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Exam 10: Capital Investment Analysis

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Question 51

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

A) True
B) False

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Question 52

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

A) average rate of return
B) accounting rate of return
C) cash payback period
D) internal rate of return

E) All of the above
F) None of the above

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Question 53

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Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows?

Using the tables above, 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, what would be the present value of the investment cash inflows, assuming an earnings rate of 12%?

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.

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.

The cash payback period for this investment is

The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines and has asked the accountant to analyze them to determine the best average rate of return.

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 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 net present value.

By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money

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, including the effect of depreciation on the investment.

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 flow of $150,000, and annual operating income of $87,500.What is the estimated cash payback period for the machine?

A project has estimated annual net cash flows of $60,000.It is estimated to cost $240,000.Determine the cash payback period.

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

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 an

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

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

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 $300,000 for the 5 years.The expected average rate of return is 37.5%.

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.

Match each of the methods that follow with the correct category a-b. -Cash payback method