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Exam 25: Capital Investment Analysis

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Question 21

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Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Tipper Co.

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Question 22

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A six-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.

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Question 23

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In calculating the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.

The rate of earnings is 12% and the cash to be received in two years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest:? $\begin{array} { c c c c } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636\end{array}$ ?

Match each definition that follows with the term (a-f) it defines. -A stream of equal cash flow amounts

In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation methods are often used?

Which of the following are two methods of analyzing capital investment proposals that both ignore present value?

Norton Company is considering a closed-loop geothermal heat pump to replace its existing heating system. The project will require an initial investment of $750,000 and will return $200,000 each year for five years. (a) If taxes are ignored and the required rate of return is 9%, what is the project's net present value? (b) Based on this analysis, should Norton Company proceed with the project?Below is a table for the present value of $1 at compound interest.​​ Below is a table for the present value of an annuity of $1 at compound interest.​

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

A qualitative characteristic that may impact capital investment analysis is manufacturing productivity.

A qualitative characteristic that may impact capital investment analysis is market opportunities.

Briefly describe the time value of money. Why is the time value of money important in capital investment analysis?

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.

Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years.

The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method.

Use these present value tables to answer the questions that follow. ​ Below is a table for the present value of $1 at compound interest. ​ $\begin{array} { c c c c } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636 \\5 & 0.747 & 0.621 & 0.567\end{array}$ Below is a table for the present value of an annuity of $1 at compound interest. ​​ $\begin{array} { c c c c } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 1.833 & 1.736 & 1.690 \\3 & 2.673 & 2.487 & 2.402 \\4 & 3.465 & 3.170 & 3.037 \\5 & 4.212 & 3.791 & 3.605\end{array}$ -Using the tables above, what would be the internal rate of return of an investment of $227,460 that would generate an annual cash inflow of $60,000 for the next five years?

A project has estimated annual cash flows of $90,000 for three years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%. Using the following tables, determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places.Below is a table for the present value of $1 at compound interest.​ Below is a table for the present value of an annuity of $1 at compound interest.

By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money

The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis.

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