Exam 14: Capital Investment Decisions

Coriander Company is considering a project with an initial investment of $426,800 in new equipment that will yield annual net cash flows of $80,000, and will be depreciated at $53,350 per year over its eight year life. What is the accounting rate of return?

Companies considering projects with shorter lives are interested in longer payback periods.

Elena Wallace invested $150,000 in a project that pays her an even amount per year for 10 years. The payback period is 6 years. What are Elena's yearly cash inflows from the project?

In general, it is best if postaudits are done by company management, since they understand the actual operating conditions.

A key element in the capital investment process is a follow-up analysis of a capital project once it is implemented; this analysis is a called a _____________.

The following information pertains to an investment: The present value of the annual cash flow (rounded) is

Figure 14-7.Osler Company is considering an investment with the following data: Depreciation will be taken on a straight-line basis over the expected life of the investment. -Refer to Figure 14-7. What is the accounting rate of return for the investment?

Figure 14-7.Osler Company is considering an investment with the following data: Depreciation will be taken on a straight-line basis over the expected life of the investment. -Refer to Figure 14-7. The company requires a minimum rate of return of 4%. What is the net present value of the investment?

The reason that a discount factor in Year 3 is less than a discount factor in Year 2 is that

Figure 14-11.Present value of an Annuity of $1 in Arrears -Refer to Figure 14-11. Aragon Company is considering an investment in equipment that will have an initial cost of $560,290 and yield annual net cash inflows of $90,000. Yearly depreciation will be $56,000. The equipment is expected to be useful for 10 years and then it will be scrapped. Aragon requires a minimum rate of return of 10%.

Companies that perform postaudits of capital projects experience a number of benefits.

Figure 14-1.A company is considering two projects. -Refer to Figure 14-1. What is the payback period for Project II?

Name two nondiscounting capital investment models. What is meant by nondiscounting?

The required rate of return used in the net present value model can also be called the

Postaudits ensure that resources are used wisely by evaluating profitability.

Dale Davis Company is evaluating a proposal to purchase a new machine that would cost $100,000 and have a salvage value of $10,000 in 4 years. It would provide annual operating cash savings of $10,000, as follows: If the new machine is purchased, the old machine will be sold for its current salvage value of $20,000. If the new machine is not purchased, the old machine will be disposed of in 4 years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in 1 year the old machine will require repairs predicted to cost $35,000. Dale Davis's cost of capital is 14%. Required: Should the new machine be purchased? Why or why not?

In order to use the payback period model, the proposed investment must have even cash inflows.

Sometimes firms require riskier projects to have longer payback periods.

Cooper Industries is considering a project that would require an initial investment of $101,000. The project would result in cost savings of $62,000 in year 1 and $70,000 in year two. The internal rate of return is

Postaudits supply feedback to managers that should help improve future decision making.