Exam 15: Capital Investment Analysis

Using the following partial table of present value of $1 at compound interest, compute the present value of $20,000 (rounded to nearest dollar) to be received one year from today, assuming an earnings rate of 15%. ? Year 10\% 15\% 20\% 1 0.909 0.870 0.833 2 0.826 0.756 0.694 3 0.751 0.658 0.579 4 0.683 0.572 0.482 5 0.621 0.497 0.402 6 0.564 0.432 0.335 7 0.513 0.376 0.279

The management of Retz Corporation is considering the purchase of a new machine costing $500,000.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 in this situation:? Year Income from Operations Net Cash Flow 1 \ 100,000 \ 200,000 2 80,000 170,000 3 50,000 130,000 4 10,000 80,000 5 10,000 80,000 ? The cash payback period for this investment is:

The internal rate of return method is used to analyze a $831,500 capital investment proposal with annual net cash flows of $250,000 for each of the six years of its useful life. ​ (a)Determine a present value factor for an annuity of $1, which can be used in determining the internal rate of return. (b)Based on the factor determined in (a) and the portion of the present value of an annuity of $1 table presented below, determine the internal rate of return for the proposal. ​ Year 10\% 15\% 20\% 1 0.909 0.870 0.833 2 1.736 1.626 1.528 3 2.487 2.283 2.106 4 3.170 2.855 2.589 5 3.791 3.353 2.991 6 4.355 3.785 3.326 7 4.868 4.160 3.605

Diamond Inc.'s sales is $520,000, its operating income is $84,000, average total assets are $480,000, and average shareholders' equity is $200,000.Determine the company's return on shareholders' equity.​

The management of Retz Corporation is considering the purchase of a new machine costing $500,000.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 in this situation: Year Income from Operations Net Cash Flow 1 \ 100,000 \ 200,000 2 80,000 170,000 3 50,000 130,000 4 10,000 80,000 5 10,000 80,000 ? The average rate of return for this investment is:

Return on stockholders' equity is calculated as the ratio of average stockholders' equity to operating income. ​

Purchase of a new machine to replace an old machine is an example of:

The methods of evaluating capital investment proposals can be grouped into two general categories: (1) average rate of return method and (2) cash payback method.

The management of London Corporation is considering the purchase of a new machine costing $750,000.The company's desired rate of return is 6%.The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively.In addition to this information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 \ 37,500 \ 187,500 2 37,500 187,500 3 37,500 187,500 4 37,500 187,500 5 37,500 187,500 ? The present value index for this investment is:

Zed Corporation is evaluating the purchase of a machine that costs $275,000.The annual cash revenues from the machine would be $50,000, and the annual cash expenses of the machine would be $10,000.What is the estimated cash payback period for the machine?

When evaluating a proposal by use of the net present value method, if there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis.

If the rate of earnings is 12% and the cash to be received in two years is $20,000, determine the present value amount, using the following partial table of 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

Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received three years hence, with earnings at the rate of 10% a year. 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

The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing.

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

The net present value for Proposals X and Y has been calculated on the basis of the data given below. Proposal X Proposal Y Amount to be invested \ 145,000 \ 280,000 Total present value of net cash flow 172,000 320,000 Net present value 27,000 40,000 ​ Determine the present value index for each proposal.

A $350,000 capital investment proposal has an estimated life of four years and no residual value.The estimated net cash flows are as follows: Year Net Cash Flow Year Net Cash Flow 1 \ 150,000 3 \ 104,000 2 130,000 4 90,000 ​ The minimum desired rate of return for net present value analysis 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 net present value.

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called:

Which of the following is the expansion of the DuPont formula for return on stockholders' equity? ​

The computations required for the net present value method are less than those the computation required for the average rate of return method.