Exam 23: Capital Investment Decisions

An asset is purchased for $50,000. It is expected to provide an additional $12,000 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $4,000. The hurdle rate is 10%. The present value of an annuity factor of 10% for 10 years is 6.1446, and the present value of $1 discounted for 10 years at 10% is 0.3855. Given the data provided, the minimum amount of annual cash inflows that would provide the 10% return is approximately:

Clarke Company purchased equipment for $100,000 that is expected to generate cash inflows from operations of $30,000 in each of the next 5 years. The machine will be depreciated on a straight-line basis with no salvage value. Assume the following present value factors: What would be the net present value of the investment by Clarke Company?

When making a capital budgeting decision, which of the following is usually NOT discounted?

Which of the following investments has the greatest present value?

The formula for computing unadjusted rate of return is:

The use of a profitability index is required when ranking projects for capital rationing under which method?

Determining whether or not a given investment is best among all acceptable alternatives is called:

Tootie Clothing Store is considering opening a new store. The expected purchase price is $270,000, expected annual revenues are $150,000, and expected annual costs are $90,000, including $22,500 of depreciation. The store has a payback period of approximately:

In order for a project to be acceptable, the rate of return must be larger than the:

All of the following define capital EXCEPT:

Which of the following is LEAST preferable for measuring profitability of an investment?

Pulaski Corporation is considering a capital investment that has a profitability index of 1.2. If the initial investment is $1,200,000, the net present value must be:

All of the following are characteristics of the capital investment decisions that are critical to long-run profitability EXCEPT:

Rocky's Packaging Company is considering the purchase of a new piece of production machinery that will reduce labor and maintenance costs. Data related to the new machine follows: Assume all cash flows occur at the end of the year and ignore income taxes.

Which of the following expenses are often ignored when making capital budgeting decisions?

Linex Corporation is considering the purchase of a new machine that costs $18,000 and has an expected useful life of 10 years. 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. The present value of $1 discounted for 10 years at 12% is 0.322. Given the data provided, if the machine had a salvage value of $4,000, the net present value of the machine would be:

Schuyler Company is considering the following six capital investment projects: Schuyler has a minimum required rate of return of 11%.

Boone Corporation expects to buy a machine for $126,000, which will be depreciated over an 8-year period on a straight-line basis with no salvage value. The machine is expected to generate a net cash flow of $42,000 per year. What is the payback period?

Cottages 4U is considering several long-term investment projects. Management wants to accept the two best projects, given the following data:

Which of the following is true?