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

The formula for calculating the accounting rate of return for a capital asset is

The Hawn Corporation bought a new machine that cost $150,000 with a 10-year life and a residual value of $20,000. The company plans to generate annual cash inflows of $40,000 over 10 years. Calculate the accounting rate of return.

Siesta Manufacturing has asked you to evaluate a capital investment project. The project will require an initial investment of $88,000. The life of the investment is 7 years with a residual value of $4,000. If the project produces net annual cash inflows of $16,000, what is the accounting rate of return?

A manager wants to know which investment decision will affect the bottom line of the financial statements according to Generally Accepted Accounting Principles. Which capital budgeting method would he choose?

When evaluating the cash flows from an investment, a reduction in cash outflows is treated as the same as an increase in cash inflows.

The present value of $1,000,000 received in 13 years, given an interest rate of 3%, is

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

Gomez Corporation is considering two alternative investment proposals with the following data: What is the accounting rate of return for Proposal X?

The Warren Company is considering investing in two alternative projects: What is the payback period for Project 2?

Choosing among alternative capital investments is called a post-audit.

Capital budgeting techniques such as payback method and net present value are based upon Generally Accepted Accounting Principles (GAAP)and accrual accounting.

If the accounting rate of return exceeds the required accounting rate of return,

The Warren Company is considering investing in two alternative projects: What is the accounting rate of return for Project 1?

(Present value tables are required.)Karpets Industries is investing in a new high-speed loom for weaving its rugs and carpets. The new loom will have a useful life of 7 years and cost $80,000. The loom's residual value is $5,000. Assume that Karpets requires a return of 10% and that the loom will create annual cost savings of $16,250. What is the net present value (NPV)of the new loom?

The term ________ is described as a "formal means of analyzing long-range investment alternatives."

Your hard work in college paid off, quite literally, and you received a graduate assistantship for your MBA program. The assistantship pays a stipend of $10,000 at the end of each of the next 2 years. Using an average discount rate of 3%, the future value of your assistantship can be calculated by

Your grandfather has promised to give you $1,000 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year. Using a discount rate of 6%, which of the following is correct for determining the present value of the gift?

Abdul Corporation bought a new machine, which cost $90,000, has a useful life of 10 years, and will generate annual cash inflows of $25,000. The residual value of the machine is $5,500. What is the payback period?

(Present value tables are needed.)Mulheim Corporation is deciding whether to automate one phase of its production process. The equipment has a six-year life and will cost $410,000. Projected net cash inflows from the equipment are as follows: Mulheim Corporation's hurdle rate is 12%. If Mulheim Corporation decides to refurbish the equipment at a cost of $60,000 at the end of year 6, it could be used for one more year and would have a $30,000 residual value at the end of year 7. Assume the cash inflow in year 7 is $65,000. What is the NPV of just the refurbishment?

The ________ capital budgeting model is generally the simplest to compute.