Objective type questions on capital budgeting

1. Chee Company has gathered the following data on a proposed investment project: The payback period for the investment is closest to:

a. 0.2 years

b. 2.5 years

c. 4.8 years

d. 5.0 years

2. The management of Leitheiser Corporation is considering a project that would require an initial investment of $51,000. No other cash outflows would be required. The present value of the cash inflows would be $57,630.
The profitability index of the project is closest to:

A. 1.13

B. b 0.87

C. 0.13

D. 0.12

3. Gibboney Inc. has provided the following data to be used in evaluating a proposed investment project:
For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 7 years. The company uses a discount rate of 12%. When computing the net present value of the project, what is the annual amount of the depreciation tax shield? In other words, by how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken?

a. $37,714

b. $88,000

c. $77,000

d. $33,000

4. Allo Foundation, a tax-exempt organization, invested $200,000 in cost saving equipment. The equipment has a five-year useful life with no salvage value. Allo estimates that the annual cash savings from this project will amount to $65,000. On investments of this type, Allo's required rate of return is 12%.
Allo's internal rate of return on this project is closest to:

a. 13%

b. 15%

c. 17%

d. 19%

5. Shufflebarger Inc. has provided the following data to be used in evaluating a proposed investment project:
The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 16%. When computing the net present value of the project, what are the annual after-tax cash receipts?

a. $112,000

b. $137,200

c. $29,400

d. $58,800

6. Chee Company has gathered the following data on a proposed investment project: The internal rate of return on the investment is closest to:

a. 11%

b. 13%

c. 15%

d. 17%

7. Gibboney Inc. has provided the following data to be used in evaluating a proposed investment project: For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 7 years. The company uses a discount rate of 12%. The net present value of the project is closest to:

a. $464,622

b. $439,736

c. 292,494

d. $267,608

8. Dumora Corporation is considering an investment project that will require an initial investment of $9,400 and will generate the following net cash inflows in each of the five years of its useful life: Dumora's payback period for this investment project is closest to:

a. 1.91 years

b. 2.61 years

c. 2.89 years

d. 3.40 years

9. Virginia Company invested in a four-year project. Virginia's discount rate is 10%. The cash inflows from this project are: Assuming a positive net present value of $1,000, the amount of the original investment was closest to:

a. $2,552

b. $4,552

c. $13,427

d. $17,400

10. The Malaise Prevention Agency is a non-profit organization that does all of its own informational printing. The printing press that Malaise currently is using needs a $20,000 overhaul. This will extend the useful life of the press by 8 years. As an alternative, Malaise could buy a brand new modern press for $45,000. The new press would also last 8 years. The annual operating expenses of the old press are $12,000. The annual operating expenses of the new press will only be $7,000. The old press is not expected to have a salvage value in 8 years. The new press is expected to have a $6,000 salvage value in 8 years. Malaise\'s discount rate is 14%. The net present value of the decision to buy the new press instead of overhauling the old press is closest to:

a. $301

b. $(301)

c. $4,195

d. $(46,089)