Deck 11: Capital Investment Decisions and the Time Value of Money

Question 1

Simms Manufacturing is considering two alternative investment proposals with the following data:
What is the accounting rate of return for Proposal Y?

A) 15.0%
B) 16.0%
C) 20.0%
D) 40.0%

Answer 1

15.0%

Question 2

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
The present value factors of $1 due 3 years from now


-How long is the payback period for Investment A?

A) 0.4 years
B) 2.4 years
C) 2.5 years
D) 3.0 years

Answer 2

2.4 years

Question 3

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
The present value factors of $1 due 3 years from now:


-How long is the payback period for Investment B?

A) 0.44 years
B) 2.25 years
C) 2.35 years
D) 3.00 years

Answer 3

2.25 years

Question 4

Simms Manufacturing is considering two alternative investment proposals with the following data:
Note: Present value tables are needed.
What is the net present value of Proposal X?

A) $3,070 positive
B) $4,130 positive
C) $3,070 negative
D) $4,130 negative

Question 5

Simms Manufacturing is considering two alternative investment proposals with the following data:
Note: Present value and future value tables are needed.
Using the net present value model, which alternative should Simms select, and why?

A) Proposal Y, because its net present value is $22,670 higher than the net present value of Proposal X.
B) Proposal Y, because it is the only alternative with a positive net present value.
C) Proposal X, because it is the only alternative with a positive net present value.
D) Both proposals are equivalent when using the net present value model.

Question 6

Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight- line method. The expected net cash inflows from the investment are:
Note: Present value tables are needed.
Is the internal rate of return of the investment equal to, higher than, or lower than 14%?

A) Equal to 14%
B) Higher
C) Lower
D) Cannot be determined from the given data

Question 7

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
The present value factors of $1 due 3 years from now are:
The annuity present value factors of $1 per year due at the end of each of 3 years are:


-The internal rate of return for Investment A is approximately what percentage?

A) 8%
B) 10%
C) 12%
D) 14%

Question 8

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
The present value factors of $1 due 3 years from now are:
The annuity present value factors of $1 per year due at the end of each of 3 years are:


-How much is the net present value of Investment B?

A) ($164)
B) $6,072
C) $40,000
D) $61,528

Question 9

Head, Inc. is deciding whether to automate one phase of its production process. The equipment has a six- year life and will cost $450,000. Projected net cash inflows from the equipment are as follows:
(Note: Present value tables are needed.)
Head, Inc.'s hurdle rate is 12%. Assume the residual value is zero. If Head, Inc. decides to refurbish the equipment at a cost of $50,000 at the end of year 6, it could be used for one more year and would have a $30,000 residual value. Assume the cash inflow in year 7 is $40,000. What is the NPV of the refurbishment?

A) $6,290
B) $7,130
C) $13,560
D) $18,080

Question 10

The Petty Company has analyzed an investment opportunity costing $270,000 and determined That the net present value is $1,420. Petty's management estimated that the investment would Generate cash inflows of $50,000 a year for eight years and used a discount rate of 10%. What was the Salvage value associated with the investment opportunity? Note: Present value tables are needed.

A) $4,670
B) $10,000
C) $6,960
D) $3,919

Question 11

Jackson Corporation is considering the following three investment opportunities:
Investment 1: Has an initial cost of $300,000 and the present value of its net cash inflows is $345,000.
Investment 2: Has an initial cost of $500,000 and the present value of its net cash inflows is $550,000.
Investment 3: Has an initial cost of $700,000 and the present value of its net cash inflows is $756,000.
Which of the following statements is correct?

A) Using the profitability index, the investment ranking, from most profitable to least profitable would be 1, 2, and 3.
B) Using the net present value method, the investment ranking, from most profitable to least profitable would be 1, 2, and 3.
C) Using the profitability index, the investment ranking, from most profitable to least profitable would be 3, 1, and 2.
D) The profitability index and the net present value methods would both rank these investment opportunities in the same order.