Exam 25: Capital Investment Analysis

Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals.

The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as 1) methods that ignore present value and 2) present values methods.

Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for 7 years. The present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is

An 8-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 5%, determine the estimated annual net income.

Below is a table for the present value of $1 at compound interest. Year 6\% 10\% 12\% 1 0.943 0.909 0.893 2 0.890 0.826 0.797 3 0.840 0.751 0.712 4 0.792 0.683 0.636 5 0.747 0.621 0.567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6\% 10\% 12\% 1 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 -Using the tables above, what is the present value of $6,000 to be received at the end of each of the next 4 years, assuming an earnings rate of 10%?

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.

A series of equal cash flows at fixed intervals is termed an)

Match each definition that follows with the term a-f) it defines. -Uses present value concepts to compute the rate of return on an investment from a capital investment proposal based on its' expected net cash flows

The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return? Machine A Machine B Machine C Annual net cash flows \ 50,000 \ 40,000 \ 75,000 Average investment \ 250,000 \ 300,000 \ 500,000

The management of Indiana Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Income from Net Cash Year Operations Flow 1 \ 100,000 \ 180,000 2 60,000 120,000 3 30,000 100,000 4 10,000 90,000 5 10,000 90,000 The average rate of return for this investment is

By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year Net Income Net Cash Flow 1 \ 75,000 \ 285,000 2 100,000 290,000 3 109,000 190,000 4 36,000 125,000 \ 320,000 \ 890,000 The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the average rate of return on investment, including the effect of depreciation on the investment.

Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment?

Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows?

Below is a table for the present value of $1 at compound interest. Year 6\% 10\% 12\% 1 0.943 0.909 0.893 2 0.890 0.826 0.797 3 0.840 0.751 0.712 4 0.792 0.683 0.636 5 0.747 0.621 0.567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6\% 10\% 12\% 1 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 -Using the tables above, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years, what would be the net present value of the investment, assuming an earnings rate of 10%?

Which of the following is not an advantage of the average rate of return method?

Jimmy Co. is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value. Jimmy Co. seeks to earn an average rate of return of 18% on all capital projects. Determine the necessary average annual income using straight-line depreciation) that must be achieved on this project for it to be acceptable to Jimmy Co.

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Income from Net Cash Year Operations Flow 1 \ 18,750 \ 93,750 2 18,750 93,750 3 18,750 93,750 4 18,750 93,750 5 18,750 93,750 -The expected average rate of return for a proposed investment of $650,000 in a fixed asset, with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is

Determine the average rate of return for a project that is estimated to yield total income of $600,000 over 4 years, cost $840,000, and has an $80,000 residual value. Round percentage answers to one decimal place.