Exam 25: Capital Investment Analysis

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 $25,000. (a) Using the 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 management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: ​​ -The cash payback period for this investment is

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 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 Years 1 through 5 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: ​​ -The average rate of return for this investment is

Use these present value tables to answer the questions that follow. ​ Below is a table for the present value of $1 at compound interest. ​ Year 6\% 10\% 12\% 1 0.943 0.909 0.893 2 0.890 0.826 0.797 3 0.840 0.751 0.712 4 0.792 0.683 0.636 5 0.747 0.621 0.567 Below is a table for the present value of an annuity of $1 at compound interest. ​ ​​ Year 6\% 10\% 12\% 1 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 -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 four years, what would be the present value of the investment cash inflows, assuming an earnings rate of 12%?

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.

The expected average rate of return for a proposed investment of $6,000,000 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 $12,000,000 over the 20 years is

Which of the following is not considered a complicating factor in capital investment decisions?

The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing.

The internal rate of return method of analyzing capital investment proposals uses present value concepts to compute a rate of return expected from the proposals.

Proposals A and B each cost $600,000 and have five-year lives. Proposal A is expected to provide equal annual net cash flows of $159,000, while the net cash flows for Proposal B are as follows:Year 1$150,000Year 2140,000Year 3110,000Year 4150,000Year 550,000$600,000?Determine the cash payback period for each proposal. Round answers to two decimal places.

Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for seven years. The present value factors for an annuity of $1 for seven years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is

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 five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: ​​ -The net present value for this investment is

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

The present value index is computed using which of the following formulas?

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: ​​ -The present value index for this investment is

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

Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

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 value methods.

The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine which of the proposals (if any) meets or exceeds the company's policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has an estimated useful life of 10 years.The accountant has identified the following data:?Which of the investments are acceptable? Machine A Machine B Machine C Present value of future cash flows computed using 10\% rate of return \ 305,000 \ 295,000 \ 300,000 Amount of initial investment 300,000 300,000 300,000