Exam 14: Capital Investment Decisions

A formula for the accounting rate of return is

Figure 14-10. Present value of $1 Present value of an Annuity of $1 Refer to Figure 14-10.Ray Corporation is looking to invest in a new piece of equipment.Two manufacturers of this type of equipment are being considered.After-tax inflows for the two competing projects are: Both projects require an initial investment of $400,000.In both cases,assume that the equipment has a life of five years with no salvage value. Required: A.Assuming a discount rate of 8 percent,compute the net present value of each piece of equipment. B.A third option is now available for a supplier outside of the country.The cost is also $400,000,but it will produce even cash flows over its five-year life.What must the annual cash flow be for this equipment to be selected over the other two? Assume an 8 percent discount rate.

The interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost is called the internal rate of return.

The difference between the present value of the cash inflows and outflows associated with a project is the internal rate of return model.

In order to use the payback period model,the proposed investment must have even cash inflows.

One drawback to the internal rate of return model is that cash inflows must occur evenly over the life of the investment.

A postaudit is an analysis of a capital project before it is implemented.

Figure 14-6. Present value of $1 Present value of an Annuity of $1 Refer to Figure 14-6.Jan Rigby is considering an investment that will cost $20,000 initially,and return annual cash flows of $10,000 in each of three years.Jan requires a minimum rate of return of 8 percent.What is the present value of the cash inflows? (Note: there may be a rounding error depending on the table you use to compute your answer.Choose the answer closest to the one you calculate.)

Figure 14-5. Sara Turner is considering investing $60,000 in a project with the following cash revenues and expenses: Refer to Figure 14-5.Assuming straight-line depreciation over five years,what is the payback period for this investment? A.between 3 and 4 years B.between 2 and 3 years C.between 3 and 4 years D.between 4 and 5 years E.between 1 and 2 years

Jackson Company invests in a new piece of equipment costing $40,000.The equipment is expected to yield the following amounts per year for the equipment's four-year useful life: What is the net present value of this investment in equipment?

A division manager was considering a project that required a significant initial investment.If accepted,the project could have a negative impact on certain financial ratios that the firm was required to maintain to satisfy debt contracts.To ensure that the ratios would not be adversely affected by the investment,the manager would use which of the following capital investment models?

Figure 14-1. A company is considering two projects. Refer to Figure 14-1.What is the payback period for Project I?

A postaudit evaluates the overall outcome of the investment and proposes corrective action if needed.

In general,it is best if postaudits are done by company management,since they understand the actual operating conditions.

When investing in automated systems,which of the following intangible or indirect benefits may be important?

Figure 14-2. A company is considering two projects. Refer to Figure 14-2.What is the payback period for Project B?

The two major categories of capital investment decision models are independent and mutually exclusive.

Companies considering projects with shorter lives are interested in longer payback periods.

Figure 14-10. Present value of $1 Present value of an Annuity of $1 Refer to Figure 14-10.A company is considering two modifications to its current manufacturing process.The after-tax cash flows associated with the two investments are: The company's cost of capital is 12 percent.

The earning of interest on interest is