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

A company is evaluating a variety of different capital investment opportunities.Due to limited funds,the company can only choose one project.What would be the best capital budgeting method for this company to use to select a project?

When you graduate from college,your mother plans to give you a gift of $50,000 to start you on your way.However,to determine what you learned in business school,your mother presents you with four options on how to receive the gift.Which of the four options presented by your mother will yield the greatest present value to you?

The cost associated with renovating a warehouse to be used as a restaurant would be considered a capital asset.

(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 and residual value?

The "decision model that computes the difference between the present value of the investment's net cash inflows,using a desired rate of return,and the cost of the initial investment" is best described by which of the following terms?

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

The ________ is generally considered to be the most superior method for making capital budgeting decisions.

Accrual-based accounting is not used in determining the accounting rate of return.

Sicily,Inc. ,is considering investing $160,000 in a machine that may last 4 years with no residual value.The new machine will generate annual operating income of $60,000 per year for 4 years.What is the accounting rate of return?

(Present value tables are required. )Lenardi Corporation is evaluating the purchase of a new machine that would have an initial cost of $125,000.This new machine would have a profitability index of 1.25.The company's discount rate is 12%.What is the present value of the net cash inflows of the new machine project?

The term ________ is best described as "the length of time required to recover the cost of an investment."

The Hanna Company uses straight-line depreciation and is considering a capital expenditure of which the following relevant cash flow data have been estimated: The total depreciation expense over the life of the asset is

One disadvantage of the payback method is that it does not consider the time value of money.

One dollar to be received in the future is worth more than one dollar today.

The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.

(Present value tables are needed. )Cleveland Cove Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair.The company has narrowed their choices down to two: the B14 Model and the F54 Model.Financial data about the two choices follows. What is the net present value of the B14 Model?

How does depreciation affect the calculation of a project's accounting rate of return (ARR)?

The discounted cash flow methods for capital budgeting are generally considered inferior to the payback period and the ARR because they consider the time value of money.

Capital investments do not typically require large sums of money.

(Present value tables are needed. )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 net present value of the Indiana proposal is closest to