Question
In: Accounting
Capital Budgeting Methods Roosevelt Corporation is considering the acquisition of machinery and equipment at a cost...
Capital Budgeting Methods
Roosevelt Corporation is considering the acquisition of machinery and equipment at a cost of $500,000. No new working capital is required to support the new equipment. The equipment has an estimated useful life of five years and a salvage value of $0. Roosevelt Corporation uses the straight-line method of depreciation. The new equipment is expected to provide an annual net cash flow benefit of $170,000 per year during the five-year period of its useful life.
Required: Evaluate the investment using each of the four methods of capital budgeting:
(1) The net present value method. The company’s desired minimum rate of return for discounted cash flow analysis is 18%. If there is a salvage value on the equipment purchased, do not forget to include that factor in your analysis.
(2) The internal rate of return method to the nearest whole percent. Calculate the factor, and then scan the appropriate line on the applicable table to state the answer to the nearest whole percent.
(3) The payback or cash payback method. Please state your answer in number of years, and round to two decimal places.
(4) The simple rate of return method (ARR). Remember to consider the effect of the depreciation on the net income from the investment. If the percentage return does not come out even, state your answer to the nearest tenth of a percent; that is, to three decimal places.
Solutions
ekkarill92 answered 1 year agoRelated Solutions
Shanks Corporation is considering a capital budgeting project that involves investing $600,000 in equipment that would...
Shanks Corporation is considering a capital budgeting project
that involves investing $600,000 in equipment that would have a
useful life of 3 years and zero salvage value. The company would
also need to invest $20,000 immediately in working capital which
would be released for use elsewhere at the end of the project in 3
years. The net annual operating cash inflow, which is the
difference between the incremental sales revenue and incremental
cash operating expenses, would be $300,000 per year....
Q3: Capital budgeting and cost of capital Reno Co is considering a project that will cost...
Q3: Capital budgeting and cost of capital
Reno Co is considering a project that will cost $ 26,000 and
result in the following cash flows:
Years
1
2
3
4
Project Cash flow
10,000
11,500
12,600
14,800
The views of the directors of Reno Co are that all investment
projects must be evaluated over four years of operations using net
present value. You have given the information below to assist you
to calculate the appropriate discount rate:
Reno Co has...
Q3: Capital budgeting and cost of capital Reno Co is considering a project that will cost...
Q3: Capital budgeting and cost of capital
Reno Co is considering a project that will cost $ 26,000 and
result in the following cash flows:
Years
1
2
3
4
Project Cash flow
10,000
11,500
12,600
14,800
The views of the directors of Reno Co are that all investment
projects must be evaluated over four years of operations using net
present value. You have given the information below to assist you
to calculate the appropriate discount rate:
Reno Co has...
CAPITAL BUDGETING DECISION Chittenden Corp. is considering the acquisition of another firm in its industry. The...
CAPITAL BUDGETING DECISION
Chittenden Corp. is considering the acquisition of
another firm in its industry. The acquisition is expected to
increase Chittenden’s free cash flow by $5 million the first year
and this contribution is expected to grow at a rate of 4% per year
from then on forever. The company has negotiated a purchase price
of $110 million. Chittenden’s weighted average cost of capital is
7.5%. After the transaction, Chittenden will adjust its capital
structure to maintain its current...
A company is considering purchasing some new machinery. Collectively, the acquisition cost would be $3.72 million...
A company is considering purchasing some new machinery.
Collectively, the acquisition cost would be $3.72 million plus a
transportation charge of $94,0000 to get the machinery to the
plant. To better engineer the production flow, $450,000 was spent
to pay a production consultant. Special electrical service would be
required, that and related (required) plant upgrades will be
$124,000. Training of the production workers costing $34,000 is
also necessary. An increase in inventory of $75,000 is needed, to
supply these raw...
Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order to make a few capital budgeting decisions.
Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order to make a few capital budgeting decisions. The firm has already established the proporation of its capital. Use these proportions in calculating the firm's WAAC.
Target Market
Source of Capital
Proportions
Long-term debt
30%
Preferred stock
5%
Common stock equity
65%
Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of...
Capital Budgeting Methods Project S has a cost of $10,000 and is expected to produce benefits...
Capital Budgeting Methods
Project S has a cost of $10,000 and is expected to produce
benefits (cash flows) of $3,500 per year for 5 years. Project L
costs $25,000 and is expected to produce cash flows of $8,000 per
year for 5 years.
Calculate the two projects' NPVs, assuming a cost of capital of
14%. Do not round intermediate calculations. Round your answers to
the nearest cent.
Project S: $
Project L: $
Which project would be selected, assuming they...
Capital Budgeting Methods Project S has a cost of $10,000 and is expected to produce benefits...
Capital
Budgeting Methods
Project S has a cost
of $10,000 and is expected to produce benefits (cash flows) of
$3,000 per year for 5 years. Project L costs $25,000 and is
expected to produce cash flows of $7,400 per year for 5 years.
Calculate the two
projects' NPVs, assuming a cost of capital of 12%. Do not round
intermediate calculations. Round your answers to the nearest
cent.
Project S:
$
Project L:
$
Which project would be
selected, assuming they...
Capital Budgeting Methods Project S has a cost of $9,000 and is expected to produce benefits...
Capital Budgeting Methods
Project S has a cost of $9,000 and is expected to produce
benefits (cash flows) of $2,700 per year for 5 years. Project L
costs $26,000 and is expected to produce cash flows of $7,100 per
year for 5 years.
Calculate the two projects' NPVs, assuming a cost of capital of
10%. Do not round intermediate calculations. Round your answers to
the nearest cent.
Project S: $
Project L: $
Which project would be selected, assuming they...
Capital Budgeting Methods Project S has a cost of $10,000 and is expected to produce benefits...
Capital Budgeting Methods Project S has a cost of $10,000 and is
expected to produce benefits (cash flows) of $3,000 per year for 5
years. Project L costs $25,000 and is expected to produce cash
flows of $7,300 per year for 5 years. Calculate the two projects'
NPVs, assuming a cost of capital of 12%. Round your answers to the
nearest cent. Project S $ Project L $ Which project would be
selected, assuming they are mutually exclusive? Calculate the...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Explain the use of neural networking modeling in predictive analytics.
- Current Market Mix of Netflix, as detail as possible, please.
- This is all one question, thank you so much in advance! You must evaluate a proposal...
- X Company is considering the purchase of a new processor that costs $200,000. Shipping and setup...
- There are a large number of tasks involved in information technology and programming, and many of...
- Using one quantitative and one qualitative health policy research method described in this chapter, design a...
- What is the Rawls' solution to the age-old question of social (economic / distributive) justice?...
ADVERTISEMENT