De Vry University Capital Budgeting Proposal Essay

1.Assume

the

following

information

for

a

capital

budgeting

proposal

with

a

five-year

time

horizon:

Initial investment:

Cost of equipment (zero salvage value)

$ 570,000 Annual revenues and costs: Sales revenues

$ 300,000 Variable expenses

$ 130,000 Depreciation expense

$ 50,000 Fixed out-of-pocket costs

$ 40,000

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

If the company’s discount rate is 12%, then the net present value for this investment is closest to:

2. Assume the following information for a capital budgeting proposal with a five-year time horizon:

Initial investment:Cost of equipment (zero salvage value)

Annual revenues and costs:

Sales revenues$ 300,000Variable expenses$ 130,000Depreciation expense$ 50,000Fixed out-of-pocket costs$ 40,000

$ 520,000

This proposal’s internal rate of return is closest to?

3. Assume that a company is considering purchasing a machine for $42,750 that will have a five-year useful life and no salvage value. The machine will lower operating costs by $17,000 per year. The company’s required rate of return is 18%. The profitability index for this investment is closest to:

4. Assume that a company buys a new machine for $220,000 that has a useful life of five years and a $20,000 salvage value. The new machine will replace an old machine that can be sold for a salvage value of $10,000. The machine will generate incremental contribution margin of $42,000 per year. The only fixed expense associated with the new machine is its annual depreciation of $40,000 per year. What is the payback period for this investment?

5. Assume the following information for a capital budgeting proposal with a five-year time horizon:

Initial investment:Cost of equipment (zero salvage value)

Annual revenues and costs:

Sales revenues$ 300,000Variable expenses$ 130,000Depreciation expense$ 50,000Fixed out-of-pocket costs$ 40,000

$ 480,000

This proposal’s simple rate of return is closest to:

6. Ursus, Incorporated, is considering a project that would have a ten-year life and would require a $1,806,000 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 (Ignore income taxes.):

Sales

Variable expenses

Contribution margin

Fixed expenses:Fixed out-of-pocket cash expenses

Depreciation

Net operating income

$ 2,000,000
1,350,000
650,000
$ 230,000
180,600	410,600
$ 239,4006

6. All of the above items, except for depreciation, represent cash flows. The company’s required rate of return is 14%.

Required:

a. Compute the project’s net present value. (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

b. Compute the project’s internal rate of return. (Round your final answer to the nearest whole percent.)

c. Compute the project’s payback period. (Round your answer to 2 decimal place.)

d. Compute the project’s simple rate of return. (Round your final answer to the nearest whole percent.)