- Which of the following capital budgeting methods considers cash flows, but not the time value of money?
- Which of the following equations can be used in certain situations to calculate the payback period?
- A company’s cost of capital is
4. Which of the following equations is used to calculate the profitability index?
- Assume the following information for a capital budgeting proposal with a five-year time horizon:
| Initial investment: | |
| Cost of equipment (zero salvage value) | $ 590,000 |
| Annual revenues and costs: | |
| Sales revenues | $ 300,000 |
| Variable expenses | $ 130,000 |
| Depreciation expense | $ 50,000 |
| Fixed out-of-pocket costs | $ 40,000 |
The payback period for this investment is closest to:
- Assume that a company is considering purchasing a machine for $50,000 that will have a five-year useful life and a $5,000 salvage value. The machine will lower operating costs by $16,750 per year. The company’s required rate of return is 17%. The net present value of this investment is closest to:
Click here to view Exhibit 12B-1and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.
- Assume that a company is considering buying a new piece of equipment for $240,000 that would have a useful life of five years and no salvage value. The equipment would generate the following estimated annual revenues and expenses:
| Revenues | $ 128,100 | |
| Less operating expenses: | ||
| Commissions | $ 15,000 | |
| Insurance | 5,000 | |
| Depreciation | 48,000 | |
| Maintenance | 30,000 | 98,000 |
| Net operating income | $ 30,100 |
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.
The internal rate of return for this investment is closest to:
- Assume that a company is considering purchasing a new piece of equipment for $240,000 that would have a useful life of 10 years and no salvage value. The new equipment would cost $20,000 per year to operate and it would replace an old piece of equipment that costs $56,500 per year to operate. The old equipment currently being used could be sold for a salvage value of $40,000. The simple rate of
- Assume that a company is choosing between two alternatives—keep an existing machine or replace it with a new machine. The costs associated with the two alternatives are summarized as follows:
| Existing Machine | New Machine | |
| Purchase cost (new) | $ 15,000 | $ 22,000 |
| Remaining book value | $ 6,000 | |
| Overhaul needed now | $ 5,000 | |
| Annual cash operating costs | $ 11,500 | $ 7,000 |
| Salvage value (now) | $ 2,000 | |
| Salvage value (eight years from now) | $ 1,000 | $ 6,000 |
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.
If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Assuming a discount rate of 16%, what is the net present value of the cash flows associated with keeping the existing machine?
- Assume the following information for a capital budgeting proposal with a five-year time horizon:
| Initial investment: | |
| Cost of equipment (zero salvage value) | $ 360,000 |
| Annual revenues and costs: | |
| Sales revenues | $ 300,000 |
| Variable expenses | $ 130,000 |
| Depreciation expense | $ 50,000 |
| Fixed out-of-pocket costs | $ 40,000 |
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.
Assuming a discount rate of 12%, this proposal’s profitability index is closest to: