Exam 14: Capital Investment Decisions

Figure 14-4. Sony Lavery is considering investing $45,000 in a project with the following cash revenues and expenses: Refer to Figure 14-4.What is the average income for the project?

Figure 14-8. Present value of an Annuity of $1 in Arrears Refer to Figure 14-8.Sawyer Company is considering a project with an initial investment of $226,000 that will yield annual net cash flows of $40,000,and will be depreciated at $22,600 per year over its ten year life.What is the internal rate of return?

The reason that a discount factor in year 3 is less than a discount factor in year 2 is that

Coriander Company is considering a project with an initial investment of $426,800 in new equipment that will yield annual net cash flows of $80,000,and will be depreciated at $53,350 per year over its eight year life.What is the accounting rate of return?

What is a postaudit? What are the advantages and disadvantages of the postaudit?

Suppose that the actual cost of capital is 10 percent,but the firm chooses a discount rate of 18 percent.Managers of that company will be more likely to choose relatively short term investments.

Greg Moss has just invested $120,000 in a coffee shop.He expects to receive cash income of $15,000 a year.What is the payback period?

A disadvantage of postaudits is that they are costly.

_______________________ ignore the time value of money.

In capital investment decision making,it is usually assumed that managers should select projects that attempt to maximize the wealth of the owners of the firm.

Projects that do not affect the cash flows of other projects are called mutually exclusive projects.

The capital investment decision making model that assumes that each cash inflow is reinvested at the required rate of return is

Carol Harrison is considering an investment in a retail shopping mall.The initial investment is $400,000.She expects to receive cash income of $80,000 a year.What is the payback period?

Figure 14-10. Present value of $1 Present value of an Annuity of $1 Refer to Figure 14-10.Durrel Company is considering two different modifications to its current manufacturing process.The after-tax cash flows associated with the two investments are as follows: Durrel's cost of capital is 6 percent. Required: A.Compute the NPV for each investment and state which project should be chosen based on the NPV. B.Compute the IRR for each investment and state which project should be chosen based on the IRR.

Which model is better for independent projects - net present value or internal rate of return? For mutually exclusive projects? Explain your reasoning for each case.

A key element in the capital investment process is a follow-up analysis of a capital project once it is implemented; this analysis is a called a _____________.

A division manager is choosing between two mutually exclusive projects. The company requires any project to earn at least 12 percent.The manager believes that cash inflows from the project can be reinvested at the rate of 12 percent.Which project will the manager likely choose?

Jerry Hall invested in a project that required an initial amount of $52,160,and returned cash inflows of $10,000 per year for 10 years.A partial table of the present value of an annuity of $1 in arrears is as follows: What is the internal rate of return for this investment?

Net present value analysis and internal rate of return analysis can sometimes produce erroneous choices because they ignore the time value of money.

Postaudits supply feedback to managers that should help improve future decision making.