incremental net operating income...........................	$  62,000

Simple rate of return = Annual incremental net operating income ÷ Initial investment = $62,000 ÷ $328,000 = 18.9%