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Exam 25: Capital Investment Analysis

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Question 21

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

A) Internal rate of return
B) Net present value
C) Discounted cash flow
D) Average rate of return

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

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Question 22

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A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 6 years.

A) True
B) False

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Question 23

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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 internal rate of return of an investment that required an investment of $189,550, and would generate an annual cash inflow of $50,000 for the next 5 years?

Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $5,500 over a five year life. Project A could be sold at the end of five years for a price of $30,000. (a) Using the proper table below determine the net present value of Project A over a five-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value? 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.

A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity.

The expected average rate of return for a proposed investment of $8,000,000 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 $12,000,000 is:

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) :

The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method) , with a useful life of four years, no residual value, and an expected total income yield of $21,600, is:

The production department is proposing the purchase of an automatic insertion machine. They have 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 a estimated useful life of 10 years.

Using the following partial table of present value of $1 at compound interest, determine the present value of $30,000 to be received three years hence, with earnings at the rate of 12% a year:

In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation method(s) are often used?

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 in this situation: The average rate of return for this investment is:

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 in this situation: The average rate of return for this investment is:

A project has estimated annual cash flows of $90,000 for three years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. 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.

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

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

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

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

A $400,000 capital investment proposal has an estimated life of four 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 .893, .797, .712, and .636, respectively. Determine the net present value.

Which of the following is important when evaluating long-term investments?