Exam 23: Capital Investment Decisions

An asset is purchased for $100,000. It is expected to provide an additional $15,600 of annual net cash inflows. The asset has a 10-year life and no expected salvage value. The hurdle rate is 10%. Assume the following present value factors: Given the data provided, the internal rate of return would be approximately:

Which of the following would have the greatest impact on the net present value of an investment?

Kankakee Company wants to buy a machine that will cost $770,124 and provide an annual cash income of $120,000 for 10 years. What is the company's internal rate of return? Assume the following present value factors:

The owner of the pizza parlor you are working for has asked for your help. He is trying to decide whether to buy an ice cream machine. The cost of the machine is $45,000. The revenue generated by the machine is expected to be $19,600 and the costs will be $14,200. The owner has no more information available. Ignoring taxes, calculate the unadjusted rate of return to help him make his decision.

Which method is preferred for capital rationing?

Stanley Company invested in an asset with a useful life of 4 years and no salvage value. The company's expected rate of return is 12%. The cash inflows and present value factors for 4 years are as follows: If the asset generates a positive net present value of $3,000, what was the amount of the original investment?

Which two capital budgeting techniques take the time value of money into consideration?

If an investment has a payback period of 13 years and provides annual cash inflows of $14,500, its cost is:

The net present value of a proposed investment represents the:

Merriam Corporation is considering the purchase of a new machine that costs $18,000, has an expected useful life of 10 years, and has no salvage value. Merriam estimates that the machine will save the company $3,000 per year over the 10-year life. The company's hurdle rate is 12%. Given the data provided, the payback period for the machine is:

Windham Company is considering a project with annual cash inflows of $3,000 a year, an estimated life of 12 years, no salvage value, and a net present value of $(7,088). If the present value of an annuity factor used to calculate the net present value was 6.222, the initial investment is:

Linex Corporation is considering the purchase of a new machine that costs $18,000, has an expected useful life of 10 years, and has no salvage value. Linex estimates that the machine will save the company $3,000 per year over the 10-year life. The company's hurdle rate is 12%. The present value annuity factors of 10, 12, and 14% for 10 years are 6.145, 5.650, and 5.216, respectively, and the present value of $1 discounted for 10 years at 12% is 0.322. Given the data provided, the net present value of the machine is:

Marketing Group Ltd. wants to know the net present value of a machine that will cost $60,000 today and will generate the following cash flows: The machine has a salvage value of $5,000 at the end of year 5. The cost of capital is 12%.

Gallatin Co. is considering the purchase of a new machine that costs $300,000. It is anticipated that it will provide net annual cash inflows of $80,000. The machine has an expected life of 5 years with no salvage value. Gallatin's hurdle rate is 7%. The present value annuity factors for 5 years are 4.1002 at 7%, 3.9927 at 8%, 3.8897 at 9%, 3.7908 at 10%, and 3.6048 at 12%. The internal rate of return for the purchase is:

Which of the following is NOT typically a qualitative factor that management must consider in strategic and capital investment decisions?

Which of the following is true when making capital budgeting decisions?

The internal rate of return capital budgeting method uses the same formula as which of the following?

The formula, Investment Cost divided by Annual Net Cash Inflows, is used to determine an interval of time in which method?

A company has a tax rate of 40% and a pre-tax net income of $200,000. Other than depreciation expense of $40,000, all other revenues and expenses used to calculate this income are on a cash basis. What is the company's after-tax cash flow?

You are considering the purchase of a car to use for pizza delivery. The owner of the car will let you pay for it in 4 monthly payments of $600. You expect to earn $300 per week with gas and related expenses of $60 per week. How long will it take for the car to pay for itself?