Exam 23: Capital Investment Decisions

Crawford Company expects to invest $144,000 in an asset with a 10-year life. The annual cash inflows from using the asset are estimated to be $24,000. The company's expected rate of return for this type of asset is 10%. The following present value information is available: The company's actual rate of return on this asset is:

Which of the following is a strength of the payback method?

The internal rate of return and the net present value methods for making capital budgeting decisions are superior to the payback method because they:

Boggs Corporation is considering the purchase of a machine with an initial cost of $26,000, a useful life of 10 years, and a salvage value of $2,000. The company desires a 12% rate of return. Given the data provided, at a present value of an annuity for 10 years at 12% of 5.650 and a present value of $1 for 10 years at 12% of 0.322, the machine should be purchased only if annual net cash inflows are:

List 10 qualitative factors that could be taken into account when making capital budgeting decisions.

Parkways Inc. is considering the purchase of a new machine. The machine will cost $60,000 to purchase and will generate $15,000 of revenues per year for the next 8 years. The machine will cost $1,000 per year to maintain and have a salvage value of $5,000 at the end of the 8 years. From a quantitative standpoint, should Parkways purchase the machine if its cost of capital is 15%?

Green Acre Farms wants to buy a machine that costs $750,000 and will increase net income an average of $200,000 per year. What is the rate of return without considering the time value of money?

A machine with a book value of $8,000 can be sold for $9,500. The corporation that owns the machine has taxable income of $50,000 and a tax rate of 40%. What would be the tax on the sale of the machine?

Another name for the accounting rate of return is the:

A corporation with taxable income of $100,000 and a tax rate of 40% is selling a machine. The original cost of the machine is $8,000, and the machine has been depreciated $4,000. If the machine is sold for $6,000, the amount of after-tax cash generated by this sale would be:

Cash outlays for capital assets include all the following EXCEPT:

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 give the company a net income of $3,000 per year over the 10-year life. The company's hurdle rate is 12%. Given the data provided, the unadjusted rate of return for the machine is:

Blakeley Company is considering the following six capital investment projects: Blakeley has a minimum required rate of return of 12%. Given this information, what ranking should Blakeley use on the capital investment projects?

Which method is best to help managers make capital investment decisions that will be LEAST costly to the organization?

Determining whether capital investment projects meet minimum standards of financial acceptability is called:

The present value of $1 to be received 2 years in the future is:

An asset is purchased for $100,000. It is expected to provide an additional $14,800 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $6,000. The hurdle rate is 9%. Assume the following present value factors: Given the data provided, the net present value would be approximately:

Which of the following capital budgeting methods ignores the time value of money?

An asset is purchased for $40,000. It is expected to provide an additional $10,000 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $3,300. The hurdle rate is 10%. The present value of an annuity factor of 10% for 10 years is 6.1446. The present value of $1 discounted for 10 years at 10% is 0.3855. Given the data provided, the net present value of the investment is approximately:

Which of the following situations is one in which a least-cost decision would be used?