ACCT 101 Study Guide - Final Guide: Earnings Before Interest And Taxes, Payback Period
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(Ignore income taxes in this problem.) Buy-Rite Pharmacy haspurchased a small auto for delivering prescriptions. The auto waspurchased for $29,000 and will have a 6-year useful life and a$4,100 salvage value. Delivering prescriptions (which the pharmacyhas never done before) should increase gross revenues by at least$32,100 per year. The cost of these prescriptions to the pharmacywill be about $25,200 per year. The pharmacy depreciates all assetsusing the straight-line method. The payback period for the auto isclosest to: |
1.(Ignore income taxes in this problem.) The management ofDewitz Corporation is considering a project that would require aninitial investment of $76,000. No other cash outflows would berequired. The present value of the cash inflows would be $93,480.The profitability index of the project is closest to:
a. 1.23
b. 0.19
c. 0.81
d. 0.23
2. (Ignore income taxes in this problem.) Czaplinski Corporationis considering a project that would require an investment of$673,000 and would last for 6 years. The incremental annualrevenues and expenses generated by the project during those 6 yearswould be as follows:
Sales | $191,000 |
Variableexpenses | 25,500 |
Contributionmargin | 165,500 |
Fixed expenses: | |
Salaries | 24,500 |
Rents | 18,000 |
Depreciation | 71,000 |
Total fixedexpenses | 113,500 |
Net operatingincome | $52,000 |
The scrap value of the project's assets at the end of the projectwould be $36,000. The payback period of the project is closestto:
a. 6.3 years
b. 5.5 years
c. 12.9 years
d. 12.2 years
3. (Ignore income taxes in this problem.) Rogers Company isstudying a project that would have a ten-year life and wouldrequire an $1,200,000 investment in equipment which has no salvagevalue. The project would provide net operating income each year asfollows for the life of the project:
Sales | $700,000 | |
Less cash variableexpenses | 130,000 | |
Contributionmargin | 570,000 | |
Less fixedexpenses: | ||
Fixed cashexpenses | $280,000 | |
Depreciationexpenses | 96,000 | 376,000 |
Net operatingincome | $194,000 |
The company's required rate of return is 8%. What is the paybackperiod for this project?(Round your answer to two decimalplaces.)
a. 6.19 years
b. 4.14 years
c. 3.11 years
d. 2.11 years
4. (Ignoreincome taxes in this problem.) Oriental Company has gathered thefollowing data on a proposed investment project:
Investment indepreciable equipment | $382,500 |
Annual net cashflows | $51,000 |
Life of theequipment | 11 years |
Salvage value | $0 |
Discount rate | 11.75% |
The company uses straight-linedepreciation on all equipment. |
The payback period for the investment would be: a. 7.50 years b. 11 years c. 0.13 years d. 3.99 years 5. (Ignore income taxes in this problem.) Blaine Corporation isconsidering replacing a technologically obsolete machine with a newstate-of-the-art numerically controlled machine. The new machinewould cost $200,000 and would have a ten-year useful life.Unfortunately, the new machine would have no salvage value. The newmachine would cost $14,500 per year to operate and maintain, butwould save $58,000 per year in labor and other costs. The oldmachine can be sold now for scrap for $21,000. What is the simplerate of return on the new machine? (Round off your answerto the nearest one-hundredth of apercent.) a. 11.75% b. 25.13% c. 29.75% d. 13.13% |
1. A company anticipates a depreciation deduction of $70,000 in year 4 of a project. The company's tax rate is 40% and its discount rate is 12%. The present value of the depreciation tax shield resulting from this deduction is closest to:
A) $17,808
B) $29,000
C) $21,000
D) $13,356
2. (Ignore income taxes in this problem.) Nevland Corporation is considering the purchase of a machine that would cost $120,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $43,000. The company requires a minimum pretax return of 19% on all investment projects. The net present value of the proposed project is closest to:
A) $32,966
B) $26,376
C) $64,902
D) $30,040
3. (Ignore income taxes in this problem) The management of Elamin Corporation is considering the purchase of a machine that would cost $305,745 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $51,000 per year. The internal rate of return on the investment in the new machine is closest to:
A) 9%
B) 11%
C) 12%
D) 10%
4. (Ignore income taxes in this problem.) The management of Solar Corporation is considering the following three investment projects:
Project L | Project M | Project N | ||
Investment required....................... | $37,000 | $55,000 | $82,000 | |
Present value of cash inflows........ | $39,480 | $60,150 | $90,200 |
Rank the projects according to the profitability index, from most profitable to least profitable.
A) M,N,L
B) L,N,M
C) N,L,M
D) N,M,L
5. (Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $368,600 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The payback period of the project is closest to:
A) 3.8 years
B) 2.6 years
C) 2.7 years
D) 4.0 years
6. Dunn Construction, Inc., has a large crane that cost $35,000 when purchased ten years ago. Depreciation taken to date totals $25,000. The crane can be sold now for $8,000. Assuming a tax rate of 40%, if the crane is sold the total after-tax cash inflow for capital budgeting purposes will be:
A) $7,400
B) $10,000
C) $8,800
D) $8,000