Exam 23: Planning for Capital Investments

A company projects an increase in net income of $135,000 each year for the next five years if it invests $900,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $300,000. What is the annual rate of return on this investment?

Intangible benefits in capital budgeting

Use the following information for questions Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below: -The net present value for Project Nuts is

If the internal rate of return exceeds the discount rate, then the net present value of a project is

Richman Co. purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $(900). Annual cost savings were: $10,000 for year 1; $8,000 for year 2; and $6,000 for year 3. The amount of the initial investment was Year Present Value of 1 at 12\% PV of an Annuity of 1 at 12\% 1 .893 .893 2 .797 1.690 3 .712 2.402

Which of the following ignores the time value of money?

A well-run organization should perform an evaluation, called a post-audit, of its investment projects before their completion.

The cash payback period is computed by dividing the cost of the capital investment by the

Johnson Corp. has an 8% required rate of return. It's considering a project that would provide annual cost savings of $50,000 for 5 years. The most that Johnson would be willing to spend on this project is Year Present Value PV of an Annuity of 1 at 8\% of 1 at 8\% 1 .926 .926 2 .857 1.783 3 .794 2.577 4 .735 3.312 5 .681 3.993

The internal rate of return is the interest rate that results in a

When calculating the annual rate of return, the average investment is equal to

The interest yield of a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

If the internal rate of return is used as the discount rate in the net present value calcula-tion, the net present value will be

If a company's required rate of return is 10% and, in using the net present value method, a project's net present value is zero, this indicates that the

If a project costing $40,000 has a profitability index of 1.00 and the discount rate was 8%, then the project's internal rate of return was

If a payback period for a project is greater than its expected useful life, the

Performing a post-audit is important because

A project with a profitability index of 1.156 also has net cash flows with a present value of $69,360. The project's internal rate of return was 10%. The initial investment was

The discount rate that will result in the highest net present value for a project is

For purposes of capital budgeting, estimated cash inflows and outflows are preferred for inputs into the capital budgeting decision tools.