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Exam 25: Capital Investment Analysis

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Question 31

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The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is the

A) cash payback method
B) net present value method
C) internal rate of return method
D) average rate of return method

E) B) and D)
F) None of the above

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Question 32

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For Years 1-5, a proposed expenditure of $250,000 for a fixed asset with a five-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is three years.

A) True
B) False

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Question 33

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A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $210,000. The present value of the future cash flows is $225,000. The company's desired rate of return used in the present value calculations was 12%. Which of the following statements is true?

Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?

Match each definition that follows with the term (a-f) it defines. -A measure of the average income as a percent of the average investment

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 is the present value of $3,000 (rounded to the nearest dollar) to be received at the end of each of the next four years, assuming an earnings rate of 12%?

The process by which management allocates available investment funds among competing investment proposals is called

All of the following are factors that may complicate capital investment analysis except

The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment:?? $\begin{array}{rrr}\text { Year } & \text { Income from } & \text { Net Cash } \\& \text { Operations } & \text { Flow } \\\hline2 & \$ 100,000 & \$ 180,000 \\2 & 40,000 & 120,000 \\3 & 20,000 & 100,000 \\4 & 10,000 & 90,000 \\5 & 10,000 & 90,000\end{array}$ The present value index for this investment is

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called

The methods of evaluating capital investment proposals can be separated into two general groups-present value methods and

A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years.

An eight-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 5%, determine the estimated annual net income.

The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this situation:​ The cash payback period for this investment is

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 five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: ​​ -The expected average rate of return for a proposed investment of $650,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the four years, is

Methods that ignore present value in capital investment analysis include the average rate of return method.

The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $200,000 for the five years. The expected average rate of return on investment is 25%.

A qualitative characteristic that may impact capital investment analysis is employee morale.

Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: ​​ -The average rate of return for this investment is