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Exam 10: Capital Investment Analysis

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Question 41

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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.

A) True
B) False

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Question 42

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A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $170,000. The present value of the future cash flows is $185,000. The company's desired rate of return used in the present value calculations was 10%. Which of the following statements is true?

A) The project should not be accepted because the net present value is negative.
B) The internal rate of return on the project is less than 10%.
C) The internal rate of return on the project is more than 10%.
D) The internal rate of return on the project is equal to 10%.

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

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Question 43

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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 accounting rate of return for the machine is 16.7%.

The accounting rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

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.

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

In calculating the present value of an investment in equipment, the present value of the terminal residual value should be added to the cash inflows.

A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for eight years. Determine the internal rate of return for this project, using the following table.

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?

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 cash payback period.

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?

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) :

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows:

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

Briefly describe the time value of money. Why is the time value of money important in capital investment analysis?

The expected average rate of return for a proposed investment of $4,800,000 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 $10,560,000 is:

A series of equal cash flows at fixed intervals is termed an annuity.

The management of Nebraska 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 in this situation: The cash payback period for this investment is:

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: