Exam 14: Capital Investment Decisions

When comparing the payback method and the accounting rate of return methods,which of the following is true?

You decide Explain the relationship between current and future dollars.

Brenning Company invested $3,000,000 in a new computer system.The following is the net income stream: Required: Calculate the accounting rate of return.

A division manager is considering a project that requires a significant initial investment.The company's top management will not approve any project that does not return at least 12%.The manager will most likely use which of the following capital investment models?

Postaudits ensure that resources are used wisely by evaluating profitability.

Figure 14-10. Present value of $1 Present value of an Annuity of $1 Refer to Figure 14-10.Jimmy Reynolds is considering investing $12,000 in a project with the following cash revenues and expenses: Jimmy requires a minimum rate of return of 8 percent.

The value of an investment at the end of its life is called its ________________.

What are some reasons why firms use the payback period model in capital investment decision making?

Companies that perform postaudits of capital projects experience a number of benefits.

The internal rate of return is the least widely used of the capital investment techniques.

______________________ are projects that,if accepted or rejected,do not affect the cash flows of other projects.

The internal rate of return model does not consistently result in choices that maximize firm wealth.

Figure 14-10. Present value of $1 Present value of an Annuity of $1 Refer to Figure 14-10.Howard-Parr Company is considering an investment that will have an initial cost of $500,000 and yield annual net cash inflows of $130,000.Yearly depreciation will be $100,000.The equipment is expected to be useful for five years,at which point it will be scrapped with no salvage value.Howard-Parr requires a minimum rate of return of 10 percent.

The internal rate of return is the most widely used of the capital investment techniques.

A disadvantage of the payback period is that it ignores a project's total profitability.

Less objective results are obtainable if an independent party performs the postaudit of a capital investment.

When the risk of obsolescence is high,managers will want

_______________________ are concerned with the process of planning,setting goals and priorities,arranging financing,and using certain criteria to select long-term assets.

The best person/group in a firm to perform a postaudit of a capital investment is usually

Figure 14-10. Present value of $1 Present value of an Annuity of $1 Refer to Figure 14-10.Jasmine Company is considering an investment costing $20,000.The investment would return $8,000 per year in each of three years.Jasmine requires a minimum rate of return of 6 percent.