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

Icy Peaks Sports makes snowboards. The company wants to add a new machine that would cost $80,000 and have a useful life of 5 years and no residual value. The company expects the machine will generate $24,000 annual cash inflows for 5 years. The discount rate is 10%. What is the net present value of the investment?

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available: The accounting rate of return for the Kentucky proposal is closest to

Which of the following is not an advantage of post-audits of capital investments?

The payback method can be used when the net cash inflows from a capital investment are unequal.

(Present value tables are needed.)O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available: The net present value of the Kentucky proposal is closest to

(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. Using the net present value model, which alternative should the company select?

The payback method primarily focuses on profitability and not time.

(Present value tables are required.)Vino Winery is considering the purchase of a state-of-the-art bottling machine. The new machine will cost $28,250 and will have a useful life of 10 years. The new machine will provide net cash savings of $5,000 per year. What is the internal rate of return (IRR)for the new bottling machine?

(Present value tables are needed.)Shaker Investments, a private investment holding company, is searching for a new investment opportunity. Shaker Investments has identified two potential investment opportunities: an upstart fast food chain and a growing organic grocery chain. Information for each investment follows: Fast Food Organic Grocery Chain Chain Investment $975,000 $1,500,000 Useful life (years)15 15 Estimated annual net cash inflows for useful life $120,000 $210,000 Residual value $50,000 $100,000 Depreciation method straight-line straight-line Required rate of return 8% 10% Required: a. Calculate the net present value of the Fast Food Chain. b. Calculate the net present value of the Organic Grocery Chain. c. Using the net present value method, which investment should Shaker select if it can select only one investment?

You win the lottery and must decide how to take the payout. Use an 8% discount rate for all parts of this question. Required: a. What is the present value of $12,000 a year received at the end of each of the next six years? b. What is the present value of taking a $60,000 lump sum now? c. What is the present value of a $90,000 lump sum taken in 7 years?

(Present value tables are required.)Mantua Motors is evaluating a capital investment opportunity. This project would require an initial investment of $38,000 to purchase equipment. The equipment will have a residual value at the end of its life of $3,000. The useful life of the equipment is 5 years. The new project is expected to generate additional net cash inflows of $12,000 per year for each of the five years. Mantua Motors' required rate of return is 14%. The net present value of this project is closest to

(Present value tables are needed.)Family Fun Park is evaluating the purchase of a new game to be located on its Midway. Family Fun has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. Using the net present value model, which alternative(s)should Family Fun Park select?

The cost associated with renovating a warehouse to be used as a restaurant would be considered to be a capital asset.

A company is evaluating a variety of different capital investment opportunities. Due to limited funds, the company can only choose one project. What would be the best capital budgeting method for this company to use to select a project?

(Present value tables are needed.)Family Fun Park is evaluating the purchase of a new game to be located on its Midway. Family Fun has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. What is the total present value of future cash inflows from the Whack-A-Mole game?

The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated: The total depreciation expense over the life of the asset is

One disadvantage of the payback method is that it does not consider the time value of money.

Income from an apartment building you own totals $260,000 per year. You plan on selling the building and retiring to France in 12 years. Assuming you can invest the income from the building each year at 3%, how much money will you have on which to retire?

The payback and accounting rate of return models are conceptually better than the discounted cash flow models because they are based on cash flows, and they consider both profitability and the time value of money.

Speedy Print Shop bought a new high-speed photo copier for customers to be able to bring in their digital pictures to make high-quality copies. Its useful life is 6 years. The copier cost $7,740 and will generate annual cash inflows of $2,150. The residual value of the copier is $1,320. The payback period in years is closest to