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Exam 11: Capital Investment Analysis

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Question 51

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Proposals L and K each cost $600,000, have 6-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: Determine the cash payback period for each proposal. Round your answers to two decimal places.

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Proposal L: $600,000/$170,000 ...

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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 D)
F) A) and B)

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Question 53

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

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

When several alternative investment proposals of the same amount are being considered, the one with the largest net present value is the most desirable. If the alternative proposals involve different amounts of investment, it is useful to prepare a relative ranking of the proposals by using a(n)

Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

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: The average rate of return for this investment is

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?

Determine the average rate of return for a project that is estimated to yield total income of $600,000 over 4 years, cost $840,000, and has an $80,000 residual value. Round percentage answers to one decimal place.

In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of:

Below is a table for the present value of $1 at compound interest. Below is a table for the present value of an annuity of $1 at compound interest. Using the tables above, what would be the present value of $30,000 to be received 3 years from today, assuming an earnings rate of 6%?

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

The present value index is computed using which of the following formulas?

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 expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 over the 20 years is

A company is contemplating investing in a new piece of manufacturing machinery.  The amount to be invested is $210,000.  The present value of the future cash flows is $225,000.  The company's desired rate of return used in the present value calculations was 12%.  Which of the following statements is true?

Which of the following is not an advantage of the average rate of return method?

In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values.