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Exam 25: Capital Investment Analysis

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Question 61

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Which of the following is true of the cash payback period?

A) The longer the payback, the longer the estimated life of the asset.
B) The longer the payback, the sooner the cash spent on the investment is recovered.
C) The shorter the payback, the less likely the possibility of obsolescence.
D) All of the above are correct.

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

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Question 62

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A 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 generated by the project is $145,000. Should they invest in this project?

A) yes, because the rate of return on the project exceeds the desired rate of return used to calculate the present value of the future cash flows.
B) no, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows.
C) no, because net present value is +$5,000
D) yes, because the rate of return on the project is equal to the desired rate of return used to calculate the present value of the future cash flows.

E) A) and B)
F) A) and C)

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Question 63

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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. Using the tables above, what would be the present value of $10,000 (rounded to the nearest dollar) to be received three years from today, assuming an earnings rate of 6%?

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

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 cash payback period.

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company's desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true?

The amount of the average investment for a proposed investment of $90,000 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 4 years, is:

Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received four years hence, with earnings at the rate of 10% a year:

A project has estimated annual net cash flows of $50,000. It is estimated to cost $180,000. Determine the cash payback period.

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 in this situation: The net present value for this investment is:

Which of the following is an advantage of the cash payback method?

What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?

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

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 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: The net present value for this investment is:

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 rejected.

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

Periods in time that experience increasing price levels are known as periods of:

The accounting rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

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 cash flows per year of $6,000. The accounting rate of return for the machine is 16.7%.

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 in this situation: The present value index for this investment is: