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

(Present value tables are needed.)The Janus Vending Machine Company is looking to expand its business by adding a new line of vending machines. The management team is considering expanding into either soda machines or snack machines. Following is the relevant financial data relating to the decision: What is the net present value for the soda machines?

When selecting a capital investment project from three alternatives, the project with the highest net present value will always be preferable.

Capital budgeting methods will not work with unequal cash flows during the capital asset's life. Other methods must be utilized in those cases.

In calculating the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.

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 Indiana proposal is closest to

When evaluating capital investment projects, if the internal rate of return is less than the required rate of return, the project will be accepted.

Solve the following two cases (the cases are independent). a. If you invest $5,000 today at 10% interest, what is the value of the investment at the end of 5 years? b. If you invest $1,200 at the end of each of the next 5 years and the investment earns 10% interest, what is the value of the investment at the end of 5 years?

Which of the capital budgeting methods is the best?

(Present value tables are required.)Currence Corporation is considering the purchase of a special blow-molding machine that would cost $59,752 and would have a useful life of 8 years. The machine would generate $11,200 of net annual cash inflows per year for each of the 8 years of its life. The internal rate of return on the machine would be closest to

What would a project's profitability index be if the project has an internal rate of return which is equal to the company's discount rate?

Your wealthy neighbor has promised to give you $2,000 a year at the end of each of the next four years to help with college. Using a discount rate of 8%, the present value of the gift can be stated as

The internal rate of return is used as the discount rate when calculating the net present value of a project.

The Warren Company is considering investing in two alternative projects: What is the payback period for Project 1?

(Present value tables are required.)Calby Enterprises is evaluating the purchase of a new computer network system. The new system would cost $25,000 and have a useful life of 6 years. At the end of the system's life, it would have a residual value of $3,000. Annual operating cost savings from the new system would be $8,800 per year for each of the six years of its life. Calby Enterprises has a minimum required rate of return of 12% on all new projects. The net present value of the new network system would be closest to

Which of the following is a weakness of the internal rate of return (IRR)?

(Present value tables are required.)Hincapie Manufacturing evaluating investing in a new metal stamping machine costing $30,924. Hincapie estimates that it will realize $12,000 in annual cash inflows for each year of the machine's 3-year useful life. The internal rate of return (IRR)for the machine is approximately

The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated: Total net inflows during the useful life of the asset are

Capital budgeting predictions must consider factors such as changing consumer preferences, competition, and government regulations.

(Present value tables are needed.)The Janus Vending Machine Company is looking to expand its business by adding a new line of vending machines. The management team is considering expanding into either soda machines or snack machines. Following is the relevant financial data relating to the decision: What is the total present value of future cash inflows from the soda machines?

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 accounting rate of return is closest to