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Exam 25: Capital Investment Analysis

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Question 51

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A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows from the investment are $36,000 Year 1), $30,000 Year 2), $18,000 Year 3), $12,000 Year 4), and $6,000 Year 5). The average income from operations over the 5-year life is $20,400. The payback period is 3.5 years.

A) True
B) False

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Question 52

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Which of the following is not considered a complicating factor in capital investment decisions?

A) income tax
B) lease versus purchasing options
C) equal proposal lives
D) qualitative factors

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

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Question 53

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

Norton Company is considering a project that will require an initial investment of $750,000 and will return $200,000 each year for 5- 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. $\begin{array} { l l l l } \text { Year } & 9 \% & \text { Year } & 9 \% \\\hline 1 & 0.917 & 6 & 0.596 \\2 & 0.842 & 7 & 0.547 \\3 & 0.772 & 8 & 0.502 \\4 & 0.708 & 9 & 0.460 \\5 & 0.650 & 10 & 0.422\end{array}$ Below is a table for the present value of an annuity of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 9 \% & \text { Year } & 9 \% \\\hline 1 & 0.917 & 6 & 4.486 \\2 & 1.759 & 7 & 5.033 \\3 & 2.531 & 8 & 5.535 \\4 & 3.240 & 9 & 5.995 \\5 & 3.890 & 10 & 6.418\end{array}$

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

An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next 4- years. What is the investment's internal rate of return? Below is a table for the present value of $1 at compound interest. $\begin{array}{lllll}\text { Year }&6\%&10\%&12\%&15\%\\\hline1 & 0.943 & 0.909 & 0.893 & 0.870 \\2 & 0.890 & 0.826 & 0.797 & 0.756 \\3 & 0.840 & 0.751 & 0.712 & 0.658 \\4 & 0.792 & 0.683 & 0.636 & 0.572 \\5 & 0.747 & 0.621 & 0.567 & 0.497\end{array}$ Below is a table for the present value of an annuity of $1 at compound interest. $\begin{array}{lllll}\text { Year }&6\%&10\%&12\%&15\%\\\hline1 & 0.943 & 0.909 & 0.893 & 0.870 \\2 & 1.833 & 1.736 & 1.690 & 1.626 \\3 & 2.673 & 2.487 & 2.402 & 2.283 \\4 & 3.465 & 3.170 & 3.037 & 2.855 \\5 & 4.212 & 3.791 & 3.605 & 3.353\end{array}$

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

The internal rate of return method of analyzing capital investment proposals uses present value concepts to compute a rate of return expected from the proposals.

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 cash payback period for this 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 of this investment: $\begin{array} { l l l } & \text { Income from } & \text { Net Cash } \\\text { Year } & \text { Operations } & \text { Flow } \\1 & \$ 20,000 & \$ 95,000 \\2 & 20,000 & 95,000 \\3 & 20,000 & 95,000 \\4 & 20,000 & 95,000 \\5 & 20,000 & 95,000\end{array}$ -The average rate of return for this investment is

If a proposed expenditure of $70,000 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 2.5 years.

Match each definition that follows with the term a-e) it defines. -Recognizes that a dollar today is worth more than a dollar tomorrow

A project has estimated annual net cash flows of $60,000. It is estimated to cost $240,000. Determine the cash payback period.

The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years, is

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.

A company is planning to purchase a machine that will cost $24,000, have a 6-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 4 years.

Which of the following are present value methods of analyzing capital investment proposals?

Brunette Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $180,000. The present value of the future cash flows generated by the project is $163,000. Should they invest in this project?

A company is planning to purchase a machine that will cost $24,000, have a 6-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 50%.

Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for 7 years. Project B has a calculated net present value of $13,500 over a 4-year life. Project A could be sold at the end of 4 years for $25,000. a) Using the table below, determine the net present value of Project A over a 4-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. $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636 \\5 & 0.747 & 0.621 & 0.567\end{array}$ Below is a table for the present value of an annuity of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 1.833 & 1.736 & 1.690 \\3 & 2.673 & 2.487 & 2.402 \\4 & 3.465 & 3.170 & 3.037 \\5 & 4.212 & 3.791 & 3.605\end{array}$