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Exam 26: Capital Investment Analysis

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Question 31

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Briefly describe the time value of money. Why is the time value of money important in capital investment analysis?

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The time value of money means that a dol...

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Question 32

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

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Question 33

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The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 over the 5 years. The expected average rate of return is 50%.

The management of Indiana 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 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 of this investment: The average rate of return for this investment is

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

The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

Jimmy Co. is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value. Jimmy Co. seeks to earn an average rate of return of 18% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Jimmy Co.

The rate of earnings is 6% and the cash to be received in 4 years is $20,000. The present value amount, using the following partial table of present value of $1 at compound interest is

The management of Charlton 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: The cash payback period for this investment is

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

An anticipated purchase of equipment for $520,000, with a useful life of 8 years and no residual value, is expected to yield the following annual incomes and net cash flows: The cash payback period for this equipment is

Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash inflow of $150,000, and annual operating income of $87,500. The estimated cash payback period for the machine is

The process by which management plans, evaluates, and controls investments in fixed assets is called _____ analysis.

Following is a table for the present value of $1 at compound interest: Following is a table for the present value of an annuity of $1 at compound interest: ​ -Using the tables provided, the internal rate of return of an investment of $227,460 that would generate an annual cash inflow of $60,000 for the next 5 years is

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

Following is a table for the present value of $1 at compound interest: Following is a table for the present value of an annuity of $1 at compound interest: ​ -Using the tables provided, the present value of $3,000 (rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 12%, is

Following is a table for the present value of $1 at compound interest: Following is a table for the present value of an annuity of $1 at compound interest: ​ -Using the tables provided, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next 4 years, the present value of the investment cash inflows, assuming an earnings rate of 12%, is

A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the average annual income.

The management of Zesty 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 in this situation: The cash payback period for this investment is

The amount of the estimated average annual income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method) , with a useful life of 4 years, no residual value, and an expected total income yield of $25,300, is