Exam 25: Capital Investment Analysis

The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset.

For Years 1-5, a proposed expenditure of $500,000 for a fixed asset with a five-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is five years.

All of the following qualitative considerations may impact capital investment analysis except

T-Bone Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project?

A $400,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net cash flows are as follows:YearNet Cash Flow1$200,0002150,000390,000480,000​The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively.​Determine the net present value.

An anticipated purchase of equipment for $520,000, with a useful life of eight years and no residual value, is expected to yield the following annual net income and net cash flow:? Year Net Income Net Cash Flow 1 \ 60,000 \ 120,000 2 50,000 110,000 3 50,000 110,000 4 40,000 100,000 5 40,000 80,000 6 40,000 80,000 7 40,000 60,000 8 40,000 60,000 What is the cash payback period?

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

The rate of earnings is 6% and the cash to be received in four years is $20,000. The present value amount, using the following partial table of present value of $1 at compound interest, is? 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 expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 over the 20 years is

The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $300,000 for the five years. The expected average rate of return is 30%.

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

The primary advantages of the average rate of return method are its ease of computation and the fact that

Which of the following is a present value method of analyzing capital investment proposals?

What is the present value of $8,000 to be received at the end of six years if the required rate of return is 15%?Below is a table for the present value of $1 at compound interest.​ Below is a table for the present value of an annuity of $1 at compound interest.

Methods that ignore present value in capital investment analysis include the internal rate of return method.

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 Years 1 through 5 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:​ The average rate of return for this investment is

Heidi Company is considering the acquisition of a machine that costs $420,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $120,000, and annual operating income of $83,721. What is the estimated cash payback period for the machine?

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.

If a proposed expenditure of $80,000 for a fixed asset with a four-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is four years.

The formula for calculating the present value factor for an annuity of $1 is