Exam 11: Capital Investment Analysis

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 income over the life of the machine is estimated to be $12,000.  The machine will generate net cash flows per year of $6,000.  The average rate of return for the machine is 50%.

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

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.

A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated annual net income.

The expected average rate of return for a proposed investment of $6,000,000 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 $12,000,000 over the 20 years is

The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as: (1) methods that ignore present value (2) present value methods.

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 net present value for this investment is

A project has estimated annual cash flows of $90,000 for 3 years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%. Using the following tables, determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. 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.

What is capital investment analysis?  Why are capital investment analysis decisions often difficult and risky?

A project has estimated annual cash flows of $95,000 for 4 years and is estimated to cost $260,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. 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.

The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. 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 of this investment: The net present value for this investment is

The average rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of 4 years, no residual value, and an expected total income yield of $25,300, is

Briefly describe the time value of money.  Why is the time value of money important in capital investment analysis?

By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money

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

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

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. Using the tables above, what would be the present value of $25,000 (rounded to the nearest dollar) to be received 4 years from today, assuming an earnings rate of 10%?

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