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Exam 26: Capital Investment Analysis

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Question 61

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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 cash payback period for this investment is

A) 4 years
B) 5 years
C) 20 years
D) 3 years

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

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Question 62

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Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% 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 Tipper Co.

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Question 63

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Match each phrase that follows with the term (a-f) it describes. -A formal means of analyzing long-range investment decisions A)Capital rationing B)Annuity C)Capital investment analysis D)Internal rate of return method E)Payback period F)Accounting rate of return

All of the following qualitative considerations may influence capital investment analysis except the investment proposal's impact on

The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine which one has the best cash payback.

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

The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. 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 net present value for this investment is

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 payback period for the machine is 12 years.

Sunrise Inc. is considering a capital investment proposal that costs $227,500 and has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: The minimum desired rate of return for net present value analysis is 10%. The factors for the present value of $1 at the compound interest rate of 10% for 1, 2, 3, and 4 years are 0.909, 0.826, 0.751, and 0.683, respectively. Determine the net present value. Round interim answers to the nearest dollar.

BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: The company's minimum desired rate of return is 12%. The factors for the present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years are 0.893, 0.797, 0.712, and 0.636, respectively.Determine (a) the average rate of return on investment and (b) the net present value.

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 $8,000 to be received 1 year from today, assuming an earnings rate of 12%, is

A $400,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: The minimum desired rate of return for net present value analysis is 12%. The factors for the present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years are 0.893, 0.797, 0.712, and 0.636, respectively.​ Determine the net present value.

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

In computing the present value of an investment in equipment, the present value of the residual value should be added to the cash inflows

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

Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life of 9 years. What is one widely used method to make the net present values of the proposals comparable?

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 payback period for the machine is 4 years.

The expected period of time between the date of an investment and the recovery in cash of the amount invested is called the cash payback period.

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.Determine the average rate of return on investment.

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 the company invest in this project?