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Exam 25: Capital Investment Analysis

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Question 41

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If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

A) True
B) False

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Question 42

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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 of $294,840 that would generate an annual cash inflow of $70,000 for the next 5 years?

A) 6%
B) 10%
C) 12%
D) cannot be determined from the data given.

E) C) and D)
F) B) and C)

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Question 43

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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.

A project has estimated annual net cash flows of $90,000. It is estimated to cost $324,000. Determine the cash payback period.

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

The expected average rate of return for a proposed investment of $600,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is:

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis.

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called cost-volume-profit analysis.

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

Proposals L and K each cost $500,000, 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 $140,000, 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.

Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years.

A company is planning to purchase a machine that will cost $24,000, have a six-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 cash flows per year of $6,000. The payback period for the machine is 4 years.

Which of the following are present value methods of analyzing capital investment proposals?

The internal rate of return method is used to analyze a $946,250 capital investment proposal with annual net cash flows of $250,000 for each of the six years of its useful life.

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

The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) methods that ignore present value and (2) present values methods.

The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

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 is less than the rate used in the analysis.

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 is the present value of $6,000 (rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 10%?

The rate of earnings is 10% and the cash to be received in three years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest: