Exam 12: Capital Investment Decisions and the Time Value of Money

The Warren Company is considering investing in two alternative projects: What is the accounting rate of return for Project 2?

Assuming an interest rate of 6%, the present value of $18,000 received at the end of each year for 6 years would be closest to

What is an attribute of the internal rate of return?

You have been awarded a scholarship that will pay you $500 per semester at the end of each of the next 8 semesters that you earn a GPA of 3.5 or better. You are a very serious student and you anticipate receiving the scholarship every semester. Using a discount rate of 3% per semester, which of the following is the correct calculation for determining the present value of the scholarship?

(Present value tables are needed.)Cleveland Cove Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two-the B14 Model and the F54 Model. Financial data about the two choices follows. What is the total present value of future cash inflows from the F54 Model?

The net present value method does not incorporate the time value of money.

When computing the present value of a future sum, the interest rate must always be expressed as an annual rate.

(Present value tables are needed.)Georgia Peach Farms is upgrading its fruit washing/separating machine. Georgia has narrowed the decision down to two machines: Machine A and Machine B.Pertinent information for each machine follows: Machine A Machine B Investment $450,000 $650,000 Useful life (years)10 10 Estimated annual net cash inflows for useful life $75,000 $120,000 Residual value $25,000 $35,000 Depreciation method straight-line straight-line Required rate of return 10% 12% Required: a. Calculate the net present value of Machine A. b. Calculate the net present value of Machine B. c. Using the net present value method, which machine should Georgia select if it can select only one investment?

Pro-Am Audio is a company that is contracted to DJ private events. Due to a recent increase in bookings, Pro-Am is considering the purchase of another mobile DJ unit. Pro-Am uses the payback method to evaluate its investments. The mobile DJ unit will cost $12,000, has a useful life of 10 years, and will generate $2,000 in net cash inflows per year. The residual value of the unit is $1,000. What is the payback period for the mobile DJ unit?

What will happen to the internal rate of return (IRR)of a project if the discount rate is decreased from 9% to 7%?

Capital budgeting is done when common stock is issued.

Which of the following is used as the equation's numerator when computing the payback period for a capital asset with equal annual net cash inflows?

The ARR allows managers to compare the present value of future cash generated by a project against the cost of investing in that project.

How does depreciation affect the calculation of a project's payback period?

Globe Enterprises purchased a new machine with a total cost of $30,450 and a useful life of 6 years. The machine will produce net cash inflows of $7,250 over its useful life and has a residual value of $2,125. What is the payback period for the new machine?

The "decision model that computes the difference between the present value of the investment's net cash inflows, using a desired rate of return, and the cost of the initial investment" is best described by which of the following terms?

Investments with longer payback periods are more desirable, all else being equal.

Gomez Corporation is considering two alternative investment proposals with the following data: How long is the payback period for Proposal X?

Which of the following areas does not make significant use of time value of money concepts?

You recently won a contest sponsored by a local radio station. The radio station will pay you $2,500 at the end of each of the next 15 years. Assuming an interest rate of 3%, what is the present value of this prize?