Exam 11: Capital Investments

The managerial accountant at Insider Technology Organization,a medical imaging company,considers the purchase of a new machine to increase the efficiency in the image division.The existing machine is operable for 4 more years and it will have a disposal price of $0.If the current machine is sold now it will be worth $75,000.The cost of the new machine is $250,000 and an additional cash investment of working capital of $25,000 is needed. The manager expects the new machine to reduce the time needed to take each image,and it will improve the green energy environmental initiatives because it is more efficient.The new machine is expected to net $50,000 in additional cash inflows during the year of acquisition and $75,000 each additional year of use. The new machine has a five-year life and $0 disposal value.The cash flows will be recognized at the end of each year.The income taxes are not considered,and the investment in working capital is not expected to be recovered at the end of the machine's useful years. Required Compute the net present value of the investment,assuming the required rate of return is 12%.Would the manager at the company want to purchase the new machine?

What is working capital?

Managers consider projects acceptable if the AARR exceeds a specified hurdle required rate of return.

When computing the payback method,cash flows are ________,with no adjustment to compensate the time value of money.

What values are necessary in order to calculate a payback period with a project that has uniform cash flows?

Relevant cash flow in discounted cash analysis:

Which of the following is not true about the AARR method?

Which of the following is true about net initial investments?

________ is the rate of return demanded to cover investment risk if there is no inflation.

Which of the following terms is not a capital budget method implemented to analyze financial information?

Similar to the NPV and IRR,the payback method does not distinguish among the sources of cash flows from operations,purchase and sale of equipment,or in the investment or recovery of working capital.

Exclusive Golfing Supplies (EGS),an outdoor golfing equipment producer that specializes in personalized,precision golf clubs,engaged in a laboratory analysis to test the newest metallic compounds on the market.In Stage I,the project-identification stage,EGS learned of a new compound that is expected to increase the precision and improve the quality of golf clubs.In Stage II,the information-gathering stage,the cost of new machinery and training is computed to produce materials associated with the new technology.The results of the analysis revealed $580,000 the cost of new machinery and $16,000 total training gear to run the new machines.The managerial accountant reported that the cash flow from the disposal of the current equipment is $42,000. Required Compute the net initial investment of the new machine.

The net present value criterion (NPV)specifies that a manager should choose a project if ________.

To encourage optimistic estimates,companies such as DuPont do not maintain records comparing actual results to the estimates individual managers make when seeking capital investment projects.

In accrual-accounting,sales made on credit cards,or other noncash expenses,are not included in NPV.

Which of the following is true about investment in research and development?

The managerial accountant at Reverse Manufacturing needs to evaluate two machines and use the payback period.The cash inflows per year are $120,000. Required Use the payback Method to compute the useful life for Machine 1 and Machine 2.What is the problem with the payback period method if the cutoff point is 3 years? Show all work.

The manager at the Key Factory purchased a new key-fitting machine at the plant in Delaware.The net investment is $450,000 and the expected average annual after-tax operating cash inflows of $122,000.The new machine results in depreciation deductions of $80,000 per year ($100,000 in annual depreciation for the new machine relative to $20,000 per year on the existing machine).The increase in expected annual after-tax income? Required Compute the AARR.

Which of the following is not true about the discounted payback method?

In what stage of the capital-budgeting process do top managers ask marketing managers for potential revenue numbers,plant managers for assembly times,and suppliers for prices and the availability of key components.