Exam 23: Planning for Capital Investments

Use the following table for questions . -A company has a minimum required rate of return of 10%. It is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $25,000 at the end of each year for three years. The profitability index for this project is

If a project has a profitability index of 1.20, then the project's internal rate of return is

Use the following information for questions A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used. -The cash payback period on the equipment is

A post-audit should be performed using

If a company's required rate of return is 9%, and in using the profitability index method, a project's index is greater than 1, this indicates that the project's rate of return is

Discounted cash flow techniques include all of the following except

Capital budgeting decisions depend in part on all of the following except the

The profitability index is calculated by dividing the total cash flows by the initial investment.

Use the following information for questions Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return. $\text { Present Value of an Annuity of } 1$ Period 8\% 9\% 10\% 11\% 12\% 15\% 6 4.623 4.486 4.355 4.231 4.111 3.784 -What is the approximate profitability index associated with this equipment?

Use the following information for questions Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below: -The internal rate of return for Project Nuts is approximately

A capital budgeting method that takes into consideration the time value of money is the

The annual rate of return method requires dividing a project's annual cash inflows by the economic life of the project.

Using the annual rate of return method, a project is acceptable if its rate of return is greater than management's minimum rate of return.

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is

If project A has a lower payback period than project B, this may indicate that project A may have a