Exam 12: Performance Measurement in Decentralized Organizations

An expansion at Fidell,Inc. ,would increase sales revenues by $75,000 per year and cash operating expenses by $38,000 per year.The initial investment would be for equipment that would cost $135,000 and have a 5 year life with no salvage value.The annual depreciation on the equipment would be $27,000.The simple rate of return on the investment is closest to:

Allen College has a telephone system that is in poor condition.The system can be either overhauled or replaced with a new system.The following data have been gathered concerning these two alternatives: Allen College uses a 12% discount rate and the total cost approach to net present value analysis.Both alternatives are expected to have a useful life of eight years. The net present value of the alternative of replacing the present system with the proposed new system is closest to:

Bevans Corporation is considering a capital budgeting project that would require an initial investment of $190,000.The investment would generate annual cash inflows of $58,000 for the life of the project,which is 4 years.The company's discount rate is 7%.The net present value of the project is closest to:

Baker Corporation is considering buying a new donut maker.This machine will replace an old donut maker that still has a useful life of 4 years.The new machine will cost $3,500 a year to operate,as opposed to the old machine,which costs $3,900 per year to operate.Also,because of increased capacity,an additional 10,000 donuts a year can be produced.The company makes a contribution margin of $0.15 per donut.The old machine can be sold for $6,000 and the new machine costs $28,000.The incremental annual net cash inflows provided by the new machine would be:

The management of Grayer Corporation is considering the following three investment projects: The only cash outflows are the initial investments in the projects. Required: Rank the investment projects using the project profitability index.Show your work

Burba Inc.is considering investing in a project that would require an initial investment of $200,000.The life of the project would be 5 years.The annual net cash inflows from the project would be $60,000.The salvage value of the assets at the end of the project would be $30,000.The company uses a discount rate of 17%. Required: Compute the net present value of the project.

Allen College has a telephone system that is in poor condition.The system can be either overhauled or replaced with a new system.The following data have been gathered concerning these two alternatives: Allen College uses a 12% discount rate and the total cost approach to net present value analysis.Both alternatives are expected to have a useful life of eight years. The net present value of the alternative of overhauling the present system is closest to:

A project requires an initial investment of $70,000 and has a project profitability index of 0.932.The present value of the future cash inflows from this investment is:

Swaggerty Corporation is considering purchasing a machine that would cost $462,000 and have a useful life of 7 years.The machine would reduce cash operating costs by $115,500 per year.The machine would have no salvage value. Required: a.Compute the payback period for the machine. b.Compute the simple rate of return for the machine.

Lebert,Inc. ,is considering the purchase of a machine that would cost $380,000 and would last for 7 years.At the end of 7 years,the machine would have a salvage value of $49,000.The machine would reduce labor and other costs by $96,000 per year.Additional working capital of $6,000 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 18% on all investment projects. 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:

Discounted cash flow techniques do not take into account recovery of initial investment.

Chee Corporation has gathered the following data on a proposed investment project: The company uses straight-line depreciation.Assume cash flows occur uniformly throughout a year except for the initial investment. The net present value on this investment is closest to:

Westland College has a telephone system that is in poor condition.The system either can be overhauled or replaced with a new system.The following data have been gathered concerning these two alternatives: Westland College uses a 10% discount rate and the total cost approach to net present value analysis.The working capital required under the new system would be released for use elsewhere at the conclusion of the project.Both alternatives are expected to have a useful life of eight years. The net present value of overhauling the present system is closest to:

Pro-Mate,Inc.is a producer of athletic equipment.The company is considering the purchase of a machine to produce baseball bats.The machine will cost $60,000 and have a 10-year useful life.The following annual revenues and expenses are projected: The machine will have no salvage value.Assume cash flows occur uniformly throughout a year except for the initial investment. The simple rate of return would be about:

When discounted cash flow methods of capital budgeting are used,the working capital required for a project is ordinarily counted as a cash inflow at the beginning of the project and as a cash outflow at the end of the project.

The management of Mashiah Corporation is considering the purchase of a machine that would cost $290,000,would last for 6 years,and would have no salvage value.The machine would reduce labor and other costs by $102,000 per year.The company requires a minimum pretax return of 13% on all investment projects. The present value of the annual cost savings of $102,000 is closest to:

The management of Stanforth Corporation is investigating automating a process.Old equipment,with a current salvage value of $24,000,would be replaced by a new machine.The new machine would be purchased for $516,000 and would have a 6 year useful life and no salvage value.By automating the process,the company would save $173,000 per year in cash operating costs.The simple rate of return on the investment is closest to:

Naomi Corporation has a capital budgeting project that has a negative net present value of $36,000.The life of this project is 6 years.Naomi's discount rate is 20%.By how much would the annual cash inflows from this project have to increase in order to have a positive net present value?

The payback method of making capital budgeting decisions does not give full consideration to the time value of money.

Pro-Mate,Inc.is a producer of athletic equipment.The company is considering the purchase of a machine to produce baseball bats.The machine will cost $60,000 and have a 10-year useful life.The following annual revenues and expenses are projected: The machine will have no salvage value.Assume cash flows occur uniformly throughout a year except for the initial investment. The payback period for the new machine is about: