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Exam 25: Capital Investment Analysis

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Question 31

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Match each of the methods that follow with the correct category a-b) . -Average rate of return method

A) Methods that does not use present value
B) Methods that uses present value

C) A) and B)
D) undefined

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Question 32

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Proposals L and K each cost $600,000, have 6-year lives, and have expected total cash flows of $720,000. Proposal L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal K are as follows: $\begin{array} { l r } \text { Year 1 } & \$ 250,000 \\\text { Year 2 } & 200,000 \\\text { Year 3 } & 100,000 \\\text { Year 4 } & 50,000 \\\text { Year 5 } & 100,000 \\\text { Year 6 } & 20,000 \\ & \$ 720,000\end{array}$ Determine the cash payback period for each proposal. Round your answers to two decimal places.

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Proposal L: $600,000/$170,000 ...

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Question 33

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The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

The expected average rate of return for a proposed investment of $6,000,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $12,000,000 over the 20 years is

Which of the following is a present value method of analyzing capital investment proposals?

All of the following qualitative considerations may impact upon capital investment analysis except

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period.

BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: $\begin{array}{lll}\text { Year } & \text { Net Income } & \text { Net Cash Flow } \\1 & \$ 75,000 & \$ 285,000 \\2 & 102,000 & 290,000 \\3 & 109,500 & 190,000 \\4 & 36,000 & 125,000 \\\hline&\$322,500&\$890,000\end{array}$ The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. Determine: a) the average rate of return on investment, including the effect of depreciation on the investment, and b) the net present value.

The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines and has asked the accountant to analyze them to determine the best cash payback. $\begin{array} { | l | l | l | l | } \hline & \text { Machine } A & \text { Machine B } & \text { Machine C } \\\hline \text { Annual cash flow } & \$ 40,000 & \$ 50,000 & \$ 75,000 \\\hline \text { Average investment } & \$ 300,000 & \$ 250,000 & \$ 500,000 \\\hline\end{array}$

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: $\begin{array} { c l l } & \text { Income from } & \text { Net Cash } \\\text { Year } & \text { Operations } & \text { Flow } \\1 & \$ 18,750 & \$ 93,750 \\2 & 18,750 & 93,750 \\3 & 18,750 & 93,750 \\4 & 18,750 & 93,750 \\5 & 18,750 & 93,750\end{array}$ -The average rate of return for this investment is

Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life of 9 years. What is one widely used method to make the net present values of the proposals comparable?

Using the following partial table of present value of $1 at compound interest, the present value of $15,000 to be received 3 years hence with earnings at the rate of 6% a year is $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636\end{array}$

In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values.

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated annual net income.

T-Bone Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project?

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: -The present value index for this investment is

Average rate of return equals average investment divided by estimated average annual income.

Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of

Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4 years, cost $480,000, and has a $20,000 residual value.