Exam 14: Capital Investment Decisions

Figure 14-5.Sara Turner is considering investing $60,000 in a project with the following cash revenues and expenses: -Refer to Figure 14-5. Assuming straight-line depreciation over five years, what is the payback period for this investment?

The time required for a firm to recover its original investment is the

Figure 14-8.Present value of an Annuity of $1 in Arrears -Refer to Figure 14-8. Lucas Company is considering a project with an initial investment of $530,250 in new equipment that will yield annual net cash flows of $95,000, and will be depreciated at $75,750 per year over its seven year life. What is the internal rate of return?

Explain the relationship between current and future dollars.

Which of the following compares the actual benefits from an investment with the estimated benefits, and the actual operating costs of the investment with estimated operating costs?

The internal rate of return is defined as

Match each item with the correct statement below. -earning of interest on interest

Jones Company is considering the purchase of a new machine for $57,000. The machine would generate an annual cash flow of $17,411 for 5 years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12%. The company uses straight-line depreciation. What is the internal rate of return for the machine rounded to the nearest percent?

_______________________ are the future cash flows expressed in terms of their present value.

If the cash flows of a project are received evenly over the life of the project, the formula for the calculating the payback period is

What is a postaudit? What are the advantages and disadvantages of the postaudit?

The best person/group in a firm to perform a postaudit of a capital investment is usually

The major disadvantage of a postaudit is that it is ____________.

When choosing among competing alternatives the ________________ model may choose an inferior project.

Taxes are important consideration in forecasting cash flows.

Figure 14-10.Present value of $1 Present value of an Annuity of $1 -Refer to Figure 14-10. Durrel Company is considering two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments are as follows: Durrel's cost of capital is 6%. Required: A. Compute the NPV for each investment and state which project should be chosen based on the NPV. B. Compute the IRR for each investment and state which project should be chosen based on the IRR.

The interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost is called the ____.

In practice, managers often choose a discount rate that is higher than the cost of capital.

A division manager is choosing between two mutually exclusive projects. The company requires any project to earn at least 12%. The manager believes that cash inflows from the project can be reinvested at the rate of 12%. Which project will the manager likely choose?

The capital investment decision making model that assumes that each cash inflow is reinvested at the project's own rate of return is