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Exam 25: Capital Investment Analysis

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Question 91

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Using the following partial table of present value of $1 at compound interest,the present value of $15,000 to be received 3 years hence with earnings at the rate of 6% a year is

A) $12,600
B) $11,880
C) $13,350
D) $11,265

E) A) and C)
F) All of the above

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Question 92

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

A) True
B) False

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Question 93

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Average rate of return equals estimated average annual income divided by average investment.

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.

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

Match each definition that follows with the term (a-f) it defines. -A stream of equal cash flow amounts

The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines and has asked the accountant to analyze them to determine the best cash payback.

A company is considering the purchase of a new piece of equipment for $90,000.Predicted annual net cash inflows from the investment are $36,000 (Year 1),$30,000 (Year 2),$18,000 (Year 3),$12,000 (Year 4),and $6,000 (Year 5).The average income from operations over the 5-year life is $20,400.The payback period is 3.5 years.

Using the tables above,what would be the present value of $15,000 to be received at the end of each of the next 2 years,assuming an earnings rate of 6%?

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $100,000.The present value of the future cash flows at the company's desired rate of return is $100,000.The IRR on the project is 12%.Which of the following statements is true?

The present value index for this investment is

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $210,000.The present value of the future cash flows is $225,000.The company's desired rate of return used in the present value calculations was 12%.Which of the following statements is true?

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested,the proposal should be rejected.

A series of equal cash flows at fixed intervals is termed a(n)

The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines and has asked the accountant to analyze them to determine the best average rate of return.

The primary advantages of the average rate of return method are its ease of computation and the fact that

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.

Periods in time that experience increasing price levels are known as periods of

Using the tables above,if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years,what would be the net present value of the investment,assuming an earnings rate of 10%?

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 $300,000 for the 5 years.The expected average rate of return is 37.5%.