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Exam 10: Capital Investment Analysis

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Question 21

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

A) True
B) False

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Question 22

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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 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 payback period for the machine is 4 years.

A) True
B) False

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Question 23

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The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.

An 8-year project is estimated to cost $400,000 and have no residual value.If the straight-line depreciation method is used and the average rate of return is 5%, determine the estimated annual net income.

The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset.

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.

T-Bone Company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $150,000.The present value of the future cash flows is $141,000.Should the company invest in this project?

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 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 16.7%.

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 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: a the average rate of return on investment, including the effect of depreciation on the investment, and b the net present value.

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

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $100,000.The present value of the future cash flows at the company's desired rate of return is $100,000.The IRR on the project is 12%.Which of the following statements is true?

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

Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

Which of the following is a method of analyzing capital investment proposals that ignores present value?

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period.

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

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 net incomes and net cash flows: What is the cash payback period?

All of the following are factors that may complicate capital investment analysis except

The management of Dakota Corporation is considering the purchase of a new machine costing $420,000.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 present value index for this investment is