Exam 26: Capital Investment Analysis

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

The cash payback method can be used only when net cash inflows are the same for each period.

Which of the following methods of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000. Determine the cash payback period.

Match each phrase that follows with the term (a-f) it describes. -The length of time it will take to recover through cash inflows the dollars of a capital outlay A)Capital rationing B)Annuity C)Capital investment analysis D)Internal rate of return method E)Payback period F)Accounting rate of return

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The average rate of return for the machine is 50%.

The net present value for this investment is

A project has estimated annual net cash flows of $60,000. It is estimated to cost $240,000. Determine the cash payback period.

The methods of evaluating capital investment proposals can be grouped into two general categories referred to as (1) methods that do not use present values and (2) methods that use present values.

If in evaluating a proposal by use of the net present value method 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.

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: The company's minimum desired rate of return is 12%. The factors for the present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years are 0.893, 0.797, 0.712, and 0.636, respectively.Determine the net present value.

Match each phrase that follows with the term (a-e) it describes. -Often referred to as the discounted cash flow method A)Capital investment analysis B)Time value of money concept C)Net present value method D)Average rate of return E)Cash payback period

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: ​ -Using the tables provided, 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, the net present value of the investment, assuming an earnings rate of 10%, is

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

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company's desired rate of return is $105,000. The IRR on the project is 12%. Which of the following statements is true?

The process by which management allocates available investment funds among competing investment proposals is called

Which of the following is an advantage of the cash payback method?

Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for 4 years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is

Match each phrase that follows with the term (a-f) it describes. -The process by which management allocates funds among various capital investment proposals A)Capital rationing B)Annuity C)Capital investment analysis D)Internal rate of return method E)Payback period F)Accounting rate of return

What is the present value of $8,000 to be received at the end of 6 years if the required rate of return is 15%? 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: