Question 1

Describe the approach that managers may take in making capital investment decisions.

Accepted Answer

Answers will vary.Managers can choose fr

Question 2

Cash inflows from a capital investment may include the salvage value of capital assets and increases in revenues.

Accepted Answer

A) True 
 B)False

Question 3

Depreciation on a capital investment (such as equipment) has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

Accepted Answer

A) True 
 B)False

Question 4

Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years. Assuming a desired rate of return of 12%, is the project acceptable? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Accepted Answer

A)  No, since the negative net present value indicates the investment will yield a rate of return below the desired rate of return. 
B)  Yes, since the investment will generate $52,500 in future cash flows, which is greater than the purchase cost of $36,000. 
C)  Yes, since the positive net present value indicates the investment will earn a rate of return greater than 12%. 
D)  The answer cannot be determined. 
A)  No, since the negative net present value indicates the investment will yield a rate of return below the desired rate of return. 
B)  Yes, since the investment will generate $52,500 in future cash flows, which is greater than the purchase cost of $36,000. 
C)  Yes, since the positive net present value indicates the investment will earn a rate of return greater than 12%. 
D)  The answer cannot be determined.

Question 5

Butch's Barbecue thinks that offering delivery will increase their sales. Butch's is considering whether to purchase a used delivery truck costing $12,000. Additional net income from the delivery service will be $1,400 per year. The truck will last approximately 5 years. What is the unadjusted rate of return based on the average investment?

Accepted Answer

A)  About 58.3% 
B)  About 11.7% 
C)  About 23.3% 
D)  About 857.1% 
A)  About 58.3% 
B)  About 11.7% 
C)  About 23.3% 
D)  About 857.1%

Question 6

Langdon Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $10,000 per year for 3 years. Assuming that Langdon's required rate of return is 8%, what is the present value of these cash inflows? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round your intermediate calculations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $24,018 
B)  $24,869 
C)  $33,121 
D)  $25,771 
A)  $24,018 
B)  $24,869 
C)  $33,121 
D)  $25,771

Question 7

Paul Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $12,000 per year for 3 years. Assuming that the required rate of return is 10%, what is the present value of these cash inflows? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round PV factors and intermediate calculations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $9,016 
B)  $28,822 
C)  $29,842 
D)  $27,047 
A)  $9,016 
B)  $28,822 
C)  $29,842 
D)  $27,047

Question 8

Match between columns
                        Premises:  The concept that recognizes that the present value of an opportunity to receive one dollar in the future is less than one dollar
 Annuity with the cash flows occurring at the end of each period.
 Paid to investors and creditors for the use of their assets
 Review conducted to determine whether a project actually generated the results that were originally expected
 Factors used to convert a series of future cash inflows into their present value equivalent
 The rate that produces a net present value of zero for an investment in a capital project
 Purchase of long term operational assets that involves a long term commitment of funds
 Technique that evaluates investment opportunities by determining the length of time necessary to recover the initial net investment
 Measure of profitability computed by dividing the average incremental increase in annual net income by the average investment cost
 An equal series of cash flows received over equal intervals of time at a constant rate of return
 Rate of return required to persuade a company to accept an investment opportunity
 Evaluation technique in which future cash flows are discounted back to present value equivalents, from which the cost of the investment is subtracted

Accepted Answer

The Answer of Accumulated conversion factors and Annuity and Capital is...

Question 9

The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.

Accepted Answer

A) True 
 B)False

Question 10

A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable investment.

Accepted Answer

A) True 
 B)False

Question 11

Chico Company is considering the purchase of a new high-speed machine for its factory. The machine will cost $160,000 and will save the company $45,000 per year in cash operating costs. The machine has an estimated useful life of five years and no expected salvage value. The company's cost of capital is 12%.(PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)Required:Compute the net present value of this investment.What is the maximum amount that Chico should be willing to pay for the machine?What are the minimum annual cash savings that will make the machine acceptable on a net present value basis if the purchase price is $160,000?

Accepted Answer

To compute the net present value (NPV) o

Question 12

Investment projects A and B offer equal cash inflows over their lives, but the cash inflows for project A occur sooner than those for project B. The two projects are otherwise identical (the cost is the same, for example). Based on this information, the internal rate of return for A is lower than for B.

Accepted Answer

A) True 
 B)False

Question 13

Burgess Corporation is considering purchasing equipment that costs $235,000. The equipment has an estimated useful life of 5 years and no salvage value. Burgess believes that the annual cash inflows from using the equipment will be $65,000.(PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)Required:Calculate the net present value of the equipment assuming that Burgess's cost of capital is 12%. Is the equipment an acceptable investment?Calculate the net present value of the equipment assuming that Burgess's cost of capital is 10%. Is the equipment an acceptable investment?Based on your results to parts 1) and 2), estimate the internal rate of return for the investment in the equipment.

Accepted Answer

To calculate the net present value (NPV)

Question 14

Connor has $300,000 to invest in a 5-year annuity. Assuming the time value of money is 10%, what amount will Connor receive in cash each year? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

Accepted Answer

A)  $79,139 
B)  $60,000 
C)  $96,631 
D)  None of these answers are correct. 
A)  $79,139 
B)  $60,000 
C)  $96,631 
D)  None of these answers are correct.

Question 15

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

Accepted Answer

A) True 
 B)False

Question 16

Saget Company is considering the purchase of equipment that would cost $35,000 and offer annual cash inflows of $10,500 over its useful life of 5 years. Assuming a required rate of return of 8%, what is the net present value of this investment opportunity? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Accepted Answer

A)  $(6,923) 
B)  $17,500 
C)  $6,923 
D)  $41,923 
A)  $(6,923) 
B)  $17,500 
C)  $6,923 
D)  $41,923

Question 17

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Accepted Answer

A) True 
 B)False

Question 18

Generally, a company should use the MACRS method to calculate depreciation on its income tax return, due to the effects of the time value of money.

Accepted Answer

A) True 
 B)False

Question 19

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: $\begin{array}{ccccc}
\text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \
\$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000
\end{array}$ Using the incremental approach, the payback period for the investment is:

Accepted Answer

A)  5 years. 
B)  2 years. 
C)  2.4 years. 
D)  1.66 years. 
A)  5 years. 
B)  2 years. 
C)  2.4 years. 
D)  1.66 years.

Question 20

A cash flow that only occurs in equal amounts each year is referred to as:

Accepted Answer

A)  a lump sum. 
B)  a perpetuity. 
C)  an annuity. 
D)  None of these answers are correct. 
A)  a lump sum. 
B)  a perpetuity. 
C)  an annuity. 
D)  None of these answers are correct.

Describe the approach that managers may take in making capital investment decisions.

Cash inflows from a capital investment may include the salvage value of capital assets and increases in revenues.

Depreciation on a capital investment (such as equipment) has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.

A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable investment.

Connor has $300,000 to invest in a 5-year annuity. Assuming the time value of money is 10%, what amount will Connor receive in cash each year? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Generally, a company should use the MACRS method to calculate depreciation on its income tax return, due to the effects of the time value of money.

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 \ 8,000 \ 6,000 \ 5,000 \ 6,000 \ 5,000 Using the incremental approach, the payback period for the investment is:

A cash flow that only occurs in equal amounts each year is referred to as:

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

Financial Statement Analysis

An Introduction to Management Accounting

Cost Behavior, Operating Leverage, and Profitability Analysis

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Filters

Exam 16: Planning for Capital Investments

Describe the approach that managers may take in making capital investment decisions.

Cash inflows from a capital investment may include the salvage value of capital assets and increases in revenues.

Depreciation on a capital investment (such as equipment) has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.

A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable investment.

Connor has $300,000 to invest in a 5-year annuity. Assuming the time value of money is 10%, what amount will Connor receive in cash each year? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Generally, a company should use the MACRS method to calculate depreciation on its income tax return, due to the effects of the time value of money.

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 \ 8,000 \ 6,000 \ 5,000 \ 6,000 \ 5,000 Using the incremental approach, the payback period for the investment is:

A cash flow that only occurs in equal amounts each year is referred to as:

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

Financial Statement Analysis

An Introduction to Management Accounting

Cost Behavior, Operating Leverage, and Profitability Analysis

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Filters