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Exam 25: Capital Investment Analysis

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Question 91

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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, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next 4 years, what would be the present value (rounded to the nearest dollar) of the investment cash inflows, (assuming an earnings rate of 12%) ?

A) $20,352
B) $3,969
C) $22,190
D) $21,259

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

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Question 92

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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%.

A) True
B) False

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Question 93

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Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for this project to be acceptable to Tipper Co.

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual 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.

The payback method can be used only when net cash inflows are the same for each period.

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 12 years.

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?

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 present value of $15,000 (rounded to the nearest dollar) to be received at the end of each of the next two years, assuming an earnings rate of 6%?

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

Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $13,500 over a four year life. Project A could be sold at the end of four years for a price of $25,000. (a) Using the proper table below determine the net present value of Project A over a four-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.

The expected average rate of return for a proposed investment of $500,000 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 net present value has been computed for Proposals P and Q. Relevant data are as follows: Determine the present value index for each proposal. Round your answers to two decimal places.

Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals.

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 discount period.

BAM Co. is evaluating a project requiring a capital expenditure of $806,250. 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 company's minimum desired rate of return 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: (a) the average rate of return on investment, including the effect of depreciation on the investment, and (b) the net present value.

Which of the following are two methods of analyzing capital investment proposals that both ignore present value?

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

Mundall Company is considering a project that will require an initial investment of $600,000 and is expected to generate the following cash flows: A. What is the project's payback period? B. If the required rate of return is 20% and taxes are ignored, what is the project's net present value? The present value of $1 at compound interest of 20% for 1, 2, 3, 4 and 5 years is .8333, .6944, .5787, .4823 and .4019, respectively.

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?