Exam 26: Capital Investment Analysis

The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total income of $360,000 for the 4 years is

In computing the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 over the 5 years. The expected average rate of return is 37.5%.

The internal rate of return method of analyzing capital investment proposals uses present value concepts to compute a rate of return expected from the proposals.

The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method.

A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years.

With expected value analysis, incorporating the probabilities of various outcomes allows uncertainty to be completely eliminated.

Which of the following methods for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?

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: ​ -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

The management of River Corporation is considering the purchase of a new machine costing $380,000. 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: ​ -The average rate of return for this investment is

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

An anticipated purchase of equipment for $490,000 with a useful life of 8 years and no residual value is expected to yield the following annual incomes and net cash flows: The cash payback period for the equipment is

Match each phrase that follows with the term (a-f) it describes. -A stream of equal cash flow amounts A)Capital rationing B)Annuity C)Capital investment analysis D)Internal rate of return method E)Payback period F)Accounting rate of return

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?

With sensitivity analysis, at least one input must be a known (not estimated) value.

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?

The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method.

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

Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for 7 years. Project B has a computed net present value of $5,500 over a 5-year life. Project A could be sold at the end of 5 years for a price of $30,000. (a) Using the present value tables that follow, determine the net present value of Project A over a 5-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value? Following is a table for the present value of $1 at compound interest: Following is a table for the present value of an annuity of $1 at compound interest:

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