Ch8 PDF

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Professional Exam Adapted
LO6: Simple rate of return
LO5: Payback
LO4: Preference ranking
LO3: Uncertain cash flows
LO2: Internal rate of return
LO1: Net present value
Question
Type
T/F
T/F
T/F
T/F
T/F
T/F
T/F
T/F
T/F
T/F
T/F
T/F
T/F
T/F
Conceptual
M/C
Conceptual
M/C
Conceptual
M/C
Conceptual
M/C
Conceptual
M/C
Conceptual
Difficulty
Chapter 13 - Capital Budgeting
Origin
Authors
Authors
Authors
Authors
Authors
Authors
Authors
Authors
Authors
Authors
Authors
Authors
Authors
Authors
x
x
6/e: 15-33
Authors
6/e: 15-42
Authors
6/e: 14-25
Authors
6/e: 14-31
Authors
M
H
x
x
x
x
7/e: 14-17
8/e: ATB14-19
Authors
David
x
x
4/e:
3/e:
6/e:
4/e:
6/e:
6/e:
6/e:
6/e:
2/e:
2/e:
3/e:
4/e:
6/e:
5/e:
ID
14-843
14-12
14-3
14-831
15-5
15-4
15-13
15-11
14-1
14-4
15-2
15-911
14-13
15-10
M
M
M
E
H
M
M
E
M
E
M
E
E
E
x
x
x
x
x
x
x
x
x
x
x
13-1
CMA/CPA origin
26
27
28
29
30
31
32
M/C
Conceptual
M/C
Conceptual
M/C
Conceptual
M/C
Conceptual
M/C
Conceptual
M/C
Conceptual
M/C
M/C
M/C
M/C
M/C
M/C
M/C
33
34
35
36
21
22
23
24
25
Keyes
E
CM
A
CM
A
CM
A
E
M
H
H
H
M
M
x
x
x
x
x
x
M/C
M/C
M/C
M/C
E
H
M
M
x
x
x
x
37
38
39
M/C
M/C
M/C
E
H
H
x
x
x
40
41
42
43
44
45
46
M/C
M/C
M/C
M/C
M/C
M/C
M/C
E
M
M
M
M
M
E
x
x
x
x
x
CM
A
CM
A
x
x
x
x
x
x
x
13-2
CMA, 12/94, Part 4,

Q23
CMA, 12/93, Part4,
Q13
CMA, 12/93, Part 4,
Q11
CMA
CMA
CMA
4-9-2010 A
E.N.
CMA, 12/93, Part 4, Q1

CMA, 12/94, Part 4,
Q20
5/e: 14-25
9eLD:CH14Q19
5/e: 14-39
3/e: 14-6
12/13/94,J
3/e: 14-20
10/11/2004 Single MC
J4
3/e: 14-15
9eLD:CH14Q15
2/e: 13-16
K4
5/e: 14-47
6/e: 14-47
L4
6/e: 14-34
2/e: 13-2
1/e: 14-15
2/e: 13-9
6/e: 14-33
5/e: 14-24
CMA
CMA
Authors
Authors
Authors
Authors
E.N.
Authors
E.N.
Authors
Authors
Authors
E.N.
Authors
Authors
E.N.
Authors
Authors
Authors
Authors
Authors
Authors
CMA, 12/94, Part 4,

Q23
CMA, 12/93, Part4, Q13
CMA, 12/93, Part 4,
Q11
CMA, 12/93, Part 4, Q1

CMA, 12/94, Part 4,
Q20
47
M/C
48
M/C
49
M/C
50
M/C
51
M/C
52
M/C
53
M/C
54
55
M/C
M/C
E
M
x
x
56
M/C
57
58
59
M/C
M/C
M/C
E
M
E
x
x
x
60
61
62
M/C
M/C
M/C
E
E
H
x
x
63
64
65
M/C
M/C
M/C
E
M
E
x
x
x
66
67
68
69
70
M/C
M/C
M/C
M/C
M/C
E
M
M
H
E
x
x
10/12/2004
N4
10/12/2004
O4
10/12/2004
M4
10/12/2004
P4
10/12/2004
R4
10/12/2004
Q4
10/12/2004
S4
10/13/2004
V4
6/e: 15-41
10/13/2004
W4
10/13/2004
T4
6/e: 15-54
6/e: 15-45
10/13/2004
U4
3/e: 15-19
5/e: 15-26
10/13/2004
X4
3/e: 15-15
4/e: 15-921
10/13/2004
Y4
12/13/94,C
4/e: 15-922
12/13/94,F
10/14/2004
x
x
x
13-3
Single MC
Single MC
Single MC
Single MC
Single MC
Single MC
Single MC
Single MC
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
Authors
Single MC
Single MC
Single MC
Single MC
Single MC
Single MC
E.N.
E.N.
Authors
Authors
E.N.
Authors
Authors
E.N.
Authors
Authors
E.N.
E.N.
Authors
E.N.
E.N.
71
72
73
13-1
13-2
13-3
13-4
13-5
13-6
13-7
13-8
13-9
1310
1311
1312
1313
1314
13-
74
7578
7982
8385
8688
8990
9192
9394
9596
9798
99100
101102
103104
105106
107108
109-
M/C
M/C
M/C
M/C
Multipart
M/C
Multipart
M/C
Multipart
M/C
Multipart
M/C
Multipart
M/C
Multipart
M/C
Multipart
M/C
Multipart
M/C
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M/C
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M/C
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M/C
Multipart
AA4
10/14/2004
AC4
10/14/2004
Z4
10/14/2004
AB4
10/14/2004
AD4
12/13/94,C
E.N.
6/e: 14-19 to 22
Authors
5/e: 14-55 to 57
Authors
Larry
Deppe
E
EM
EH
Single MC
Single MC
Single MC
E.N.
E.N.
E.N.
E.N.
9eLD:CH14Q11-13
10/13/2003 Multi MC
A4
10/13/2003 Multi MC
B4
10/11/2004 Multi MC
H4
M
EH
6/e: 14-51 to 54
Authors
4/e: 14-886 to 889
Authors
10/11/2004 Multi MC I4
E.N.
Authors
6/e: 14-27 to 29
10/11/2004 Multi MC
G4
10/12/2004 Multi MC J4
10/12/2004 Multi MC
K4
10/12/2004 Multi MC
E.N.
E
E
x
x
Single MC
CM
A
CM
A
13-4
CMA
CMA
E.N.
E.N.
E.N.
E.N.
CMA, 12/95, Part 4,

Q12&13
CMA, 12/95, Part 4,
Q12&13

15
1316
1317
1318
1319
110
111112
113114
115116
117118
119
M/C
Multipart
M/C
Multipart
M/C
Multipart
M/C
Multipart
M/C
Problem
120
EM
EM
x
x
M
E
M
Problem
121
Problem
122
123
Problem
Problem
E
M
x
x
124
Problem
125
126
Problem
Problem
M
M
x
x
127
128
Problem
Problem
E
M
x
x
129
130
Problem
Problem
E
E
x
x
131
Problem
132
Problem
133
Problem
134
Problem
135
Problem
L4
10/13/2004 Multi MC
N4
10/13/2004 Multi MC
M4
E.N.
E.N.
5/e: 15-35 to 37
Authors
x
x
x
x
2/e: 14-5 to 6
12/14/94,C
10/14/2003 Problem
N4
10/14/2003 Problem
O4
10/14/2003 Problem
M4
3/e: Problem 14-3
10/11/2004 Problem
R4
Authors
E.N.
9eLD:CH14P2
6/e: Problem 14-1
10/11/2004 Problem
S4
5/e: Problem 14-2
10/11/2004 Problem
T4
10/14/2003 Problem L4
10/12/2004 Problem
W4
10/12/2004 Problem
V4
10/12/2004 Problem
U4
10/12/2004 Problem
X4
10/12/2004 Problem
Z4
13-5
E.N.
E.N.
E.N.
Authors
E.N.
Larry
Deppe
Authors
E.N.
Authors
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.

136
Problem
137
Problem
138
Problem
139
Problem
140
Problem
141
Problem
142
Problem
143
Problem
144
Problem
145
Problem
146
Problem
147
Problem
7/10/2001,I7
10/12/2004 Problem
Y4
10/13/2004 Problem
AA4
10/13/2004 Problem
AB4
10/14/2003 Problem
Q4
10/14/2003 Problem
P4
10/13/2004 Problem
AC4
10/13/2004 Problem
AD4
10/14/2004 Problem
AG4
10/14/2004 Problem
AH4
10/14/2004 Problem
AE4
10/14/2004 Problem
AF4
13-6
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
Chapter 13
Capital Budgeting Decisions
True / False Questions
1. If the internal rate of return exceeds the required rate of return for a project, then the net
present value of that project is positive.
True False
2. In comparing two investment alternatives, the difference between the net present values of
the two alternatives obtained using the total cost approach will be the same as the net present
value obtained using the incremental cost approach.
True False
3. The simple rate of return is the same as the internal rate of return.
True False
4. The internal rate of return for a project is the discount rate that makes the net present value
of the project equal to zero.
True False
5. If two projects require the same amount of investment, then the preference ranking
computed using either the project profitability index or the net present value will be the same.
True False
6. In preference decisions, the profitability index and internal rate of return methods may
produce conflicting rankings of projects.
True False
13-1
7. The project profitability index is used to compare the internal rates of return of two
companies with different investment amounts.
True False
8. Preference decisions attempt to determine which of many alternative investment projects

would be the best for the company to accept.
True False
9. Projects with shorter payback periods are always more profitable than projects with longer
payback periods.
True False
10. One criticism of the payback method is that it ignores cash flows that occur after the
payback point has been reached.
True False
11. A very useful guide for making investment decisions is: The shorter the payback period,
the more profitable the project.
True False
12. If new equipment is replacing old equipment, any salvage received from sale of the old
equipment should not be considered in computing the payback period of the new equipment.
True False
13. The simple rate of return focuses on accounting net operating income rather than on cash
flows.
True False
13-2
14. The simple rate of return method places its focus on cash flows instead of on accounting
net operating income.
True False
Multiple Choice Questions
15. If a company has computed the project profitability index of an investment project as
0.15, then:
A. the project's internal rate of return is less than the discount rate.
B. the project's internal rate of return is greater than the discount rate.
C. the project's internal rate of return is equal to the discount rate.
D. the relation between the rate of return and the discount rate is impossible to determine from
the given data.
16. Spring Company has invested $20,000 in a project. Spring's discount rate is 12% and the
project profitability index on the project is zero. Which of the following statements would be
true?
I. The net present value of the project is $20,000.
II. The project's internal rate of return is equal to 12%.
A. Only I.
B. Only II.
C. Both I and II.
D. Neither I nor II.
17. If the internal rate of return is used as the discount rate in computing net present value, the
net present value will be:
A. positive.
B. negative.
C. zero.
D. unknown.
13-3
18. The discount rate must be specified in advance for which of the following methods?
A. Option A
B. Option B
C. Option C
D. Option D
19. An investment project for which the net present value is $300 would result in which of the
following conclusions?
A. The net present value is too small; the project should be rejected.
B. The rate of return of the investment project is greater than the required rate of return.
C. The net present value method is not suitable for evaluating this project; the internal rate of
return method should be used.
D. The investment project should only be accepted if net present value is zero; a positive net
present value indicates an error in the estimates associated with the analysis of this
investment.
20. In capital budgeting, what will be the effect on the following if there is an increase in the
working capital needed for a project?
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
13-4
21. The capital budgeting method that recognizes the time value of money by discounting
cash flows over the life of the project, using the company's required rate of return as the
discount rate is called the:
A. simple rate of return method.
B. the net present value method.
C. the internal rate of return method.
D. the payback method.
22. The internal rate of return of an investment project is the:

A. discount rate that results in a zero net present value for the project.
B. minimum acceptable rate of return.
C. weighted average rate of return generated by internal funds.
D. company's cost of capital.
23. If an investment has a project profitability index of 0.15, then the:

A. project's internal rate of return is 15%.
B. discount rate is greater than the project's internal rate of return.
C. net present value of the project is positive.
D. the discount rate is 15%.
24. If investment A has a payback period of 3 years and investment B has a payback period of
4 years, then:
A. A has a higher net present value than B.
B. A has a lower net present value than B.
C. A and B have the same net present value.
D. the relation between investment A's net present value and investment B's net present value
cannot be determined from the given information.
25. Which one of the following statements about the payback method of capital budgeting is
correct?
A. The payback method does not consider the time value of money.
B. The payback method considers cash flows after the payback has been reached.
C. The payback method uses discounted cash flow techniques.
D. The payback method will lead to the same decision as other methods of capital budgeting.
13-5
26. The length of time required to recover the initial cash outlay for a project is determined by
using the:
A. discounted cash flow method.
B. the payback method.
C. the net present value method.
D. the simple rate of return method.
27. (Ignore income taxes in this problem.) An investment of P dollars now will yield cash
inflows of $3,000 at the end of the first year and $2,000 at the end of the fourth year. If the
internal rate of return for this investment is 20%, then the value of P is:
A. $3,463
B. $2,499
C. $964
D. $4,185
28. (Ignore income taxes in this problem.) The Baker Company purchased a piece of
equipment with the following expected results:
The initial cost of the equipment was:

A. $300,100
B. $180,250
C. $190,600
D. Cannot be determined from the given information.
13-6
29. (Ignore income taxes in this problem.) The Yates Company purchased a piece of
equipment which is expected to have a useful life of 7 years with no salvage value at the end
of the 7-year period. This equipment is expected to generate a cash inflow of $32,000 each
year of its useful life. If this investment has a internal rate of return of 14%, then the initial
cost of the equipment is:
A. $150,000
B. $137,216
C. $12,800
D. $343,360
30. (Ignore income taxes in this problem.) The following information is available on a new
piece of equipment:
The life of the equipment is approximately:

A. 6 years
B. 4.3 years
C. 8 years
D. It is impossible to determine from the data given.
31. (Ignore income taxes in this problem.) Mercredi, Inc., is considering investing in
automated equipment with a ten-year useful life. Managers at Highpoint have estimated the
cash flows associated with the tangible costs and benefits of automation, but have been unable
to estimate the cash flows associated with the intangible benefits. Using the company's 14%
required rate of return, the net present value of the cash flows associated with just the tangible
costs and benefits is a negative $182,560. How large would the annual net cash inflows from
the intangible benefits have to be to make this a financially acceptable investment?
A. $18,256
B. $26,667
C. $35,000
D. $38,000
13-7
32. (Ignore income taxes in this problem.) A piece of new equipment will cost $70,000. The
equipment will provide a cost savings of $15,000 per year for ten years, after which it will
have a $3,000 salvage value. If the required rate of return is 14%, the equipment's net present
value is:
A. $8,240
B. $(8,240)
C. $23,888
D. $9,050
33. (Ignore income taxes in this problem.) Sibble Corporation is considering the purchase of a
machine that would cost $330,000 and would last for 5 years. At the end of 5 years, the
machine would have a salvage value of $50,000. By reducing labor and other operating costs,
the machine would provide annual cost savings of $76,000. 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. -$56,020
B. -$6,020
C. -$48,764
D. -$27,670
34. (Ignore income taxes in this problem.) Benz Company is considering the purchase of a
machine that costs $100,000, has a useful life of 18 years, and no salvage value. The
company's discount rate is 12%. If the machine's net present value is $5,850, then the annual
cash inflows associated with the machine must be (round to the nearest whole dollar):
A. $42,413
B. $14,600
C. $13,760
13-8
35. (Ignore income taxes in this problem.) Sam Weller is thinking of investing $70,000 to
start a bookstore. Sam plans to withdraw $15,000 from the business at the end of each year for
the next five years. At the end of the fifth year, Sam plans to sell the business for $110,000
cash. At a 12% discount rate, what is the net present value of the investment?
A. $54,075
B. $62,370
C. $46,445
D. $70,000
36. (Ignore income taxes in this problem.) The following data pertain to an investment
proposal:
The net present value of the proposed investment is:

A. $1,720
B. $6,064
C. $2,154
D. $2,025
37. (Ignore income taxes in this problem) The management of Serpas Corporation is
considering the purchase of a machine that would cost $180,000, would last for 5 years, and
would have no salvage value. The machine would reduce labor and other costs by $46,000 per
year. The company requires a minimum pretax return of 13% on all investment projects. The
net present value of the proposed project is closest to:
A. $27,138
B. $50,000
C. -$18,218
D. -$33,565
13-9
38. (Ignore income taxes in this problem.) The Gage Company purchased a machine which
will be depreciated by the straight-line method over its estimated 6 year life. The machine will
have no salvage value. It will generate cash inflows of $7,000 each year over the next 6 years.
Gage Company's required rate of return is 14%. If the net present value of this investment is
$12,016, the purchase price of the machine was:
A. $30,016
B. $15,207
C. $17,916
D. $18,000
39. (Ignore income taxes in this problem.) Stutz Company purchased a machine with an
estimated useful life of seven years. The machine will generate cash inflows of $8,000 each
year over the next seven years. If the machine has no salvage value at the end of seven years,
if Stutz's discount rate is 12%, and if the net present value of this investment is $15,000, then
the purchase price of the machine was:
A. $17,888
B. $36,512
C. $15,000
D. $21,512
40. (Ignore income taxes in this problem.) Mcclam, Inc., is considering the purchase of a
machine would have a salvage value of $23,000. The machine would reduce labor and other
costs by $19,000 per year. Additional working capital of $2,000 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 13% on all investment projects.
The net present value of the proposed project is closest to:
A. $3,833
B. $5,167
C. -$2,492
D. $11,514
13-10
41. (Ignore income taxes in this problem.) Charley has a typing service. He estimates that a
new computer will result in increased cash inflow $1,600 in Year 1, $2,000 in Year 2 and
$3,000 in Year 3. If Charley's required rate of return is 12%, the most that Charley would be
willing to pay for the new computer would be:
A. $4,623
B. $5,159
C. $3,294
D. $4,804
42. (Ignore income taxes in this problem.) A piece of equipment has a cost of $20,000. The
equipment will provide cost savings of $3,500 each year for ten years, after which time it will
have a salvage value of $2,500. If the company's discount rate is 12%, the equipment's net
present value is:
A. $580
B. $(225)
C. $17,500
D. $2,275
43. (Ignore income taxes in this problem.) The following data pertain to an investment in
equipment:
At the completion of the project, the working capital will be released for use elsewhere.
Compute the net present value of the project, using a discount rate of 10%:
A. $606
B. $8,271
C. $(1,729)
D. $1,729
13-11
proposal:
The working capital would be released for use elsewhere when the project is completed. What
is the net present value of the project, using a discount rate of 8 percent?
A. $2,566
B. $(251)
C. $251
D. $5,251
45. (Ignore income taxes in this problem.) The Valentine Company has decided to buy a
machine costing $14,750. Estimated cash savings from using the new machine amount to
$4,500 per year. The machine will have no salvage value at the end of its useful life of five
years. If Valentine's required rate of return is 10%, the machine's internal rate of return is
closest to:
A. 10%
B. 12%
C. 14%
D. 16%
46. (Ignore income taxes in this problem.) If an investment of $14,760 now will yield $18,000
at the end of one year, then the internal rate of return for this investment to the nearest whole
percentage is:
A. 14%
B. 18%
C. 22%
D. 28%
13-12
47. (Ignore income taxes in this problem.) Duhl Long-Haul, Inc., is considering the purchase
of a tractor-trailer that would cost $126,175, would have a useful life of 5 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 $35,000 per year. The internal rate of return on the
investment in the tractor-trailer is closest to:
A. 10%
B. 15%
C. 13%
D. 12%
48. (Ignore income taxes in this problem.) Mongon Roofing is considering the purchase of a
crane that would cost $40,224, would have a useful life of 5 years, and would have no salvage
value. The use of the crane would result in labor savings of $12,000 per year. The internal rate
of return on the investment in the crane is closest to:
A. 17%
B. 14%
C. 15%
D. 18%
49. (Ignore income taxes in this problem) The management of Mazor Corporation is
considering the purchase of a machine that would cost $144,144 and would have a useful life
of 5 years. The machine would have no salvage value. The machine would reduce labor and
other operating costs by $39,000 per year. The internal rate of return on the investment in the
new machine is closest to:
A. 14%
B. 13%
C. 12%
D. 11%
13-13
50. (Ignore income taxes in this problem) Lett 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 15% in its capital budgeting. The net present value of the
investment, excluding the salvage value of the aircraft, is -$578,739. 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. $578,739
B. $86,811
C. $3,858,260
D. $1,539,199
51. (Ignore income taxes in this problem) The management of Hirsh Corporation is
investigating an investment in equipment that would have a useful life of 9 years. The
investment, excluding the annual cash inflow, is -$666,493. To the nearest whole dollar how
large would the annual cash inflow have to be to make the investment in the equipment
A. $86,644
B. $666,493
C. $74,055
D. $129,870
52. (Ignore income taxes in this problem) The management of Londo Corporation is
investigating buying a small used aircraft to use in making airborne inspections of its aboveground pipelines. The aircraft would have a useful life of 6 years. The company uses a
discount rate of 15% in its capital budgeting. The net present value of the investment,
excluding the intangible benefits, is -$474,060. 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. $474,060
B. $125,280
C. $79,010
D. $71,109
13-14
53. (Ignore income taxes in this problem.) Cottrell, Inc., is investigating an investment in
equipment that would have a useful life of 9 years. The company uses a discount rate of 15%
in its capital budgeting. The net present value of the investment, excluding the salvage value,
is -$230,392. 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. $1,535,947
B. $34,559
C. $811,239
D. $230,392
54. (Ignore income taxes in this problem.) Girman Corporation is considering three
investment projects: K, L, and M. Project K would require an investment of $27,000, Project
L of $59,000, and Project M of $88,000. No other cash outflows would be involved. The
present value of the cash inflows would be $31,860 for Project K, $66,080 for Project L, and
$95,040 for Project M. Rank the projects according to the profitability index, from most
profitable to least profitable.
A. K, M, L
B. K, L, M
C. L, M, K
D. L, K, M
55. Logan Company is considering two projects, A and B. The following information has
been gathered on these projects:
Based on this information, which of the following statements is (are) true?

I. Project A has the highest ranking according to the project profitability index criterion.
II. Project B has the highest ranking according to the net present value criterion.
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II
13-15
56. (Ignore income taxes in this problem.) The management of Dewitz Corporation is
considering a project that would require an initial investment of $65,000. No other cash
outflows would be required. The present value of the cash inflows would be $72,800. The
profitability index of the project is closest to:
A. 0.12
B. 1.12
C. 0.88
D. 0.11
57. (Ignore income taxes in this problem.) The management of Dittrick Corporation is
considering the following three investment projects:
Rank the projects according to the profitability index, from most profitable to least profitable.
A. I, J, K
B. K, J, I
C. J, K, I
D. I, K, J
58. A project requires an initial investment of $60,000 and has a project profitability index of
0.329. The present value of the future cash inflows from this investment is:
A. $79,740
B. $45,147
C. $60,000
D. Cannot be determined with available data.
13-16
59. Blanding Company is considering several investment proposals, as shown below:
Using the project profitability index, the ranking would be:

A. D, B, A, C
B. D, C, A, B
C. C, D, A, B
D. C, A, D, B
60. (Ignore income taxes in this problem.) Deibel Corporation is considering a project that
would require an investment of $59,000. No other cash outflows would be involved. The
present value of the cash inflows would be $66,080. The profitability index of the project is
closest to:
A. 0.88
B. 0.12
C. 1.12
D. 0.11
61. Perkins Company is considering several investment proposals, as shown below:
Rank the proposals in terms of preference using the project profitability index:
A. D, B, C, A
B. B, D, C, A
C. B, D, A, C
D. A, C, B, D
13-17
62. (Ignore income taxes in this problem.) The Jackson Company has invested in a machine
that cost $70,000, that has a useful life of seven years, and that has no salvage value at the end
of its useful life. The machine is being depreciated by the straight-line method, based on its
useful life. It will have a payback period of four years. Given these data, the simple rate of
return on the machine is closest to:
A. 7.1%
B. 8.2%
C. 10.7%
D. 39.3%
63. (Ignore income taxes in this problem.) Czaplinski Corporation is considering a project that
would require an investment of $323,000 and would last for 7 years. The incremental annual
revenues and expenses generated by the project during those 7 years would be as follows:
The scrap value of the project's assets at the end of the project would be $22,000. The
payback period of the project is closest to:
A. 9.7 years
B. 4.4 years
C. 4.1 years
D. 10.4 years
13-18
64. (Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for
delivering prescriptions. The auto was purchased for $9,000 and will have a 6-year useful life
and a $3,000 salvage value. Delivering prescriptions (which the pharmacy has never done
before) should increase gross revenues by at least $5,000 per year. The cost of these
prescriptions to the pharmacy will be about $2,000 per year. The pharmacy depreciates all
assets using the straight-line method. The payback period for the auto is:
A. 3.0 years
B. 1.8 years
C. 2.0 years
D. 1.2 years
65. (Ignore income taxes in this problem.) The Higgins Company has just purchased a piece
of equipment at a cost of $120,000. This equipment will reduce operating costs by $40,000
each year for the next eight years. This equipment replaces old equipment which was sold for
$8,000 cash. The new equipment has a payback period of:
A. 8.0 years
B. 2.8 years
C. 10.0 years
D. 3.0 years
66. (Ignore income taxes in this problem.) The management of Rusell Corporation is
considering a project that would require an investment of $282,000 and would last for 6 years.
The annual net operating income from the project would be $107,000, which includes
depreciation of $43,000. The scrap value of the project's assets at the end of the project would
be $24,000. The payback period of the project is closest to:
A. 1.9 years
B. 2.4 years
C. 1.7 years
D. 2.6 years
13-19
67. (Ignore income taxes in this problem.) Rogers Company is studying a project that would
have a ten-year life and would require an $800,000 investment in equipment which has no
salvage value. The project would provide net operating income each year as follows for the
life of the project:
The company's required rate of return is 8%. What is the payback period for this project?
A. 3 years
B. 6.67 years
C. 2 years
D. 4 years
68. (Ignore income taxes in this problem.) The Jason Company is considering the purchase of
a machine that will increase revenues by $32,000 each year. Cash outflows for operating this
machine will be $6,000 each year. The cost of the machine is $65,000. It is expected to have a
useful life of five years with no salvage value. For this machine, the simple rate of return is:
A. 20%
B. 40%
C. 49.2%
D. 9.2%
69. (Ignore income taxes in this problem.) Blaine Corporation is considering replacing a
technologically obsolete machine with a new state-of-the-art numerically controlled machine.
The new machine would cost $180,000 and would have a ten-year useful life. Unfortunately,
the new machine would have no salvage value. The new machine would cost $12,000 per year
to operate and maintain, but would save $48,000 per year in labor and other costs. The old
machine can be sold now for scrap for $20,000. What is the simple rate of return on the new
machine (round off your answer to the nearest one-hundredth of a percent)?
A. 10.00%
B. 26.67%
C. 22.50%
D. 11.25%
13-20
70. (Ignore income taxes in this problem.) The management of Burney Corporation is
investigating purchasing equipment that would increase sales revenues by $74,000 per year
and cash operating expenses by $32,000 per year. The equipment would cost $115,000 and
have a 5 year life with no salvage value. The simple rate of return on the investment is closest
to:
A. 36.5%
B. 25.7%
C. 20.0%
D. 16.5%
71. (Ignore income taxes in this problem.) Tu Corporation is investigating automating a

process by purchasing a machine for $423,000 that would have a 9 year useful life and no
salvage value. By automating the process, the company would save $112,000 per year in cash
operating costs. The new machine would replace some old equipment that would be sold for
scrap now, yielding $27,000. The annual depreciation on the new machine would be $47,000.
The simple rate of return on the investment is closest to:
A. 15.4%
B. 16.4%
C. 26.5%
D. 11.1%
72. (Ignore income taxes in this problem.) Hartong Corporation is contemplating purchasing
equipment that would increase sales revenues by $185,000 per year and cash operating
expenses by $89,000 per year. The equipment would cost $416,000 and have a 8 year life
with no salvage value. The annual depreciation would be $52,000. The simple rate of return
on the investment is closest to:
A. 23.8%
B. 12.5%
C. 10.6%
D. 23.1%
13-21
73. (Ignore income taxes in this problem.) An expansion at Fenstermacher, Inc., would
increase sales revenues by $315,000 per year and cash operating expenses by $186,000 per
year. The initial investment would be for equipment that would cost $405,000 and have a 5
year life with no salvage value. The annual depreciation on the equipment would be $81,000.
A. 31.9%
B. 15.2%
C. 20.0%
D. 11.9%
74. (Ignore income taxes in this problem.) The management of Rouleau Corporation is
investigating automating a process. Old equipment, with a current salvage value of $10,000,
would be replaced by a new machine. The new machine would be purchased for $240,000 and
would have a 6 year useful life and no salvage value. By automating the process, the company
would save $64,000 per year in cash operating costs. The simple rate of return on the
investment is closest to:
A. 10.0%
B. 26.7%
C. 10.4%
D. 16.7%
(Ignore income taxes in this problem.) Shields Company has gathered the following data on a
proposed investment project:
75. The payback period for the investment is closest to:

A. 0.2 years
B. 1.0 years
C. 3.0 years
D. 5.0 years
13-22
76. The simple rate of return on the investment is closest to:

A. 5%
B. 10%
C. 15%
D. 20%
77. The net present value on this investment is closest to:

A. $400,000
B. $80,000
C. $91,600
D. $76,750
78. The internal rate of return on the investment is closest to:

A. 11%
B. 13%
C. 15%
D. 17%
(Ignore income taxes in this problem.) Chow Company has gathered the following data on a

A. 8.00 years
B. 1.42 years
C. 4.75 years
D. 0.21 years
13-23

A. 8.55%
B. 10.00%
C. 21.05%
D. 33.55%

A. $30,000
B. $76,024
C. $58,800
D. $17,550

A. 13%
B. 15%
C. 14%
D. 12%
(Ignore income taxes in this problem.) Bugle's Bagel Bakery is investigating the purchase of
a new bagel making machine. This machine would provide an annual operating cost savings
of $3,650 for each of the next 4 years. In addition, this new machine would allow the
production of one new type of bagel which would result in selling 1,500 dozen more bagels
each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The
purchase price of this machine is $13,450 and it will have a 4 year useful life. Bugle's
discount rate is 14%.
83. The total annual cash inflow from this machine for capital budgeting purposes is:
A. $3,650
B. $5,150
C. $4,750
D. $5,000
13-24
84. The internal rate of return for this investment is closest to:
A. 14%
B. 16%
C. 18%
D. 20%
85. The net present value of this investment is closest to:

A. $1,120
B. $6,550
C. $13,450
D. $20,000
(Ignore income taxes in this problem.) Oriental Company has gathered the following data on
a proposed investment project:
The company uses straight-line depreciation on all equipment.
86. The payback period for the investment would be:

A. 2.41 years
B. 0.25 years
C. 10 years
D. 4 years
87. The simple rate of return on the investment would be:

A. 10%
B. 35%
C. 15%
D. 25%
13-25
88. The net present value of this investment would be:

A. $(14,350)
B. $107,250
C. $77,200
D. $200,000
(Ignore income taxes in this problem.) Houis Inc. is considering the acquisition of a new
machine that costs $300,000 and has a useful life of 5 years with no salvage value. The
incremental net operating income and incremental net cash flows that would be produced by
the machine are:
89. If the discount rate is 11%, the net present value of the investment is closest to:
A. $77,315
B. $210,000
C. $377,315
D. $300,000
90. The payback period of this investment is closest to:

A. 1.8 years
B. 5.0 years
C. 2.1 years
D. 2.9 years
13-26
(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment
that costs $480,000 and has a useful life of 6 years with no salvage value. The incremental net
cash flows that would be generated by the equipment are:
A. $654,709
B. $234,257
C. $415,000
D. $174,709

A. 3.1 years
B. 2.9 years
C. 5.0 years
D. 3.5 years
(Ignore income taxes in this problem.) The management of Melchiori Corporation is

would have no salvage value. The machine would reduce labor and other costs by $116,000
per year. The company requires a minimum pretax return of 16% on all investment projects.
93. The present value of the annual cost savings of $116,000 is closest to:
A. $427,460
B. $696,000
C. $175,448
D. $1,041,462
13-27
94. The net present value of the proposed project is closest to:
A. $286,179
B. $386,000
C. $117,460
D. $158,431
(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be
rebuilt or replaced. The following information has been gathered concerning this decision:
Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting
decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years
Mr. Lichty plans to close the car wash and retire.
95. If the new equipment is purchased, the present value of all cash flows that occur now is:
A. $(45,000)
B. $(39,000)
C. $(37,000)
D. $(34,000)
96. If the new equipment is purchased, the present value of the annual cash operating costs
associated with this alternative is:
A. $(26,537)
B. $(15,164)
C. $(18,463)
D. $(37,901)
13-28
(Ignore income taxes in this problem.) 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%.
97. The immediate cash outflow required for this project would be:
A. $(120,000)
B. $(150,000)
C. $(90,000)
D. $(130,000)
98. 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
(Ignore income taxes in this problem.) Gillaspie, Inc., is considering the purchase of a
99. The combined present value of the working capital needed at the beginning of the project
and the working capital released at the end of the project is closest to:
A. -$8,420
B. $25,170
C. -$4,570
D. $0
13-29
A. $30,155
B. $47,139
C. $2,462
D. $25,585
(Ignore income taxes in this problem.) Rushforth Manufacturing has $90,000 to invest in
either Project A or Project B. The following data are available on these projects:
Both projects will have a useful life of 6 years. At the end of 6 years, the working capital
investment will be released for use elsewhere. Rushforth's required rate of return is 14%.
101. The net present value of Project A is:

A. $27,341
B. $94,000
C. $71,000
D. $117,341
102. The net present value of Project B is:

A. $57,225
B. $30,025
C. $7,225
D. $13,350
(Ignore income taxes in this problem.) Meharg Corporation is considering the purchase of a
pretax return of 10% on all investment projects.
13-30
A. $18,630
B. $183,163
C. $150,000
D. $113,730
A. $14,905
B. -$6,270
C. $9,255
D. $18,730
(Ignore income taxes in this problem.) Trybus Corporation uses a discount rate of 16% in its
capital budgeting. Partial analysis of an investment in automated equipment with a useful life
of 5 years has thus far yielded a net present value of -$233,764. 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.
105. 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. $71,400
B. $37,402
C. $233,764
D. $46,753
106. 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
A. $491,101
B. $1,461,025
C. $233,764
D. $37,402
13-31
(Ignore income taxes in this problem.) The management of Gimenez Corporation is

company uses a discount rate of 17% 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 -$274,265.
107. 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. $39,181
B. $274,265
C. $46,625
D. $69,930
108. 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. $274,265
B. $46,625
C. $1,613,324
D. $823,619
(Ignore income taxes in this problem.) Burchell Corporation is investigating buying a small
initial investment and the annual operating cash cost is -$594,381. Management is having
difficulty estimating the annual benefit of having the aircraft and estimating the salvage value
of the aircraft.
109. 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. $3,962,540
B. $89,157
C. $594,381
D. $1,580,801
13-32
110. 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. $594,381
B. $89,157
C. $84,912
D. $142,880
(Ignore income taxes in this problem.) The management of Pattee Corporation is considering
three investment projects-M, N, and O. Project M would require an investment of $25,000,
Project N of $67,000, and Project O of $70,000. The present value of the cash inflows would
be $28,750 for Project M, $73,700 for Project N, and $79,100 for Project O.
111. The profitability index of investment project N is closest to:

A. 0.10
B. 0.90
C. 0.09
D. 1.10
112. Rank the projects according to the profitability index, from most profitable to least
profitable.
A. O, M, N
B. O, N, M
C. M, O, N
D. N, M, O
(Ignore income taxes in this problem.) Altro Corporation is considering the following three
investment projects:
13-33
113. The profitability index of investment project S is closest to:

A. 0.15
B. 1.17
C. 0.83
D. 0.17
profitable.
A. S, T, R
B. R, T, S
C. T, R, S
D. T, S, R
(Ignore income taxes in this problem.) The Crawford Company is pondering an investment in
a machine that costs $350,000, that will have a useful life of eight years, and that will have a
salvage value of $25,000. If this machine is purchased, a similar, old machine will be sold at a
salvage value of $40,000. The anticipated yearly revenues and expenses associated with the
new machine are:
All of the revenues and expenses except depreciation are for cash. The company's required
rate of return is 12%. The annual cash flows occur uniformly throughout the year.
115. The payback period, to the nearest tenth of a year, of this investment is:
A. 6.2 years
B. 3.2 years
C. 3.6 years
D. 4.0 years
13-34
116. The simple rate of return, to the nearest tenth of a percent, of this investment is:
A. 18.2%
B. 16.1%
C. 31.3%
D. 27.7%
(Ignore income taxes in this problem.) Friden Company has just purchased a new piece of
equipment with the following characteristics:
117. Assume straight-line depreciation and no salvage value. The payback period would be:
A. 4.5 years
B. 10 years
C. 2.7 years
D. 8.2 years
118. The simple rate of return would be approximately:

A. 22.2%
B. 12.2%
C. 11.1%
D. 10%
Essay Questions
13-35
119. (Ignore income taxes in this problem.) Tranter, Inc., is considering a project that would
have a ten-year life and would require a $1,200,000 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 operating income each year as follows:
All of the above items, except for depreciation, represent cash flows. 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 to the nearest whole percent.
c. Compute the project's payback period.
d. Compute the project's simple rate of return.
13-36
120. (Ignore income taxes in this problem.) Farah Corporation has provided the following
data concerning a proposed investment project:
The company uses a discount rate of 11%. The working capital would be released at the end
of the project.
Required:
Compute the net present value of the project.
121. (Ignore income taxes in this problem.) Dunay Corporation is considering investing
$810,000 in a project. The life of the project would be 9 years. The project would require
additional working capital of $24,000, which would be released for use elsewhere at the end
of the project. The annual net cash inflows would be $162,000. The salvage value of the
assets used in the project would be $41,000. The company uses a discount rate of 17%.
Required:
13-37
122. (Ignore income taxes in this problem.) Whatley Inc. is considering investing in a project
that would require an initial investment of $460,000. The life of the project would be 5 years.
The annual net cash inflows from the project would be $138,000. The salvage value of the
assets at the end of the project would be $69,000. The company uses a discount rate of 15%.
Required:
123. (Ignore income taxes in this problem.) Bill Anders retires in 8 years. He has $650,000 to
invest and is considering a franchise for a fast-food outlet. He would have to purchase
equipment costing $500,000 to equip the outlet and invest an additional $150,000 for
inventories and other working capital needs. Other outlets in the fast-food chain have an
annual net cash inflow of about $160,000. Mr. Anders would close the outlet in 8 years. He
estimates that the equipment could be sold at that time for about 10% of its original cost. Mr.
Anders' required rate of return is 16%.
Required:
What is the investment's net present value when the discount rate is 16 percent? Is this an
acceptable investment?
13-38
124. (Ignore income taxes in this problem.) Weilbacher Corporation is considering the
purchase of a machine that would cost $240,000 and would last for 8 years. At the end of 8
years, the machine would have a salvage value of $50,000. The machine would reduce labor
and other costs by $62,000 per year. The company requires a minimum pretax return of 16%
on all investment projects.
Required:
Determine the net present value of the project. Show your work!
125. (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?
13-39
126. (Ignore income taxes in this problem.) Jane Summers has just inherited $600,000 from
her mother's estate. She is considering investing part of these funds in a small catering
business. She would need to purchase a delivery van and various equipment costing $100,000
to equip the business and another $50,000 for inventories and other working capital needs.
Rent on the building used by the business will be $24,000 per year. Jane's marketing studies
indicate that the annual cash inflow from the business will amount to $90,000. In addition to
the building rent, other annual cash outflows for operating costs will amount to $30,000. Jane
wants to operate the catering business for only six years. She estimates that the equipment
could be sold at that time for about 10% of its original cost. Jane's required rate of return is
16%.
Required:
Compute the net present value of this investment.
127. (Ignore income taxes in this problem.) The management of Basler Corporation is
year. The company requires a minimum pretax return of 12% on all investment projects.
Required:
13-40
128. (Ignore income taxes in this problem.) A newly developed device is being considered by
Fairway Foods for use in processing and canning peaches. The device, which is available only
on a royalty basis, is reported to be a great labor saver. Fairway's production manager has
gathered the following data:
The new device must be obtained through a licensing arrangement with the developer. The
license period lasts for only 8 years. Fairway Foods' required rate of return is 10%.
Required:
By use of the incremental cost approach, compute the net present value of the proposed
licensing of the new device. Show all computations in good form. Should the company enter
into a licensing arrangement to use the new device?
129. (Ignore income taxes in this problem.) Janes, Inc., is considering the purchase of a
machine that would cost $430,000 and would last for 6 years, at the end of which, the
immediately, all of which would be recovered at the end of 6 years. The company requires a
minimum pretax return of 17% on all investment projects.
Required:
13-41
130. (Ignore income taxes in this problem.) Juliar Inc. has provided the following data
concerning a proposed investment project:
The company uses a discount rate of 12%.

Required:
131. (Ignore income taxes in this problem.) The management of Peregoy Corporation is
considering the purchase of an automated molding machine that would cost $255,552, would
have a useful life of 5 years, and would have no salvage value. The automated molding
machine would result in cash savings of $64,000 per year due to lower labor and other costs.
Required:
Determine the internal rate of return on the investment in the new automated molding
machine. Show your work!
13-42
132. (Ignore income taxes in this problem.) Hayner Limos, Inc., is considering the purchase of
a limousine that would cost $149,868, would have a useful life of 9 years, and would have no
salvage value. The limousine would bring in cash inflows of $36,000 per year in excess of its
cash operating costs.
Required:
Determine the internal rate of return on the investment in the new limousine. Show your
work!
133. (Ignore income taxes in this problem.) The management of Eastridge Corporation is
other operating costs by $14,000 per year.
Required:
Determine the internal rate of return on the investment in the new machine. Show your work!
13-43
134. (Ignore income taxes in this problem.) Rosenholm Corporation uses a discount rate of
18% in its capital budgeting. Partial analysis of an investment in automated equipment with a
useful life of 5 years has thus far yielded a net present value of -$327,960. 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.
Required:
a. Ignoring any salvage value, 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?
b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the
automated equipment have to be to make the investment in the automated equipment
135. (Ignore income taxes in this problem.) Verdin Corporation uses a discount rate of 16% in
its capital budgeting. Management is considering an investment in telecommunications
equipment with a useful life of 6 years. Excluding the salvage value of the equipment, the net
present value of the investment in the equipment is -$166,194.
Required:
How large would the salvage value of the telecommunications equipment have to be to make
the investment in the telecommunications equipment financially attractive?
13-44
136. (Ignore income taxes in this problem.) The management of an amusement park is
considering purchasing a new ride for $40,000 that would have a useful life of 10 years and a
salvage value of $4,000. The ride would require annual operating costs of $19,000 throughout
its useful life. The company's discount rate is 8%. Management is unsure about how much
additional ticket revenue the new ride would generate-particularly because customers pay a
flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence
of the ride would attract new customers.
Required:
How much additional revenue would the ride have to generate per year to make it an
attractive investment?
137. (Ignore income taxes in this problem.) The management of Rosengarten Corporation is
investigating the purchase of a new satellite routing system with a useful life of 7 years. The
investment, excluding its intangible benefits, is -$607,020.
Required:
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?
13-45
138. (Ignore income taxes in this problem.) Ahlman Corporation is considering the following
three investment projects:
Required:
Rank the investment projects using the project profitability index. Show your work
139. (Ignore income taxes in this problem.) The management of Suddreth Corporation is
The only cash outflows are the initial investments in the projects.
Required:
13-46
140. (Ignore income taxes in this problem.) Brewer Company is considering purchasing a
machine that would cost $537,600 and have a useful life of 9 years. The machine would
reduce cash operating costs by $82,708 per year. The machine would have a salvage value of
$107,520 at the end of the project.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
141. (Ignore income taxes in this problem.) Gocke Company is considering purchasing a
reduce cash operating costs by $114,000 per year. The machine would have no salvage value.
Required:
13-47
142. (Ignore income taxes in this problem.) Limon Corporation is considering a project that
would require an initial investment of $204,000 and would last for 6 years. The incremental
annual revenues and expenses for each of the 6 years would be as follows:
At the end of the project, the scrap value of the project's assets would be $12,000.
Required:
Determine the payback period of the project. Show your work!
143. (Ignore income taxes in this problem.) The management of Fowkes Corporation is
considering a project that would require an initial investment of $331,000 and would last for 8
years. The annual net operating income from the project would be $54,000, including
depreciation of $40,000. At the end of the project, the scrap value of the project's assets would
be $11,000.
Required:
13-48
144. (Ignore income taxes in this problem.) Sheridon Corporation is investigating automating
a process by purchasing a new machine for $483,000 that would have a 7 year useful life and
no salvage value. By automating the process, the company would save $140,000 per year in
cash operating costs. The company's current equipment would be sold for scrap now, yielding
$29,000. The annual depreciation on the new machine would be $69,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
145. (Ignore income taxes in this problem.) The management of Orebaugh Corporation is
investigating automating a process by replacing old equipment by a new machine. The old
equipment would be sold for scrap now for $15,000. The new machine would cost $445,000,
would have a 5 year useful life, and would have no salvage value. By automating the process,
the company would save $165,000 per year in cash operating costs.
Required:
your work!
13-49
146. (Ignore income taxes in this problem.) Pal Corporation is contemplating purchasing
with no salvage value. The annual depreciation would be $56,000.
Required:
your work!
147. (Ignore income taxes in this problem.) The management of Ossenfort Corporation is
investigating purchasing equipment that would cost $440,000 and have a 8 year life with no
salvage value. The equipment would allow an expansion of capacity that would increase sales
revenues by $192,000 per year and cash operating expenses by $61,000 per year.
Required:
your work!
13-50
Chapter 13 Capital Budgeting Decisions Answer Key
True / False Questions
1. If the internal rate of return exceeds the required rate of return for a project, then the net
present value of that project is positive.
TRUE
AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 13-01 Evaluate the acceptability of an investment project using the net present value method
Learning Objective: 13-02 Evaluate the acceptability of an investment project using the internal rate of return method
Level: Medium
2. In comparing two investment alternatives, the difference between the net present values of
the two alternatives obtained using the total cost approach will be the same as the net present
value obtained using the incremental cost approach.
TRUE

Level: Medium
3. The simple rate of return is the same as the internal rate of return.
FALSE

Learning Objective: 13-06 Compute the simple rate of return for an investment
Level: Medium
13-51
4. The internal rate of return for a project is the discount rate that makes the net present value
of the project equal to zero.
TRUE

Bloom's: Knowledge
Level: Easy
5. If two projects require the same amount of investment, then the preference ranking
computed using either the project profitability index or the net present value will be the same.
TRUE

Learning Objective: 13-04 Rank investment projects in order of preference
Level: Hard
6. In preference decisions, the profitability index and internal rate of return methods may
produce conflicting rankings of projects.
TRUE

Level: Medium
7. The project profitability index is used to compare the internal rates of return of two
companies with different investment amounts.
FALSE

Level: Medium
13-52
8. Preference decisions attempt to determine which of many alternative investment projects

would be the best for the company to accept.
TRUE

Bloom's: Knowledge
Level: Easy
9. Projects with shorter payback periods are always more profitable than projects with longer
payback periods.
FALSE

Learning Objective: 13-05 Determine the payback period for an investment
Level: Medium
10. One criticism of the payback method is that it ignores cash flows that occur after the
payback point has been reached.
TRUE

Bloom's: Knowledge
Level: Easy
11. A very useful guide for making investment decisions is: The shorter the payback period,
the more profitable the project.
FALSE

Level: Medium
13-53
12. If new equipment is replacing old equipment, any salvage received from sale of the old
equipment should not be considered in computing the payback period of the new equipment.
FALSE

Bloom's: Knowledge
Level: Easy
13. The simple rate of return focuses on accounting net operating income rather than on cash
flows.
TRUE

Bloom's: Knowledge
Level: Easy
14. The simple rate of return method places its focus on cash flows instead of on accounting
net operating income.
FALSE

Bloom's: Knowledge
Level: Easy
Multiple Choice Questions
13-54
15. If a company has computed the project profitability index of an investment project as
0.15, then:
A. the project's internal rate of return is less than the discount rate.
B. the project's internal rate of return is greater than the discount rate.
C. the project's internal rate of return is equal to the discount rate.
D. the relation between the rate of return and the discount rate is impossible to determine from
the given data.

Level: Medium
16. Spring Company has invested $20,000 in a project. Spring's discount rate is 12% and the
project profitability index on the project is zero. Which of the following statements would be
true?
I. The net present value of the project is $20,000.
II. The project's internal rate of return is equal to 12%.
A. Only I.
B. Only II.
C. Both I and II.
D. Neither I nor II.

Level: Medium
13-55
17. If the internal rate of return is used as the discount rate in computing net present value, the
net present value will be:
A. positive.
B. negative.
C. zero.
D. unknown.

Level: Medium
18. The discount rate must be specified in advance for which of the following methods?
A. Option A
B. Option B
C. Option C
D. Option D

Level: Medium
13-56
19. An investment project for which the net present value is $300 would result in which of the
following conclusions?
A. The net present value is too small; the project should be rejected.
B. The rate of return of the investment project is greater than the required rate of return.
C. The net present value method is not suitable for evaluating this project; the internal rate of
return method should be used.
D. The investment project should only be accepted if net present value is zero; a positive net
present value indicates an error in the estimates associated with the analysis of this
investment.

Level: Medium
20. In capital budgeting, what will be the effect on the following if there is an increase in the
working capital needed for a project?
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

Level: Hard
13-57
21. The capital budgeting method that recognizes the time value of money by discounting
cash flows over the life of the project, using the company's required rate of return as the
discount rate is called the:
A. simple rate of return method.
B. the net present value method.
C. the internal rate of return method.
D. the payback method.

Bloom's: Knowledge
Level: Easy
Source: CMA, adapted
22. The internal rate of return of an investment project is the:

A. discount rate that results in a zero net present value for the project.
B. minimum acceptable rate of return.
C. weighted average rate of return generated by internal funds.
D. company's cost of capital.

Bloom's: Knowledge
Level: Easy
23. If an investment has a project profitability index of 0.15, then the:

A. project's internal rate of return is 15%.
B. discount rate is greater than the project's internal rate of return.
C. net present value of the project is positive.
D. the discount rate is 15%.

Level: Medium
13-58
24. If investment A has a payback period of 3 years and investment B has a payback period of
4 years, then:
A. A has a higher net present value than B.
B. A has a lower net present value than B.
C. A and B have the same net present value.
D. the relation between investment A's net present value and investment B's net present value
cannot be determined from the given information.

Bloom's: Knowledge
Level: Medium
25. Which one of the following statements about the payback method of capital budgeting is
correct?
A. The payback method does not consider the time value of money.
B. The payback method considers cash flows after the payback has been reached.
C. The payback method uses discounted cash flow techniques.
D. The payback method will lead to the same decision as other methods of capital budgeting.

Bloom's: Knowledge
Level: Easy
26. The length of time required to recover the initial cash outlay for a project is determined by
using the:
A. discounted cash flow method.
B. the payback method.
C. the net present value method.
D. the simple rate of return method.

Bloom's: Knowledge
Level: Easy
13-59
27. (Ignore income taxes in this problem.) An investment of P dollars now will yield cash
inflows of $3,000 at the end of the first year and $2,000 at the end of the fourth year. If the
internal rate of return for this investment is 20%, then the value of P is:
A. $3,463
B. $2,499
C. $964
D. $4,185
AACSB: Analytic
Bloom's: Application
Level: Hard
13-60
28. (Ignore income taxes in this problem.) The Baker Company purchased a piece of
equipment with the following expected results:
The initial cost of the equipment was:

A. $300,100
B. $180,250
C. $190,600
D. Cannot be determined from the given information.
The internal rate of return is the rate of return at which the net present value of the project is
zero.
-X + $180,250 = $0
X = $180,250
AACSB: Analytic
Level: Hard
13-61
29. (Ignore income taxes in this problem.) The Yates Company purchased a piece of
equipment which is expected to have a useful life of 7 years with no salvage value at the end
of the 7-year period. This equipment is expected to generate a cash inflow of $32,000 each
year of its useful life. If this investment has a internal rate of return of 14%, then the initial
cost of the equipment is:
A. $150,000
B. $137,216
C. $12,800
D. $343,360
The internal rate of return is the rate of return at which the net present value of the project is
zero.
-X + $137,216 = $0
X = $137,216
AACSB: Analytic
Level: Hard
13-62
30. (Ignore income taxes in this problem.) The following information is available on a new
piece of equipment:
The life of the equipment is approximately:

A. 6 years
B. 4.3 years
C. 8 years
Factor of the internal rate of return = Investment required Annual net cash inflow
= $21,720 $5,000
= 4.344
The factor of 4.344 for 8 years represents an internal rate of return of 16%.
AACSB: Analytic
Level: Hard
13-63
31. (Ignore income taxes in this problem.) Mercredi, Inc., is considering investing in
automated equipment with a ten-year useful life. Managers at Highpoint have estimated the
cash flows associated with the tangible costs and benefits of automation, but have been unable
to estimate the cash flows associated with the intangible benefits. Using the company's 14%
required rate of return, the net present value of the cash flows associated with just the tangible
costs and benefits is a negative $182,560. How large would the annual net cash inflows from
the intangible benefits have to be to make this a financially acceptable investment?
A. $18,256
B. $26,667
C. $35,000
D. $38,000
Minimum annual cash flows required = Negative net present value to be offset Present
value factor
= $182,560 5.216 = $35,000
AACSB: Analytic
Learning Objective: 13-03 Evaluate an investment project that has uncertain cash flows
Level: Medium
13-64
32. (Ignore income taxes in this problem.) A piece of new equipment will cost $70,000. The
equipment will provide a cost savings of $15,000 per year for ten years, after which it will
have a $3,000 salvage value. If the required rate of return is 14%, the equipment's net present
value is:
A. $8,240
B. $(8,240)
C. $23,888
D. $9,050
AACSB: Analytic
Level: Medium
13-65
33. (Ignore income taxes in this problem.) Sibble Corporation is considering the purchase of a
pretax return of 12% on all investment projects. The net present value of the proposed project
is closest to:
A. -$56,020
B. -$6,020
C. -$48,764
D. -$27,670
AACSB: Analytic
Level: Easy
13-66
34. (Ignore income taxes in this problem.) Benz Company is considering the purchase of a
machine that costs $100,000, has a useful life of 18 years, and no salvage value. The
company's discount rate is 12%. If the machine's net present value is $5,850, then the annual
cash inflows associated with the machine must be (round to the nearest whole dollar):
A. $42,413
B. $14,600
C. $13,760
-$100,000 + 7.250X = $5,850

7.250X = $100,000 + $5,850
X = ($100,000 + $5,850) 7.250 = $14,600
AACSB: Analytic
Level: Hard
13-67
35. (Ignore income taxes in this problem.) Sam Weller is thinking of investing $70,000 to
start a bookstore. Sam plans to withdraw $15,000 from the business at the end of each year for
the next five years. At the end of the fifth year, Sam plans to sell the business for $110,000
cash. At a 12% discount rate, what is the net present value of the investment?
A. $54,075
B. $62,370
C. $46,445
D. $70,000
AACSB: Analytic
Level: Medium
13-68
proposal:
The net present value of the proposed investment is:

A. $1,720
B. $6,064
C. $2,154
D. $2,025
AACSB: Analytic
Level: Medium
13-69
37. (Ignore income taxes in this problem) The management of Serpas Corporation is
year. The company requires a minimum pretax return of 13% on all investment projects. The
net present value of the proposed project is closest to:
A. $27,138
B. $50,000
C. -$18,218
D. -$33,565
AACSB: Analytic
Level: Easy
13-70
38. (Ignore income taxes in this problem.) The Gage Company purchased a machine which
will be depreciated by the straight-line method over its estimated 6 year life. The machine will
have no salvage value. It will generate cash inflows of $7,000 each year over the next 6 years.
Gage Company's required rate of return is 14%. If the net present value of this investment is
$12,016, the purchase price of the machine was:
A. $30,016
B. $15,207
C. $17,916
D. $18,000
-X + $27,223 = $12,016
X = $27,223 - $12,016
= $15,207
AACSB: Analytic
Level: Hard
13-71
39. (Ignore income taxes in this problem.) Stutz Company purchased a machine with an
estimated useful life of seven years. The machine will generate cash inflows of $8,000 each
year over the next seven years. If the machine has no salvage value at the end of seven years,
if Stutz's discount rate is 12%, and if the net present value of this investment is $15,000, then
the purchase price of the machine was:
A. $17,888
B. $36,512
C. $15,000
D. $21,512
-X + $36,512= $15,000
X = $36,512- $15,000
= $21,512
AACSB: Analytic
Level: Hard
13-72
40. (Ignore income taxes in this problem.) Mcclam, Inc., is considering the purchase of a
The net present value of the proposed project is closest to:
A. $3,833
B. $5,167
C. -$2,492
D. $11,514
AACSB: Analytic
Level: Easy
13-73
41. (Ignore income taxes in this problem.) Charley has a typing service. He estimates that a
new computer will result in increased cash inflow $1,600 in Year 1, $2,000 in Year 2 and
$3,000 in Year 3. If Charley's required rate of return is 12%, the most that Charley would be
willing to pay for the new computer would be:
A. $4,623
B. $5,159
C. $3,294
D. $4,804
AACSB: Analytic
Level: Medium
13-74
42. (Ignore income taxes in this problem.) A piece of equipment has a cost of $20,000. The
equipment will provide cost savings of $3,500 each year for ten years, after which time it will
have a salvage value of $2,500. If the company's discount rate is 12%, the equipment's net
present value is:
A. $580
B. $(225)
C. $17,500
D. $2,275
AACSB: Analytic
Level: Medium
13-75
43. (Ignore income taxes in this problem.) The following data pertain to an investment in
equipment:
At the completion of the project, the working capital will be released for use elsewhere.
Compute the net present value of the project, using a discount rate of 10%:
A. $606
B. $8,271
C. $(1,729)
D. $1,729
AACSB: Analytic
Level: Medium
13-76
proposal:
The working capital would be released for use elsewhere when the project is completed. What
is the net present value of the project, using a discount rate of 8 percent?
A. $2,566
B. $(251)
C. $251
D. $5,251
AACSB: Analytic
Level: Medium
13-77
45. (Ignore income taxes in this problem.) The Valentine Company has decided to buy a
machine costing $14,750. Estimated cash savings from using the new machine amount to
$4,500 per year. The machine will have no salvage value at the end of its useful life of five
years. If Valentine's required rate of return is 10%, the machine's internal rate of return is
closest to:
A. 10%
B. 12%
C. 14%
D. 16%
= $14,750 $4,500 = 3.278
AACSB: Analytic
Level: Medium
46. (Ignore income taxes in this problem.) If an investment of $14,760 now will yield $18,000
at the end of one year, then the internal rate of return for this investment to the nearest whole
percentage is:
A. 14%
B. 18%
C. 22%
D. 28%
= $14,760 $18,000 = 0.820
The factor of .820 for 1 year represents an internal rate of return of 22%.
AACSB: Analytic
Level: Easy
13-78
47. (Ignore income taxes in this problem.) Duhl Long-Haul, Inc., is considering the purchase
of a tractor-trailer that would cost $126,175, would have a useful life of 5 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 $35,000 per year. The internal rate of return on the
investment in the tractor-trailer is closest to:
A. 10%
B. 15%
C. 13%
D. 12%
= $126,175 $35,000 = 3.605
AACSB: Analytic
Level: Easy
48. (Ignore income taxes in this problem.) Mongon Roofing is considering the purchase of a
crane that would cost $40,224, would have a useful life of 5 years, and would have no salvage
value. The use of the crane would result in labor savings of $12,000 per year. The internal rate
of return on the investment in the crane is closest to:
A. 17%
B. 14%
C. 15%
D. 18%
= $40,224 $12,000 = 3.352
AACSB: Analytic
Level: Easy
13-79
49. (Ignore income taxes in this problem) The management of Mazor Corporation is
other operating costs by $39,000 per year. The internal rate of return on the investment in the
new machine is closest to:
A. 14%
B. 13%
C. 12%
D. 11%
= $144,144 $39,000 = 3.696
AACSB: Analytic
Level: Easy
50. (Ignore income taxes in this problem) Lett Corporation is investigating buying a small
investment, excluding the salvage value of the aircraft, is -$578,739. 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
A. $578,739
B. $86,811
C. $3,858,260
D. $1,539,199
Minimum salvage value = Negative net present value to the offset Present value factor
= $578,739 0.376 = $1,539,199
AACSB: Analytic
Level: Easy
13-80
51. (Ignore income taxes in this problem) The management of Hirsh Corporation is
investment, excluding the annual cash inflow, is -$666,493. To the nearest whole dollar how
large would the annual cash inflow have to be to make the investment in the equipment
A. $86,644
B. $666,493
C. $74,055
D. $129,870
Minimum annual cash flows from the intangible benefits
= Negative net present value to be offset Present value factor
= $666,493 5.132 = $129,870
AACSB: Analytic
Level: Easy
13-81
52. (Ignore income taxes in this problem) The management of Londo Corporation is
investigating buying a small used aircraft to use in making airborne inspections of its aboveground pipelines. The aircraft would have a useful life of 6 years. The company uses a
discount rate of 15% in its capital budgeting. The net present value of the investment,
excluding the intangible benefits, is -$474,060. 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. $474,060
B. $125,280
C. $79,010
D. $71,109
= $474,060 3.784 = $125,280
AACSB: Analytic
Level: Easy
53. (Ignore income taxes in this problem.) Cottrell, Inc., is investigating an investment in
equipment that would have a useful life of 9 years. The company uses a discount rate of 15%
in its capital budgeting. The net present value of the investment, excluding the salvage value,
is -$230,392. 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. $1,535,947
B. $34,559
C. $811,239
D. $230,392
= $230,392 0.284 = $811,239
AACSB: Analytic
Level: Easy
13-82
54. (Ignore income taxes in this problem.) Girman Corporation is considering three
investment projects: K, L, and M. Project K would require an investment of $27,000, Project
L of $59,000, and Project M of $88,000. No other cash outflows would be involved. The
present value of the cash inflows would be $31,860 for Project K, $66,080 for Project L, and
$95,040 for Project M. Rank the projects according to the profitability index, from most
profitable to least profitable.
A. K, M, L
B. K, L, M
C. L, M, K
D. L, K, M
AACSB: Analytic
Level: Easy
13-83
55. Logan Company is considering two projects, A and B. The following information has
been gathered on these projects:
Based on this information, which of the following statements is (are) true?

I. Project A has the highest ranking according to the project profitability index criterion.
II. Project B has the highest ranking according to the net present value criterion.
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II
AACSB: Analytic
Level: Medium
13-84
56. (Ignore income taxes in this problem.) The management of Dewitz Corporation is
considering a project that would require an initial investment of $65,000. No other cash
outflows would be required. The present value of the cash inflows would be $72,800. The
profitability index of the project is closest to:
A. 0.12
B. 1.12
C. 0.88
D. 0.11
AACSB: Analytic
Level: Easy
13-85
57. (Ignore income taxes in this problem.) The management of Dittrick Corporation is
Rank the projects according to the profitability index, from most profitable to least profitable.
A. I, J, K
B. K, J, I
C. J, K, I
D. I, K, J
AACSB: Analytic
Level: Easy
13-86
58. A project requires an initial investment of $60,000 and has a project profitability index of
0.329. The present value of the future cash inflows from this investment is:
A. $79,740
B. $45,147
C. $60,000
D. Cannot be determined with available data.
Project profitability index = Net present value of the project Investment required
0.329 = Net present value of the project $60,000
Net present value of the project = 0.329 $60,000 = $19,740
Net present value of the project = Present value of the future cash inflows - Investment
required
$19,740 = Present value of the future cash inflows - $60,000
Present value of the future cash inflows = $19,740 + $60,000 = $79,740
AACSB: Analytic
Level: Medium
13-87
59. Blanding Company is considering several investment proposals, as shown below:
Using the project profitability index, the ranking would be:

A. D, B, A, C
B. D, C, A, B
C. C, D, A, B
D. C, A, D, B
AACSB: Analytic
Level: Easy
13-88
60. (Ignore income taxes in this problem.) Deibel Corporation is considering a project that
would require an investment of $59,000. No other cash outflows would be involved. The
present value of the cash inflows would be $66,080. The profitability index of the project is
closest to:
A. 0.88
B. 0.12
C. 1.12
D. 0.11
AACSB: Analytic
Level: Easy
13-89
61. Perkins Company is considering several investment proposals, as shown below:
Rank the proposals in terms of preference using the project profitability index:
A. D, B, C, A
B. B, D, C, A
C. B, D, A, C
D. A, C, B, D
AACSB: Analytic
Level: Easy
13-90
62. (Ignore income taxes in this problem.) The Jackson Company has invested in a machine
that cost $70,000, that has a useful life of seven years, and that has no salvage value at the end
of its useful life. The machine is being depreciated by the straight-line method, based on its
useful life. It will have a payback period of four years. Given these data, the simple rate of
return on the machine is closest to:
A. 7.1%
B. 8.2%
C. 10.7%
D. 39.3%
*Payback period = Investment required Annual net cash inflow

4 years = $70,000 Annual net cash inflow
Annual net cash inflow = $70,000 4 years = $17,500 yearly cash flow
Simple rate of return = Annual incremental net operating income Initial investment
= $7,500 $70,000 = 10.70%
AACSB: Analytic
Level: Hard
13-91
63. (Ignore income taxes in this problem.) Czaplinski Corporation is considering a project that
would require an investment of $323,000 and would last for 7 years. The incremental annual
revenues and expenses generated by the project during those 7 years would be as follows:
The scrap value of the project's assets at the end of the project would be $22,000. The
payback period of the project is closest to:
A. 9.7 years
B. 4.4 years
C. 4.1 years
D. 10.4 years
Payback period = Investment required Annual net cash inflow

= $323,000 $74,000 per year = 4.4 years
AACSB: Analytic
Level: Easy
13-92
64. (Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for
delivering prescriptions. The auto was purchased for $9,000 and will have a 6-year useful life
and a $3,000 salvage value. Delivering prescriptions (which the pharmacy has never done
before) should increase gross revenues by at least $5,000 per year. The cost of these
prescriptions to the pharmacy will be about $2,000 per year. The pharmacy depreciates all
assets using the straight-line method. The payback period for the auto is:
A. 3.0 years
B. 1.8 years
C. 2.0 years
D. 1.2 years
Annual net cash inflow = $5,000 - $2,000 = $3,000
= $9,000 $3,000 per year = 3.0 years
AACSB: Analytic
Level: Medium
65. (Ignore income taxes in this problem.) The Higgins Company has just purchased a piece
of equipment at a cost of $120,000. This equipment will reduce operating costs by $40,000
each year for the next eight years. This equipment replaces old equipment which was sold for
$8,000 cash. The new equipment has a payback period of:
A. 8.0 years
B. 2.8 years
C. 10.0 years
D. 3.0 years
= ($120,000 - $8,000) $40,000 per year = 2.8 years
AACSB: Analytic
Level: Easy
13-93
66. (Ignore income taxes in this problem.) The management of Rusell Corporation is
considering a project that would require an investment of $282,000 and would last for 6 years.
The annual net operating income from the project would be $107,000, which includes
depreciation of $43,000. The scrap value of the project's assets at the end of the project would
be $24,000. The payback period of the project is closest to:
A. 1.9 years
B. 2.4 years
C. 1.7 years
D. 2.6 years

= $282,000 $150,000 per year = 1.9 years
AACSB: Analytic
Level: Easy
13-94
67. (Ignore income taxes in this problem.) Rogers Company is studying a project that would
have a ten-year life and would require an $800,000 investment in equipment which has no
salvage value. The project would provide net operating income each year as follows for the
life of the project:
The company's required rate of return is 8%. What is the payback period for this project?
A. 3 years
B. 6.67 years
C. 2 years
D. 4 years

= $800,000 $200,000 per year = 4.0 years
AACSB: Analytic
Level: Medium
13-95
68. (Ignore income taxes in this problem.) The Jason Company is considering the purchase of
a machine that will increase revenues by $32,000 each year. Cash outflows for operating this
machine will be $6,000 each year. The cost of the machine is $65,000. It is expected to have a
useful life of five years with no salvage value. For this machine, the simple rate of return is:
A. 20%
B. 40%
C. 49.2%
D. 9.2%
= $13,000 $65,000
= 20%
AACSB: Analytic
Level: Medium
13-96
69. (Ignore income taxes in this problem.) Blaine Corporation is considering replacing a
technologically obsolete machine with a new state-of-the-art numerically controlled machine.
The new machine would cost $180,000 and would have a ten-year useful life. Unfortunately,
the new machine would have no salvage value. The new machine would cost $12,000 per year
to operate and maintain, but would save $48,000 per year in labor and other costs. The old
machine can be sold now for scrap for $20,000. What is the simple rate of return on the new
machine (round off your answer to the nearest one-hundredth of a percent)?
A. 10.00%
B. 26.67%
C. 22.50%
D. 11.25%
= $18,000 ($180,000 - $20,000)
= 11.25%
AACSB: Analytic
Level: Hard
13-97
70. (Ignore income taxes in this problem.) The management of Burney Corporation is
investigating purchasing equipment that would increase sales revenues by $74,000 per year
and cash operating expenses by $32,000 per year. The equipment would cost $115,000 and
have a 5 year life with no salvage value. The simple rate of return on the investment is closest
to:
A. 36.5%
B. 25.7%
C. 20.0%
D. 16.5%
= $19,000 $115,000 = 16.5%
AACSB: Analytic
Level: Easy
13-98
71. (Ignore income taxes in this problem.) Tu Corporation is investigating automating a

process by purchasing a machine for $423,000 that would have a 9 year useful life and no
salvage value. By automating the process, the company would save $112,000 per year in cash
operating costs. The new machine would replace some old equipment that would be sold for
scrap now, yielding $27,000. The annual depreciation on the new machine would be $47,000.
A. 15.4%
B. 16.4%
C. 26.5%
D. 11.1%
= $65,000 ($423,000 - $27,000) = 16.4%
AACSB: Analytic
Level: Easy
13-99
72. (Ignore income taxes in this problem.) Hartong Corporation is contemplating purchasing
with no salvage value. The annual depreciation would be $52,000. The simple rate of return
on the investment is closest to:
A. 23.8%
B. 12.5%
C. 10.6%
D. 23.1%
= $44,000 $416,000 = 10.6%
AACSB: Analytic
Level: Easy
13-100
73. (Ignore income taxes in this problem.) An expansion at Fenstermacher, Inc., would
increase sales revenues by $315,000 per year and cash operating expenses by $186,000 per
year. The initial investment would be for equipment that would cost $405,000 and have a 5
year life with no salvage value. The annual depreciation on the equipment would be $81,000.
A. 31.9%
B. 15.2%
C. 20.0%
D. 11.9%
= $48,000 $405,000 = 11.9%
AACSB: Analytic
Level: Easy
13-101
74. (Ignore income taxes in this problem.) The management of Rouleau Corporation is
investigating automating a process. Old equipment, with a current salvage value of $10,000,
would be replaced by a new machine. The new machine would be purchased for $240,000 and
would have a 6 year useful life and no salvage value. By automating the process, the company
would save $64,000 per year in cash operating costs. The simple rate of return on the
investment is closest to:
A. 10.0%
B. 26.7%
C. 10.4%
D. 16.7%
= $24,000 ($240,000 - $10,000) = 10.4%
AACSB: Analytic
Level: Easy
(Ignore income taxes in this problem.) Shields Company has gathered the following data on a
13-102

A. 0.2 years
B. 1.0 years
C. 3.0 years
D. 5.0 years
= $400,000 $80,000 = 5 years
AACSB: Analytic
Level: Easy

A. 5%
B. 10%
C. 15%
D. 20%
= $40,000 $400,000 = 10%
AACSB: Analytic
Level: Medium
13-103

A. $400,000
B. $80,000
C. $91,600
D. $76,750
AACSB: Analytic
Level: Medium

A. 11%
B. 13%
C. 15%
D. 17%
= $400,000 $80,000 = 5.000
AACSB: Analytic
Level: Medium
13-104
(Ignore income taxes in this problem.) Chow Company has gathered the following data on a

A. 8.00 years
B. 1.42 years
C. 4.75 years
D. 0.21 years
= $142,500 $30,000 = 4.75 years
AACSB: Analytic
Level: Easy
13-105

A. 8.55%
B. 10.00%
C. 21.05%
D. 33.55%
= $12,187 $142,500 = 8.55%
AACSB: Analytic
Level: Medium

A. $30,000
B. $76,024
C. $58,800
D. $17,550
AACSB: Analytic
Level: Medium
13-106

A. 13%
B. 15%
C. 14%
D. 12%
= $142,500 $30,000 = 4.75
AACSB: Analytic
Level: Hard
(Ignore income taxes in this problem.) Bugle's Bagel Bakery is investigating the purchase of
a new bagel making machine. This machine would provide an annual operating cost savings
of $3,650 for each of the next 4 years. In addition, this new machine would allow the
production of one new type of bagel which would result in selling 1,500 dozen more bagels
each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The
purchase price of this machine is $13,450 and it will have a 4 year useful life. Bugle's
discount rate is 14%.
13-107
83. The total annual cash inflow from this machine for capital budgeting purposes is:
A. $3,650
B. $5,150
C. $4,750
D. $5,000
AACSB: Analytic
Level: Medium
84. The internal rate of return for this investment is closest to:
A. 14%
B. 16%
C. 18%
D. 20%
= $13,450 $5,000 = 2.69
AACSB: Analytic
Level: Medium
13-108
85. The net present value of this investment is closest to:

A. $1,120
B. $6,550
C. $13,450
D. $20,000
AACSB: Analytic
Level: Medium
(Ignore income taxes in this problem.) Oriental Company has gathered the following data on
a proposed investment project:
The company uses straight-line depreciation on all equipment.
13-109
86. The payback period for the investment would be:

A. 2.41 years
B. 0.25 years
C. 10 years
D. 4 years
= $200,000 $50,000 = 4 years
AACSB: Analytic
Level: Medium
87. The simple rate of return on the investment would be:

A. 10%
B. 35%
C. 15%
D. 25%
= $30,000 $200,000 = 15%
AACSB: Analytic
Level: Medium
13-110
88. The net present value of this investment would be:

A. $(14,350)
B. $107,250
C. $77,200
D. $200,000
AACSB: Analytic
Level: Medium
(Ignore income taxes in this problem.) Houis Inc. is considering the acquisition of a new
machine that costs $300,000 and has a useful life of 5 years with no salvage value. The
incremental net operating income and incremental net cash flows that would be produced by
the machine are:
13-111
A. $77,315
B. $210,000
C. $377,315
D. $300,000
AACSB: Analytic
Level: Medium
13-112

A. 1.8 years
B. 5.0 years
C. 2.1 years
D. 2.9 years
Year 3: $103,000 $110,000 = 0.9

Payback = 2.9 years
AACSB: Analytic
Level: Medium
(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment
that costs $480,000 and has a useful life of 6 years with no salvage value. The incremental net
cash flows that would be generated by the equipment are:
13-113
A. $654,709
B. $234,257
C. $415,000
D. $174,709
AACSB: Analytic
Level: Easy
13-114

A. 3.1 years
B. 2.9 years
C. 5.0 years
D. 3.5 years
Year 3: $15,000 $157,000 = 0.1

Payback = 3.1 years
AACSB: Analytic
Level: Easy
(Ignore income taxes in this problem.) The management of Melchiori Corporation is

would have no salvage value. The machine would reduce labor and other costs by $116,000
per year. The company requires a minimum pretax return of 16% on all investment projects.
13-115
A. $427,460
B. $696,000
C. $175,448
D. $1,041,462
AACSB: Analytic
Level: Easy
A. $286,179
B. $386,000
C. $117,460
D. $158,431
AACSB: Analytic
Level: Easy
13-116
(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be
rebuilt or replaced. The following information has been gathered concerning this decision:
Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting
decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years
Mr. Lichty plans to close the car wash and retire.
95. If the new equipment is purchased, the present value of all cash flows that occur now is:
A. $(45,000)
B. $(39,000)
C. $(37,000)
D. $(34,000)
AACSB: Analytic
Level: Medium
13-117
96. If the new equipment is purchased, the present value of the annual cash operating costs
associated with this alternative is:
A. $(26,537)
B. $(15,164)
C. $(18,463)
D. $(37,901)
AACSB: Analytic
Level: Medium
(Ignore income taxes in this problem.) 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%.
13-118
97. The immediate cash outflow required for this project would be:
A. $(120,000)
B. $(150,000)
C. $(90,000)
D. $(130,000)
AACSB: Analytic
Level: Easy
13-119
98. 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

= $140,920 4.833
= $29,158
AACSB: Analytic
Level: Hard
(Ignore income taxes in this problem.) Gillaspie, Inc., is considering the purchase of a
13-120
99. The combined present value of the working capital needed at the beginning of the project
and the working capital released at the end of the project is closest to:
A. -$8,420
B. $25,170
C. -$4,570
D. $0
AACSB: Analytic
Level: Easy
13-121
A. $30,155
B. $47,139
C. $2,462
D. $25,585
AACSB: Analytic
Level: Easy
(Ignore income taxes in this problem.) Rushforth Manufacturing has $90,000 to invest in
either Project A or Project B. The following data are available on these projects:
Both projects will have a useful life of 6 years. At the end of 6 years, the working capital
investment will be released for use elsewhere. Rushforth's required rate of return is 14%.
13-122
101. The net present value of Project A is:

A. $27,341
B. $94,000
C. $71,000
D. $117,341
AACSB: Analytic
Level: Medium
13-123
102. The net present value of Project B is:

A. $57,225
B. $30,025
C. $7,225
D. $13,350
AACSB: Analytic
Level: Medium
(Ignore income taxes in this problem.) Meharg Corporation is considering the purchase of a
pretax return of 10% on all investment projects.
13-124
A. $18,630
B. $183,163
C. $150,000
D. $113,730
AACSB: Analytic
Level: Easy
A. $14,905
B. -$6,270
C. $9,255
D. $18,730
AACSB: Analytic
Level: Easy
13-125
(Ignore income taxes in this problem.) Trybus Corporation uses a discount rate of 16% in its
capital budgeting. Partial analysis of an investment in automated equipment with a useful life
of 5 years has thus far yielded a net present value of -$233,764. 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.
105. 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
A. $71,400
B. $37,402
C. $233,764
D. $46,753
= $233,764 3.274 = $71,400
AACSB: Analytic
Level: Easy
13-126
106. 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
A. $491,101
B. $1,461,025
C. $233,764
D. $37,402
Minimum salvage value
= Negative net present value to the offset Present value factor
= $233,764 0.476 = $491,101
AACSB: Analytic
Level: Easy
(Ignore income taxes in this problem.) The management of Gimenez Corporation is

company uses a discount rate of 17% 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 -$274,265.
13-127
107. 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. $39,181
B. $274,265
C. $46,625
D. $69,930
= $274,265 3.922 = $69,930
AACSB: Analytic
Level: Easy
108. 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. $274,265
B. $46,625
C. $1,613,324
D. $823,619
= $274,265 0.333 = $823,619
AACSB: Analytic
Level: Easy
13-128
(Ignore income taxes in this problem.) Burchell Corporation is investigating buying a small
initial investment and the annual operating cash cost is -$594,381. Management is having
difficulty estimating the annual benefit of having the aircraft and estimating the salvage value
of the aircraft.
109. 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. $3,962,540
B. $89,157
C. $594,381
D. $1,580,801
= $594,381 0.376 = $1,580,801
AACSB: Analytic
Level: Easy
13-129
110. 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. $594,381
B. $89,157
C. $84,912
D. $142,880
= $594,381 4.160 = $142,880
AACSB: Analytic
Level: Easy
(Ignore income taxes in this problem.) The management of Pattee Corporation is considering
three investment projects-M, N, and O. Project M would require an investment of $25,000,
Project N of $67,000, and Project O of $70,000. The present value of the cash inflows would
be $28,750 for Project M, $73,700 for Project N, and $79,100 for Project O.
111. The profitability index of investment project N is closest to:

A. 0.10
B. 0.90
C. 0.09
D. 1.10
AACSB: Analytic
Level: Easy
13-130
profitable.
A. O, M, N
B. O, N, M
C. M, O, N
D. N, M, O
AACSB: Analytic
Level: Medium
(Ignore income taxes in this problem.) Altro Corporation is considering the following three
investment projects:
13-131
113. The profitability index of investment project S is closest to:

A. 0.15
B. 1.17
C. 0.83
D. 0.17
AACSB: Analytic
Level: Easy
profitable.
A. S, T, R
B. R, T, S
C. T, R, S
D. T, S, R
AACSB: Analytic
Level: Medium
13-132
(Ignore income taxes in this problem.) The Crawford Company is pondering an investment in
a machine that costs $350,000, that will have a useful life of eight years, and that will have a
salvage value of $25,000. If this machine is purchased, a similar, old machine will be sold at a
salvage value of $40,000. The anticipated yearly revenues and expenses associated with the
new machine are:
All of the revenues and expenses except depreciation are for cash. The company's required
rate of return is 12%. The annual cash flows occur uniformly throughout the year.
115. The payback period, to the nearest tenth of a year, of this investment is:
A. 6.2 years
B. 3.2 years
C. 3.6 years
D. 4.0 years

= ($350,000 - $40,000) $97,000 per year = 3.2 years
AACSB: Analytic
Level: Medium
13-133
116. The simple rate of return, to the nearest tenth of a percent, of this investment is:
A. 18.2%
B. 16.1%
C. 31.3%
D. 27.7%
= $56,375 $310,000 = 18.2%
AACSB: Analytic
Level: Medium
(Ignore income taxes in this problem.) Friden Company has just purchased a new piece of
equipment with the following characteristics:
117. Assume straight-line depreciation and no salvage value. The payback period would be:
A. 4.5 years
B. 10 years
C. 2.7 years
D. 8.2 years
= $27,000 $6,000 = 4.5 years
AACSB: Analytic
Level: Easy
13-134
118. The simple rate of return would be approximately:

A. 22.2%
B. 12.2%
C. 11.1%
D. 10%
= $3,300 $27,000 = 12.2%
AACSB: Analytic
Level: Easy
Essay Questions
13-135
119. (Ignore income taxes in this problem.) Tranter, Inc., is considering a project that would
have a ten-year life and would require a $1,200,000 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 operating income each year as follows:
All of the above items, except for depreciation, represent cash flows. 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 to the nearest whole percent.
c. Compute the project's payback period.
d. Compute the project's simple rate of return.
a. Because depreciation is the only noncash item on the income statement, the annual net cash
flow can be computed by adding back depreciation to net operating income.
b. The formula for computing the factor of the internal rate of return (IRR) is:
Factor of the IRR = Investment required Annual net cash inflow
$1,200,000 $300,000 = 4.00 Factor
To the nearest whole percent, the internal rate of return is 21%
c. The formula for the payback period is:
$1,200,000 $300,000 per year = 4.0 years
d. The formula for the simple rate of return is:
$180,000 $1,200,000 = 15%
13-136
AACSB: Analytic
Level: Medium
120. (Ignore income taxes in this problem.) Farah Corporation has provided the following
data concerning a proposed investment project:
The company uses a discount rate of 11%. The working capital would be released at the end
of the project.
Required:
AACSB: Analytic
Level: Easy
13-137
121. (Ignore income taxes in this problem.) Dunay Corporation is considering investing
$810,000 in a project. The life of the project would be 9 years. The project would require
additional working capital of $24,000, which would be released for use elsewhere at the end
of the project. The annual net cash inflows would be $162,000. The salvage value of the
assets used in the project would be $41,000. The company uses a discount rate of 17%.
Required:
AACSB: Analytic
Level: Easy
13-138
122. (Ignore income taxes in this problem.) Whatley Inc. is considering investing in a project
that would require an initial investment of $460,000. The life of the project would be 5 years.
The annual net cash inflows from the project would be $138,000. The salvage value of the
assets at the end of the project would be $69,000. The company uses a discount rate of 15%.
Required:
AACSB: Analytic
Level: Easy
13-139
123. (Ignore income taxes in this problem.) Bill Anders retires in 8 years. He has $650,000 to
invest and is considering a franchise for a fast-food outlet. He would have to purchase
equipment costing $500,000 to equip the outlet and invest an additional $150,000 for
inventories and other working capital needs. Other outlets in the fast-food chain have an
annual net cash inflow of about $160,000. Mr. Anders would close the outlet in 8 years. He
estimates that the equipment could be sold at that time for about 10% of its original cost. Mr.
Anders' required rate of return is 16%.
Required:
What is the investment's net present value when the discount rate is 16 percent? Is this an
acceptable investment?
Present
Yes, the outlet is an acceptable investment because its net present value is positive.
AACSB: Analytic
Level: Medium
13-140
124. (Ignore income taxes in this problem.) Weilbacher Corporation is considering the
purchase of a machine that would cost $240,000 and would last for 8 years. At the end of 8
years, the machine would have a salvage value of $50,000. The machine would reduce labor
and other costs by $62,000 per year. The company requires a minimum pretax return of 16%
on all investment projects.
Required:
AACSB: Analytic
Level: Easy
13-141
125. (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?
Bingham should make this investment because the NPV is positive.
AACSB: Analytic
Level: Medium
13-142
126. (Ignore income taxes in this problem.) Jane Summers has just inherited $600,000 from
her mother's estate. She is considering investing part of these funds in a small catering
business. She would need to purchase a delivery van and various equipment costing $100,000
to equip the business and another $50,000 for inventories and other working capital needs.
Rent on the building used by the business will be $24,000 per year. Jane's marketing studies
indicate that the annual cash inflow from the business will amount to $90,000. In addition to
the building rent, other annual cash outflows for operating costs will amount to $30,000. Jane
wants to operate the catering business for only six years. She estimates that the equipment
could be sold at that time for about 10% of its original cost. Jane's required rate of return is
16%.
Required:
Compute the net present value of this investment.
AACSB: Analytic
Level: Medium
13-143
127. (Ignore income taxes in this problem.) The management of Basler Corporation is
year. The company requires a minimum pretax return of 12% on all investment projects.
Required:
AACSB: Analytic
Level: Easy
13-144
128. (Ignore income taxes in this problem.) A newly developed device is being considered by
Fairway Foods for use in processing and canning peaches. The device, which is available only
on a royalty basis, is reported to be a great labor saver. Fairway's production manager has
gathered the following data:
The new device must be obtained through a licensing arrangement with the developer. The
license period lasts for only 8 years. Fairway Foods' required rate of return is 10%.
Required:
By use of the incremental cost approach, compute the net present value of the proposed
licensing of the new device. Show all computations in good form. Should the company enter
into a licensing arrangement to use the new device?
The company should not license the new device, because it has a negative net present value at
a 10% discount rate.
AACSB: Analytic
Level: Medium
13-145
129. (Ignore income taxes in this problem.) Janes, Inc., is considering the purchase of a
machine that would cost $430,000 and would last for 6 years, at the end of which, the
immediately, all of which would be recovered at the end of 6 years. The company requires a
minimum pretax return of 17% on all investment projects.
Required:
AACSB: Analytic
Level: Easy
13-146
130. (Ignore income taxes in this problem.) Juliar Inc. has provided the following data
concerning a proposed investment project:
The company uses a discount rate of 12%.

Required:
AACSB: Analytic
Level: Easy
13-147
131. (Ignore income taxes in this problem.) The management of Peregoy Corporation is
considering the purchase of an automated molding machine that would cost $255,552, would
have a useful life of 5 years, and would have no salvage value. The automated molding
machine would result in cash savings of $64,000 per year due to lower labor and other costs.
Required:
Determine the internal rate of return on the investment in the new automated molding
machine. Show your work!
= $255,552 $64,000 = 3.993
AACSB: Analytic
Level: Easy
132. (Ignore income taxes in this problem.) Hayner Limos, Inc., is considering the purchase of
a limousine that would cost $149,868, would have a useful life of 9 years, and would have no
salvage value. The limousine would bring in cash inflows of $36,000 per year in excess of its
cash operating costs.
Required:
Determine the internal rate of return on the investment in the new limousine. Show your
work!
= $149,868 $36,000 = 4.163
AACSB: Analytic
Level: Easy
13-148
133. (Ignore income taxes in this problem.) The management of Eastridge Corporation is
other operating costs by $14,000 per year.
Required:
Determine the internal rate of return on the investment in the new machine. Show your work!
= $50,470 $14,000 = 3.605
AACSB: Analytic
Level: Easy
13-149
134. (Ignore income taxes in this problem.) Rosenholm Corporation uses a discount rate of
18% in its capital budgeting. Partial analysis of an investment in automated equipment with a
useful life of 5 years has thus far yielded a net present value of -$327,960. 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.
Required:
a. Ignoring any salvage value, 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?
b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the
automated equipment have to be to make the investment in the automated equipment
a. Minimum annual cash flows from the intangible benefits
= $327,960 3.127 = $104,880
b. Minimum salvage value
= $327,960 0.437 = $750,481
AACSB: Analytic
Level: Easy
13-150
135. (Ignore income taxes in this problem.) Verdin Corporation uses a discount rate of 16% in
its capital budgeting. Management is considering an investment in telecommunications
equipment with a useful life of 6 years. Excluding the salvage value of the equipment, the net
present value of the investment in the equipment is -$166,194.
Required:
How large would the salvage value of the telecommunications equipment have to be to make
the investment in the telecommunications equipment financially attractive?
= $166,194 0.410 = $405,351
AACSB: Analytic
Level: Easy
13-151
136. (Ignore income taxes in this problem.) The management of an amusement park is
considering purchasing a new ride for $40,000 that would have a useful life of 10 years and a
salvage value of $4,000. The ride would require annual operating costs of $19,000 throughout
its useful life. The company's discount rate is 8%. Management is unsure about how much
additional ticket revenue the new ride would generate-particularly because customers pay a
flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence
of the ride would attract new customers.
Required:
How much additional revenue would the ride have to generate per year to make it an
attractive investment?
Minimum annual cash flows required = Negative net present value to be offset Present
value factor
$165,638 6.710 = $24,685
This much additional revenue would result in a zero net present value. Any less than this and
the net present value would be negative. Any more than this and the net present value would
be positive.
AACSB: Analytic
Level: Hard
13-152
137. (Ignore income taxes in this problem.) The management of Rosengarten Corporation is
investigating the purchase of a new satellite routing system with a useful life of 7 years. The
investment, excluding its intangible benefits, is -$607,020.
Required:
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?
= $607,020 5.206 = $116,600
AACSB: Analytic
Level: Easy
138. (Ignore income taxes in this problem.) Ahlman Corporation is considering the following
three investment projects:
Required:
AACSB: Analytic
Level: Easy
13-153
139. (Ignore income taxes in this problem.) The management of Suddreth Corporation is
The only cash outflows are the initial investments in the projects.
Required:
AACSB: Analytic
Level: Easy
13-154
140. (Ignore income taxes in this problem.) Brewer Company is considering purchasing a
reduce cash operating costs by $82,708 per year. The machine would have a salvage value of
$107,520 at the end of the project.
Required:
a. The payback period is computed as follows:
Payback period = Investment required Annual net cash flow
= $537,600 $82,708 = 6.50 years
In this case the salvage value plays no part in the payback period because all of the investment
is recovered before the end of the project.
b. The simple rate of return is computed as follows:
= $34,921 $537,600 = 6.50%
AACSB: Analytic
Level: Medium
13-155
141. (Ignore income taxes in this problem.) Gocke Company is considering purchasing a
reduce cash operating costs by $114,000 per year. The machine would have no salvage value.
Required:
a. The payback period is computed as follows:Payback period = Investment required
Annual net cash flow
= $478,800 $114,000 = 4.20 years
b. The simple rate of return is computed as follows:
= $18,240 $478,800 = 3.81%
AACSB: Analytic
Level: Easy
13-156
142. (Ignore income taxes in this problem.) Limon Corporation is considering a project that
would require an initial investment of $204,000 and would last for 6 years. The incremental
annual revenues and expenses for each of the 6 years would be as follows:
At the end of the project, the scrap value of the project's assets would be $12,000.
Required:

= $204,000 $111,000 = 1.84 years
AACSB: Analytic
Level: Easy
13-157
143. (Ignore income taxes in this problem.) The management of Fowkes Corporation is
considering a project that would require an initial investment of $331,000 and would last for 8
years. The annual net operating income from the project would be $54,000, including
depreciation of $40,000. At the end of the project, the scrap value of the project's assets would
be $11,000.
Required:

= $331,000 $94,000 = 3.52 years
AACSB: Analytic
Level: Easy
13-158
144. (Ignore income taxes in this problem.) Sheridon Corporation is investigating automating
a process by purchasing a new machine for $483,000 that would have a 7 year useful life and
no salvage value. By automating the process, the company would save $140,000 per year in
cash operating costs. The company's current equipment would be sold for scrap now, yielding
$29,000. The annual depreciation on the new machine would be $69,000.
Required:
your work!
= $71,000 $454,000 = 15.6%
AACSB: Analytic
Level: Easy
13-159
145. (Ignore income taxes in this problem.) The management of Orebaugh Corporation is
investigating automating a process by replacing old equipment by a new machine. The old
equipment would be sold for scrap now for $15,000. The new machine would cost $445,000,
would have a 5 year useful life, and would have no salvage value. By automating the process,
the company would save $165,000 per year in cash operating costs.
Required:
your work!
= $76,000 $430,000 = 17.7%
AACSB: Analytic
Level: Easy
13-160
146. (Ignore income taxes in this problem.) Pal Corporation is contemplating purchasing
with no salvage value. The annual depreciation would be $56,000.
Required:
your work!
= $124,000 $504,000 = 24.6%
AACSB: Analytic
Level: Easy
13-161
147. (Ignore income taxes in this problem.) The management of Ossenfort Corporation is
investigating purchasing equipment that would cost $440,000 and have a 8 year life with no
salvage value. The equipment would allow an expansion of capacity that would increase sales
revenues by $192,000 per year and cash operating expenses by $61,000 per year.
Required:
your work!
= $76,000 $440,000 = 17.3%
AACSB: Analytic
Level: Easy
13-162

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1

Professional Exam Adapted

LO6: Simple rate of return

LO4: Preference ranking

LO3: Uncertain cash flows

LO2: Internal rate of return

LO1: Net present value

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

CMA, 12/94, Part 4,

CMA, 12/93, Part 4, Q1

CMA, 12/94, Part 4,

CMA, 12/93, Part 4, Q1

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

4/e: 14-886 to 889

CMA, 12/95, Part 4,

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

8. Preference decisions attempt to determine which of many alternative investment projects

Chapter 13 - Capital Budgeting

Multiple Choice Questions

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

22. The internal rate of return of an investment project is the:

23. If an investment has a project profitability index of 0.15, then the:

Chapter 13 - Capital Budgeting

The initial cost of the equipment was:

Chapter 13 - Capital Budgeting

The life of the equipment is approximately:

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

The net present value of the proposed investment is:

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Based on this information, which of the following statements is (are) true?

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

59. Blanding Company is considering several investment proposals, as shown below:

Using the project profitability index, the ranking would be:

61. Perkins Company is considering several investment proposals, as shown below:

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

Chapter 13 - Capital Budgeting

71. (Ignore income taxes in this problem.) Tu Corporation is investigating automating a

Chapter 13 - Capital Budgeting

75. The payback period for the investment is closest to:

Chapter 13 - Capital Budgeting

76. The simple rate of return on the investment is closest to:

77. The net present value on this investment is closest to:

78. The internal rate of return on the investment is closest to:

79. The payback period for the investment is closest to:

Chapter 13 - Capital Budgeting

80. The simple rate of return on the investment is closest to:

81. The net present value on this investment is closest to:

82. The internal rate of return on the investment is closest to: