Exam 12: Performance Measurement in Decentralized Organizations

Cascade,Inc. ,has assembled the estimates shown below relating to a proposed new product.These estimates are based on a 5-year project life,at the end of which the new equipment would be sold,working capital would revert to other uses in the company,and the product would be discontinued.Cascade uses a discount rate of 18%. Required: Compute the net present value of the new product.

The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000.The equipment would have a useful life of six years,with a salvage value of $29,000.This new equipment would be depreciated over its useful life by the straight-line method.It would replace existing equipment which is fully depreciated.The existing equipment has a salvage value now of $38,000.The anticipated annual revenues and expenses associated with the new equipment are: Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project. For this investment,the simple rate of return to the nearest tenth of a percent is:

The basic premise of the payback method is that the more quickly the cost of an investment is recovered the more desirable is the investment.

The Gomez Corporation is considering two projects,T and V.The following information has been gathered on these projects: Based on this information,which of the following statements is (are)true? I.Project T has the highest ranking according to the project profitability index criterion. II)Project V has the highest ranking according to the net present value criterion.

A company with $600,000 in operating assets is considering the purchase of a machine that costs $72,000 and which is expected to reduce operating costs by $18,000 each year.These reductions in cost occur evenly throughout the year.The payback period for this machine in years is closest to:

Mark Stevens is considering opening a hobby and craft store.He would invest $50,000 to purchase equipment and furnishings and another $100,000 for inventories and other working capital needs.Rent on the building used by the business will be $25,000 per year.In addition to building rent,other annual cash outflows for operating costs will amount to $44,000.Mark estimates that the annual cash inflow from the business will amount to $100,000.Mark plans to operate the business for only six years.He estimates that the equipment and furnishings could be sold at that time for about 10% of its original cost.Mark's discount rate is 16%.All cash flows,except for the initial investment,would occur at the ends of the years. Required: Compute the net present value of this investment.

Correl Corporation has provided the following data concerning an investment project that it is considering: The life of the project is 4 years.The company's discount rate is 15%.The net present value of the project is closest to:

An investment project with a project profitability index of less than one should ordinarily be rejected.

Baldock Inc.is considering the acquisition of a new machine that costs $420,000 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: Assume cash flows occur uniformly throughout a year except for the initial investment. If the discount rate is 12%,the net present value of the investment is closest to:

Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $250,000 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 $55,000 per year in labor and other costs.The old machine can be sold now for scrap for $10,000.The simple rate of return on the new machine is closest to:

The management of Basler Corporation is considering the purchase of a machine that would cost $440,000,would last for 5 years,and would have no salvage value.The machine would reduce labor and other costs by $128,000 per year.The company requires a minimum pretax return of 12% on all investment projects. Required: Determine the net present value of the project.Show your work!

Weilbacher Corporation is considering the purchase of a machine that would cost $240,000 and would last for 8 years.At the end of 5 years,the machine would have a salvage value of $50,000.The machine would reduce labor and other costs by $72,000 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!

Juliar Inc.has provided the following data concerning a proposed investment project: The company uses a discount rate of 12%. Required: Compute the net present value of the project.

In the payback method,depreciation is deducted from net operating income when computing the annual net cash flow.

In preference decision situations,a project with a lower net present value may be preferable to a project with a higher net present value.

Peter wants to buy a computer which he expects to save him $4,000 each year in bookkeeping costs.The computer will last for five years,and at the end of five years it will have no salvage value.If Peter's required rate of return is 12%,what is the maximum price Peter should be willing to pay for the computer now?

When considering a number of investment projects,the project that has the shortest payback period does not necessarily have the highest net present value.

Beaver Corporation is investigating the purchase of a new threading machine that costs $18,000.The machine would save about $4,000 per year over the present method of threading component parts,and would have a salvage value of about $3,000 in 6 years when the machine would be replaced.The company's required rate of return is 12%.The machine's net present value is closest to:

Jason Corporation has invested in a machine that cost $80,000,that has a useful life of eight 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 five years.Given these data,the simple rate of return on the machine is closest to:

If a project does not have constant incremental revenues and expenses over its useful life,the simple rate of return will fluctuate from year to year.