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Exam 25: Capital Investment Analysis

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Question 91

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The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) average rate of return and (2) cash payback methods.

A) True
B) False

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Question 92

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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, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next four years, what would be the net present value of the investment, assuming an earnings rate of 10%?

A) $23,500
B) $16,050
C) $25,360
D) $1,860

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

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Question 93

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Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths and weaknesses of each method.

A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000. Determine the cash payback period.

Match each definition that follows with the term (a-e) it defines. -Average income as a percentage of average investment

Methods that ignore present value in capital investment analysis include the cash payback 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 50%.

Proposals L and K each cost $600,000, have six-year lives, and have expected total cash flows of $720,000. Proposal L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal K are as follows:​​ $\begin{array}{l}\text { Year 1 } & \$ 250,000 \\\text { Year 2 } & 200,000 \\\text { Year 3 } & 100,000 \\\text { Year 4 } & 50,000 \\\text { Year 5 } & 100,000 \\\text { Year 6 } & 20,000\\&\$ 720,000\end{array}$ Determine the cash payback period for each proposal. Round answers to two decimal places.

Match each of the methods that follow with the correct category (a or b) . -Internal rate of return method

Average rate of return equals average investment divided by estimated average annual income.

Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $150,000, and annual operating income of $87,500. What is the estimated cash payback period for the machine?

Assume in analyzing alternative proposals that Proposal F has a useful life of six years and Proposal J has a useful life of nine years. What is one widely used method to make the net present values of the proposals comparable?

The net present value has been computed for Proposals P and Q. Relevant data are as follows:​ Determine the present value index for each proposal. Round answers to two decimal places.

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 $25,000 (rounded to the nearest dollar) to be received four years from today, assuming an earnings rate of 10%?

All of the following qualitative considerations may impact capital investment analysis except

Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions.

Determine the average rate of return for a project that is estimated to yield total income of $600,000 over four years, cost $840,000, and has an $80,000 residual value. Round percentage to one decimal place.

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 $30,000 to be received three years from today, assuming an earnings rate of 6%?

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 50%.

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 $6,000 to be received at the end of each of the next four years, assuming an earnings rate of 10%?