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

(Present value tables are needed. )Somerville Corporation is considering investing in specialized equipment costing $618,000.The equipment has a useful life of 5 years and a residual value of $55,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are: Somerville Corporation's required rate of return is 14%. The net present value of the investment is closest to

(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: Using the net present value model,which alternative should Janus Vending Machine Company select?

Icy Peaks Sports makes snowboards.The company wants to add a new machine that would cost $80,000 and have a useful life of 5 years and no residual value.The company expects the machine will generate $24,000 annual cash inflows for 5 years.The discount rate is 10%.What is the net present value of the investment?

In calculating the net present value of an investment in equipment,the required investment and its residual value should be subtracted from the present value of all future cash inflows.

Calculating interest on the principal and on all the interest earned to date is called compound interest.

(Present value tables are needed. )Georgia Peach Farms is upgrading its fruit washing/separating machine.Georgia has narrowed the decision down to two machines: Machine A and Machine B.Pertinent information about each machine include : Required: a.Calculate the net present value of Machine A. b.Calculate the net present value of Machine B. c.Using the net present value method,which machine should Georgia select if it can select only one investment?

Solve the following two cases (the cases are independent). a.If you invest $5,000 today at 10% interest,what is the value of the investment at the end of 5 years? b.If you invest $1,200 at the end of each of the next 5 years and the investment earns 10% interest,what is the value of the investment at the end of 5 years?

"A measure of profitability computed by dividing the average annual operating income by the amount of the investment" is best described by which of the following terms?

Globe Enterprises purchased a new machine with a total cost of $30,450 and a useful life of 6 years.The machine will produce net cash inflows of $7,250 over its useful life and has a residual value of $2,125.What is the payback period for the new machine?

Assuming an interest rate of 6%,if you invest a lump sum of $6,500 now,the balance of your investment in 7 years will be closest to

Buller Manufacturing is considering acquiring another facility for a cost of $610,000.The required payback period is 4.5 years.Assume annual net cash inflows are $150,000 for the first two years and $125,000 for years 3 and 4.What must the inflow be in the fifth year to meet the 4.5 year payback period?

The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated: Total net inflows during the useful life of the asset are

Which of the following is not an advantage of post-audits of capital investments?

Siesta Manufacturing has asked you to evaluate a capital investment project.The project will require an initial investment of $88,000.The life of the investment is 7 years with a residual value of $4,000.If the project produces net annual cash inflows of $16,000,what is the accounting rate of return?

How does depreciation affect the calculation of a project's payback period?

The Internal Rate of Return,the Accounting Rate of Return,Net Present Value and Payback Period are four recognized capital budgeting methods.

Buxton Corporation is evaluating a capital investment project which would require an initial investment of $240,000 to purchase new machinery.The annual revenues and expenses generated specifically by this project each year during the project's nine year life would be: The residual value of the machinery at the end of the nine years would be $15,000.The payback period of this potential project in years would be closest to

The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.

(Present value of annuity table required)Velocity Tire Company's managerial accountant assesses the net present value of two different types of tread repair machines in order to ascertain the better investment option.The Retreadit-2000 will require an investment of $320,000 while the Econ-4760 will require an investment of $280,000.Each piece of equipment has a useful life of 10 years with no residual value.The Retreadit-2000 annual net cash inflow has a static value of $72,000 annually whereas the Econ-4760 has a static cash inflow predicted at $49,500.The revenue generated by the chosen product will be invested in an annuity at 12%,compute the net present value of the two pieces of equipment and state which will be the better investment according to their respective NPVs.

(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%.Assume the residual value is zero. What is the net present value of the equipment?