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Exam 26: Capital Investment Analysis

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Question 91

True/False

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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) True
B) False

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Question 92

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The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is:

A) cash payback method
B) net present value method
C) internal rate of return method
D) average rate of return method

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

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Question 93

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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 expected from capital investment proposals?

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

Methods that ignore present value in capital investment analysis include the average rate of return method.

Proposals M and N each cost $600,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Determine the cash payback period for each proposal.

The accounting rate of return is a measure of profitability computed by dividing the average annual cash flows from an asset by the average amount invested in the asset.

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) :

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

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.

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 12 years.

Match each of the following terms with the best definition given below.

If a proposed expenditure of $70,000 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 2.5 years.

The present value factor for an annuity of $1 is determined using which of the following formulas?

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

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 cash payback period for this investment is:

Methods that ignore present value in capital investment analysis include the internal rate of return method.

Which of the following is not an advantage of the average rate of return method?

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.