Exam 6: Making Capital Investment Decisions

Calgary Cabs is considering buying 10 new taxi cabs for a total cost of $310,000. After the purchase, total cash flows will improve by $80,000. the new cabs are expected to be in service for six years. What is the internal rate of return for this investment proposal?

Machine A is bought for $200,000 and has a residual value of $80,000 after six years of use. The amortization is straight-line and the annual profit before depreciation generated by the machine is $30,000. What is the ARR?

If a business was considering an investment of $350,000 and the Net Present Value (NPV) of its expected cash flow at 12% was ($25,000) this would mean that the business should

LaVeryndre Ltd. needs to replace the roof and re-insulate a small manufacturing facility at a cost of $70,000. Based on degree-days data, the company expects to save $17,600, $19,200, $15,700, $17,100 and $14,000 over the next five years. Using 4% and 12% as trial discount rates, determine the internal rate of return on the investment.

Ballantyne Uniforms will be purchasing one or other of two models of high efficiency industrial washing machines. It will also have to purchase an extension of the racking with linen bags that move dirty laundry to the washers. The racking system should be viewed as a

Of the current methods of investment appraisal, which offers the best measurement?

Berringer International Inc. has invested $20 million and launched its new product. The company projected sales of over the next 10 years of $500,000, $3.2 million, $6.5 million, and $7.5 million for the first four years and $11 million for the next 6 years. A capital injection of 5 million will be required in Years 5 and 7 and a residual value of $4.5 million is expected at the end. If Berringer expects a return of 18%, what is the net present value of this project?

A metal fabricator requires a return of 11%. The company is considering the purchase of six 40-ton hydraulic shop presses at a cost of $11,300 each. The profit before depreciation over the next ten years is projected at $5,700, $6,800, $7,200 and $8,500 for the first four years and then expected to be $9,700 for the next six years. Depreciation is straight-line with a residual value of $13,400. Which of the following should you advise the metal fabricator do?

Chrome Brite Plating Inc. is considering a purchase of a new nickel plating machine for $35,000. It expects that for the following five years, cash inflow will be $10,000, $20,000, $50,000, $70,000 and $75,000 as its business expands. If the company requires a return of 14% on new investment, the net present value (NPV) is

The first trial of an IRR interpolation used an interest rate of 15% and produced a NPV of ($81,450) and the second trial of IRR at 6% produced an NPV of $56,000. Assuming a straight-line relationship between IRR and NPV, what percent reduction from 15% would result in the project's IRR?

Open Windows Corp. has the following investment goals: payback (PB) of five years, accounting rate of return (ARR) of 15%, hurdle rate of 20%. Analysis of the Great Bear Oil plant expansion shows the following results: PB is 4.5 years, ARR is 14%, IRR is 21% and NPV is ($12,500). What should Open Windows do?

The Paper Euphoria Co. (PEC) has received several similar new machine investment proposals from its branches across Canada. In general the data are: cost of the new machine is $200,000; residual value after five years is $40,000; economic life is 10 years; average annual profit before depreciation is $48,000. PEC only uses the ARR to measure investment success and requires an ARR of at least 27.5%. Which of the following actions would result in the project being accepted by PEC?

In addition to most capital investment decisions, what additional investment is usually needed?

Which of the following best describes the discount rate that when applied to the future cash flows makes them equal to the initial cash expenditures?

What is the primary factor in the creation of positive cash flow?

Which of the following is essential to consider when making the calculations required for NPV, IRR, PP or APP?

A large cable television provider is considering getting in to the high end ice cream business. Which of the following questions is most relevant to evaluating this proposal?

A business would like to buy a large piece of equipment that will improve their cash flow over the next ten years by $30,000 annually. If the company's hurdle rate is 14% and they expect no residual value at the end of the period, how much should the company be willing to pay for the equipment?

A company can invest $20,000,000 for three years in Option A paying out $7,500,000, $8,500,000, and $9,500,000 respectively. For an investment of $1,500,000, Option B will pay out $650,000, $750,000, and $850,000. Where should the company invest its money given a hurdle rate of 9%?

What type of investment opportunities are Apple Inc.'s iPod, 4G iPhone, and iPad?