Exam 13: Capital Investment Decisions: Appraisal Methods

Fill in the lettered blanks in the following table: Investment A Investment B Investment C Amount of investment £40,000 (a) £20,000 Economic life in years 10 5 8 Annual cash flow £5,000 (b) £2,500 Payback period in years (c) 4 (d) Present value of cash flows () £33,000 (f) Net present value £5,500 £3,000 (£1,000)

Lake Kariba Company is considering buying a new boat that would cost £120,000. The accountant determined that the boat promises an internal rate of return of 10 per cent and has a life of four years. The accountant resigned and the president wanted to check her calculations. What were the approximate annual net cash inflows from the project?

If the annual cash flows are not an annuity (equal each period), payback is calculated by

Which of the following capital investment models would be preferred when choosing among mutually exclusive alternatives?

The accounting rate of return is calculated as

A capital investment project requires an investment of £145,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Year Amount 1 £35,000 2 £45,000 3 £55,000 4 £50,000 a.Compute payback assuming that the cash flows occur evenly throughout the year. b.Compute the net present value of the project using an 8 per cent discount rate.

____ are capital budgeting models that identify criteria for accepting or rejecting projects without considering the time value of money.

A firm is considering a project with an annual cash flow of £240,000. The project would have an 8-year life, and the company uses a discount rate of 12 per cent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

Which of the following is NOT included in the calculation of net present value of a proposed project? (Ignore income taxes.)

Lewis Manufacturing Company is planning to invest in equipment costing £240,000. The estimated cash flows from this equipment are expected to be as follows: Year Cash Inflows 1 £100,000 2 75,000 3 55,000 4 40,000 5 50,000 Total £320,000 Assume that the cash inflows occur evenly over the year. The payback period for this investment is

If the investment's internal rate of return is more than the required rate of return, the investment should be

A capital investment project requires an investment of £350,000. It has an expected life of ten years with annual cash flows of £50,000 received at the end of each year. a.Compute payback for the project. b.Determine the accounting rate of return for the project, based on the initial capital investment. c.Compute the internal rate of return for the project. d.Compute the net present value of the project using a 14 per cent discount rate. e.Would you recommend this project be accepted? Why or why not?

Which of the following is a capital investment criterion, but NOT captured in any of the basic capital budgeting models examined in the text?

Firms may select projects with short paybacks because

A capital investment project requires an investment of £450,000. It has an expected life of six years with an annual cash flow of £90,000 received at the end of each year. The company uses the straight-line method of depreciation. Ignore income taxes. a.Compute payback for the project. b.Compute the net present value of the project using a 12 per cent discount rate. c.Would you recommend this project be accepted? Why or why not?

Why would a company use the accounting rate of return?

Matusadona Company plans to invest £450,000 in a new factory. With a discount rate of 14 per cent, the present value from the factory is £483,000. To yield a 14 per cent internal rate of return, the actual investment cost cannot exceed the £450,000 estimate by more than

The time required for a project to return its investment is the

The internal rate of return is the

The present value of £10,000 to be received five years from now and earning a 12 per cent return is