Question

Section 7:

Rank the following three investments (from best to worst) using the NPV method (assume a 17% cost of capital). Besides ranking them, also identify which of them are acceptable under the NPV method:

**Investment A**

Cost: $100,000. Cash Flows: Year 1: $45,000; Year 2: $48,000; Year 3: $55,000

**Investment B**

Cost: $120,000. Cash Flows: Year 1: $40,000; Year 2: $38,000; Year 3: $65,000

**Investment C**

Cost: $150,000. Cash Flows: Year 1: $55,000; Year 2: $58,000; Year 3: $65,000

Group of answer choices

Rank: 1--B (acceptable); 2--A (unacceptable); 3--C (unacceptable)

Rank: 1--B (acceptable); 2--C (acceptable); 3--A (unacceptable)

Rank: 1--C (acceptable); 2--A (unacceptable); 3--B (unacceptable)

Rank: 1--A (acceptable); 2--B (unacceptable); 3--C (unacceptable)

Tony Romy's BBQ Rib company is trying to decide whether to make an investment in a new smoker. The smoker will cost $300,000. They will sell the old smoker for $75,000. The old smoker has a book value of $25,000. Tony's tax rate is 35%. What is the net cost of the investment in this case (for capital budgeting purposes)?

Group of answer choices

$207,500

$242,500

$300,000

$225,000

Paul's Pretzels Company is considering an investment in a new oven. The oven will cost $50,000. Paul will sell the old oven for its current book value, $5,000. Paul's tax rate is 35%. Using the 5-year MACRS depreciation method, calculate the depreciation for the new oven in year 2 of its residence at Paul's Pretzels.

Group of answer choices

$9,000

$14,400

$10,000

$16,000

Answer #1

Answer with working notes is given below

Section 6:
Wally's Water Delivery Company is considering buying a second
delivery truck so that it can expand its operations. The company
currently has $250,000 in annual sales. The truck will cost
$45,000. Wally believes that the second truck will allow his
company to increase its cash flows by $25,000 in the first year.
The cash flows associated with the new truck are expected to
increase by 25% each year (vs. the prior year) for years 2, 3, and
4....

Section 5
Jean's Juice Company is considering an investment in a new juice
machine. The machine will cost $10,000. Jean's Juice uses a
corporate hurdle rate (cost of capital) of 18% for all of its
projects. If the juice machine project has a positive NPV of $5.00,
what does this mean?
Group of answer choices
The project's IRR is probably greater than 18%.
The project should be rejected.
The project earns $5.00 on the investment of $10,000.
The project's payback...

Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Cute Camel Woodcraft Company is evaluating a proposed
capital budgeting project (project Beta) that will require an
initial investment of $3,225,000. The project is expected to
generate the following net cash flows:
Year
Cash Flow
Year 1
$300,000
Year 2
$450,000
Year...

Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Black Sheep Broadcasting Company is evaluating a
proposed capital budgeting project (project Beta) that will require
an initial investment of $2,750,000. The project is expected to
generate the following net cash flows:
Year
Cash Flow
Year 1
$300,000
Year 2
$500,000
Year 3
$500,000
Year 4...

Assume a $105,000 investment and the following cash flows for
two alternatives.
Year
Investment A
Investment B
1
$
45,000
$
55,000
2
30,000
30,000
3
15,000
25,000
4
30,000
—
5
10,000
—
a. Calculate the payback for investment A and B.
(Round your answers to 2 decimal places.)
b. Which investment would you select under the
payback method?
Investment A
Investment B
c. If the inflow in the fifth year for Investment
A was $10,000,000 instead...

1. The Hunter Company uses the high-low method to estimate the
cost function. Year-to-date information for 2020 is provided below:
Machine-hours Labor Costs January 400 $10,000 February 280 $ 6,800
March 380 $10,050 April 250 $ 7,300 May 320 $ 9,525 What can Hunter
expect the total cost to be when 300 machine-hours are used? Group
of answer choices $9,406.25 $7,450.00 $8,200.00 $7,233.33
2. Southwestern Company needs 1,000 motors in its manufacture of
automobiles. It can buy the motors from...

Medical Technology Enterprises is trying to select the best
investment from among four alternatives. Each alternative involves
an initial outlay of $100,000. and the company’s cost of capital
(WACC) is 8%. Their future cash flows follow:
(See pages 383 – 390).
Year
Alternative A ($)
Alternative B (S)
Alternative C ($)
Alternative D ($)
1
10,000
50,000
25,000
0
2
20,000
40,000
25,000
0
3
30,000
30,000
25,000
45,000
4
40,000
0
25,000
55,000
5
50,000
0
25,000
60,000...

Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Happy Dog Soap Company is evaluating a proposed capital
budgeting project (project Alpha) that will require an initial
investment of $450,000. The project is expected to generate the
following net cash flows:
Year
Cash Flow
Year 1
$300,000
Year 2
$475,000
Year...

Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Fuzzy Button Clothing Company is evaluating a proposed
capital budgeting project (project Alpha) that will require an
initial investment of $450,000. The project is expected to generate
the following net cash flows:
Year
Cash Flow
Year 1
$325,000
Year 2
$475,000
Year 3
$450,000
Year 4...

Section 4
Brady's Burgers is considering purchasing a new deep fryer. The
fryer will cost $25,000. The new machine will allow them to make
french fries faster to fill demand. Brady's estimates that their
extra cash flows from investing in this new machine will be:
Yr 1: $10,000
Yr 2: $14,000
Yr 3: $10,000
What is the payback period of this investment? Assume cash flows
will be evenly distributed throughout each year.
Group of answer choices
2.5 years
3 years...

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