Question : 76.              Sloan Inc. recently invested in a project with a : 1311933

 

 

76.              Sloan Inc. recently invested in a project with a 3-year life span. The net present value was $9,000 and annual cash inflows were $21,000 for year 1; $24,000 for year 2; and $27,000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was

Present ValuePV of an Annuity

Year  of 1 at 15%                    of 1 at 15%

1              .870              .870

2              .756              1.626

3              .658              2.283

a.$45,792.

b.$45,180.

c.$29,232.

d.$38,376.

 

 

77.              Mini Inc. is contemplating a capital project costing $47,019. The project will provide annual cost savings of $18,000 for 3 years and have a salvage value of $3,000. The company’s required rate of return is 10%. The company uses straight-line depreciation.

Present ValuePV of an Annuity

Year  of 1 at 10%                    of 1 at 10%

1              .909              .909

2              .826              1.736

3              .751              2.487

This project is

a.unacceptable because it earns a rate less than 10%.

b.acceptable because it has a positive NPV.

c.unacceptable because it has a negative NPV.

d.acceptable because it has a zero NPV.

 

 

78.              Johnson Corp. has an 8% required rate of return. It’s considering a project that would provide annual cost savings of $50,000 for 5 years. The most that Johnson would be willing to spend on this project is

Present ValuePV of an Annuity

Year  of 1 at 8%                    of 1 at 8%

1              .926              .926

2              .857              1.783

3              .794              2.577

4              .735              3.312

5              .681              3.993

a.$125,910.

b.$165,600.

c.$199,650.

d.$34,050.

 

 

79.              Benaflek Co. purchased some equipment 3 years ago. The company’s required rate of return is 12%, and the net present value of the project was $(1,800). Annual cost savings were: $20,000 for year 1; $16,000 for year 2; and $12,000 for year 3. The amount of the initial investment was

Present ValuePV of an Annuity

Year  of 1 at 12%                    of 1 at 12%

1              .893              .893

2              .797              1.690

3              .712              2.402

a.$40,956.

b.$36,632.

c.$40,232.

d.$37,356.

 

 

80.              In capital budgeting, intangible benefits should be

a.excluded entirely.

b.included using optimistic estimated values.

c.included using conservative estimated values.

d.included only when benefits are known with certainty.

 

 

81.              Miles, Inc. is considering the purchase of a new machine for $600,000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $105,000. It is believed that the new machine will reduce downtime because of its reliability. Assume the discount rate is 8%. In order to make the project acceptable, the reduction in downtime must be worth

Present ValuePV of an Annuity

Year  of 1 at 8%                    of 1 at 8%

1              .926              .926

2              .857              1.783

3              .794              2.577

4              .735              3.312

5              .681              3.993

a.$23,958 per year.

b.$49,662 per year.

c.$18,264 per year.

d.$45,263 per year.

 

 

82.              Intangible benefits in capital budgeting would include all of the following except increased

a.product quality.

b.employee loyalty.

c.salvage value.

d.product safety.

 

 

83.              Intangible benefits in capital budgeting

a.should be ignored because they are difficult to determine.

b.include increased quality or employee loyalty.

c.are not considered because they are usually not relevant to the decision.

d.have a rate of return in excess of the company’s cost of capital.

 

 

84.              To avoid rejecting projects that actually should be accepted,

1.intangible benefits should be ignored.

2.conservative estimates of the intangible benefits’ value should be incorporated into the NPV calculation.

3.calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV.

a.1

b.2

c.3

d.both 2 and 3 are correct.

 

 

85.              All of the following statements about intangible benefits in capital budgeting are correct except that they

a.include increased quality and employee loyalty.

b.are difficult to quantify.

c.are often ignored in capital budgeting decisions.

d.cannot be incorporated into the NPV calculation.