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Exam 25: Capital Investment Analysis

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Question 61

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Match each definition that follows with the term (a-e) it defines. -Can be determined by initial cost divided by annual net cash inflow of an investment

A) Capital investment analysis
B) Time value of money concept
C) Net present value method
D) Average rate of return
E) Cash payback period

F) B) and C)
G) D) and E)

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Question 62

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A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The average rate of return for the machine is 16.7%.

A) True
B) False

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Question 63

Multiple Choice

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Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The payback period for the machine is four years.

The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. 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:​ The net present value for this investment is

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

Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $5,500 over a five-year life. Project A could be sold at the end of five years for a price of $30,000. (a) Using the table below, determine the net present value of Project A over a five-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value?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. $\begin{array} { c c c c } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 1.833 & 1.736 & 1.690 \\3 & 2.673 & 2.487 & 2.402 \\4 & 3.465 & 3.170 & 3.037 \\5 & 4.212 & 3.791 & 3.605\end{array}$

An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years. What is the investment's internal rate of return?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.​

Match each definition that follows with the term (a-f) it defines. -A formal means of analyzing long-range investment decisions

A series of equal cash flows at fixed intervals is termed a (n)

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 present value of $15,000 to be received at the end of each of the next two years, assuming an earnings rate of 6%?

The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the four years is

Match each of the methods that follow with the correct category (a or b) . -Cash payback method

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

The production department is proposing the purchase of an automatic insertion machine. It has identified three machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return??? $\begin{array}{|l|r|r|r|}\hline & \text { Machine A } & \text { Machine B } & \text { Machine C } \\\hline \text { Annual net cash flows } & \$ 50,000 & \$ 40,000 & \$ 75,000 \\\hline \text { Average investment } & 250,000 & 300,000 & 500,000 \\\hline\end{array}$

Match each definition that follows with the term (a-e) it defines. -Also referred to as capital budgeting

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

The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine the best cash payback. Which machine has the best payback period?​

The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method) , with a useful life of four years, no residual value, and an expected total income yield of $25,300, is

The management of California 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 investment:​ The present value index for this investment is