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Exam 26: Capital Investment Analysis

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Question 1

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Match each of the methods that follow with the correct category (a-b). -Internal rate of return method A)Methods that do not use present values B)Methods that use present values

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Question 2

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Using the following partial table of present value of $1 at compound interest, determine the present value of $50,000 to be received 3 years hence with earnings at the rate of 12% a year.

A) $37,550
B) $31,800
C) $35,600
D) $39,850

E) All of the above
F) A) and B)

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Question 3

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A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on employee morale.

A company is considering purchasing a machine for $21,000. The machine will generate operating income of $2,000; annual net cash inflows from the machine will be $3,500. The cash payback period for the new machine is 10.5 years.

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: ​ -The present value index for this investment is

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

Match each phrase that follows with the term (a-e) it describes. -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

The management of Nebraska 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 1 through 5 years 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: ​ -The average rate of return for this investment is

A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on manufacturing productivity.

A project is estimated to cost $248,400 and provide annual net cash inflows of $50,000 for 8 years. Determine the internal rate of return for this project, using the following present value of an annuity table.

The _____ method of analyzing capital investment proposals divides the estimated average annual income by the average investment.

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

Xander Inc. has prepared the following sensitivity analysis: In addition, it has assigned the following likelihoods to the three possible annual net cash flows: $500,000, 70%; $600,000, 20%; and $700,000, 10%. Based on an expected value analysis, which of the following statements is accurate?

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash inflow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on market opportunities.

A company is considering purchasing a machine for $21,000. The machine will generate operating income of $2,000; annual net cash inflows from the machine will be $3,500. The cash payback period for the new machine is 6 years.

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

The time expected to pass before the net cash inflows from an investment would return its initial cost is called the amortization period.

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 operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The average rate of return for the machine is 16.7%.

Proposals A and B each cost $600,000 and have 5-year lives. Proposal A is expected to provide equal annual net cash flows of $159,000, while the net cash flows for Proposal B are as follows: Determine the cash payback period for each proposal. Round answers to two decimal places.