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Exam 25: Capital Investment Analysis

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Question 71

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Decisions to install new equipment,replace old equipment,and purchase or construct a new building are examples of

A) sales mix analysis
B) variable cost analysis
C) capital investment analysis
D) variable cost analysis.

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

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Question 72

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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 for the 5 years.The expected average rate of return on investment is 50%.

A) True
B) False

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Question 73

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

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

The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines and have asked the accountant to analyze them to determine which of the proposals (if any) meet or exceed the company's policy of a minimum desired rate of return of 10% using the net present value method.Each of the assets has an estimated useful life of 10 years.The accountant has identified the following data: ​ ​Which of the investments are acceptable?

Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?

Match each definition that follows with the term (a-e) it defines. -Average income as a percentage of average investment

Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332.Estimated cash flows are expected to be $36,000 annually for 4 years.The present value factors for an annuity of $1 for 4 years at interest of 10%,12%,14%,and 15% are 3.170,3.037,2.914,and 2.855,respectively.The internal rate of return for this investment is

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 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 estimated annual net income.

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

Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240.Estimated cash flows are expected to be $40,000 annually for 7 years.The present value factors for an annuity of $1 for 7 years at interest of 6%,8%,10%,and 12% are 5.582,5.206,4.868,and 4.564,respectively.The internal rate of return for this investment 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 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.

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

If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested,the rate of return on the proposal exceeds the rate used in the analysis.

The management of Arkansas 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 of this investment: ​ The net present value for this investment is

A project has estimated annual net cash flows of $80,000.It is estimated to cost $600,000.Determine the cash payback period.

A project is estimated to cost $273,840 and provide annual net cash flows of $60,000 for 7 years.Determine the internal rate of return for this project,using the following present value of an annuity table.

The cash payback method of capital investment analysis is one of the methods referred to as a present value method.

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.