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

Which of the following is used as the equation's numerator when computing the payback period for a capital asset with equal annual net cash inflows?

Smith & Cramer,Computer Repair,is considering an investment in computer and network equipment costing $254,000.This equipment would allow them to offer new programming services to clients.The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $60,000.Using the accounting rate of return model,what is the minimum average annual operating income that must be generated from this investment in order to achieve an 11% accounting rate of return?

(Annuity FV Table Required)Jennifer recently earned a degree in accounting and her first employment opportunity is an accountant at a major corporation.The 401K portion of her employment package has a personal investment cap at 20% of her salary and the employer contribution portion is 50% of her contribution.Her annual salary is $56,500 and she chose to invest 14% annually.Calculate the value of her 401K after 10 years at 4%,and then calculate the value of her 401K had she invested the maximum amount that her employer would match.

The hurdle rate is the length of time it takes to recoup an investment's initial cost from the cash inflows that investment generates.

Cowell Corporation is considering an investment in new equipment costing $155,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $45,000 the first year,$65,000 the second year,and $90,000 every year thereafter until the fifth year.What is the payback period for this investment? The equipment has no residual value.

The net present value method assumes that all cash inflows are immediately reinvested at a rate of return equal to the internal rate of return.

Which of the following is a characteristic of a capital asset?

(Present value tables are required. )Currence Corporation is considering the purchase of a special blow-molding machine that would cost $59,752 and would have a useful life of 8 years.The machine would generate $11,200 of net annual cash inflows per year for each of the 8 years of its life.The internal rate of return on the machine would be closest to

(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?

(Future Value Table Required)An accounting student in her first year of college who is working on a 4-year degree receives from her parents $200 in her first year.As an incentive to encourage her to graduate,they promise that in the second year she will receive double the amount of the first year,and in the third year she will receive double the amount of the second year.In her fourth year,she will receive $1,000.If she invests her yearly gifts at a rate of 4% as she receives them,compare the value of the investment after five years with the value of the gift (present value).What is the investment loss if the gift is not invested?

The Warren Company is considering investing in two alternative projects: What is the payback period for Project 1?

The process of making capital investment decisions is referred to as capital budgeting.

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

Your wealthy neighbor has promised to give you $2,000 a year at the end of each of the next four years to help with college.Using a discount rate of 8%,the present value of the gift can be stated as

What will happen to the internal rate of return (IRR)of a project if the discount rate is decreased from 9% to 7%?

(Present value tables required)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?

Capital budgeting methods will not work with unequal cash flows during the capital asset's life.Other methods must be utilized in those cases.

GlenGary Investment Corporation is analyzing a proposal to build condo units in southern Florida.The project will require an initial investment of $500,000.The building has a useful life of 20 years,a residual value of $200,000,and is depreciated on a straight-line basis.GlenGary uses the accounting rate of return model to evaluate investment projects.What is the minimum annual operating income that must be generated by this project to achieve the 9% accounting return required by GlenGary?

Net present value and the internal rate of return are examples of discounted cash flow models used in capital budgeting decisions.

(Present value tables required)Assuming an interest rate of 6%,the present value of $22,000 to be received 9 years from now would be closest to