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

Your hard work in college paid off,quite literally,and you received a graduate assistantship for your MBA program.The assistantship pays a stipend of $10,000 at the end of each of the next 2 years.Using an average discount rate of 3%,the future value of your assistantship can be calculated by

(Present value tables required)Assuming an interest rate of 10%,the present value of $11,000 received at the end of each year for 6 years would be closest to

Neither the payback period nor the IRR capital budgeting method recognizes the time value of money.

What would a project's profitability index be if the project has an internal rate of return which is equal to the company's discount rate?

What is an attribute of the internal rate of return?

(Present value tables are required. )The Speedy-Delivery Company has two options for its delivery truck.The first option is to purchase a new truck for $15,000.The new truck will have a useful life of 5 years and a residual value of $2,000.Operating costs for the new truck will be $200.The second option is to overhaul its existing truck.The cost of the overhaul will be $8,000.The overhauled truck will have a useful life of 5 years and a residual value of $0.Operating costs for the overhauled truck will be $600.Using Speedy's discount rate of 5%,which option is better and by what amount?

A series of equal payments or deposits made at equal time intervals are called compound interest.

Landrum Corporation is considering investing in specialized equipment costing $250,000.The equipment has a useful life of 5 years and a residual value of $20,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are: Landrum Corporation's required rate of return on investments is 14%. What is the accounting rate of return on the investment?

A company would consider all of the following in computing the IRR of an investment,except

(Present value tables are required. )Figgey,a plastics processor,is considering the purchase of a high-speed extruder as one option.The new extruder would cost $52,000 and would have a residual value of $5,000 at the end of its 8-year life.The annual operating expenses of the new extruder would be $8,000.The other option that Figgey has is to rebuild its existing extruder.The rebuilding would require an investment of $30,000 and would extend the life of the existing extruder by 8 years.The existing extruder has annual operating costs of $11,000 per year and does not have a residual value.Figgey discount rate is 14%.Using net present value analysis,which option is the better option and by how much?

The payback and accounting rate of return models are conceptually better than the discounted cash flow models because they are based on cash flows,and they consider both profitability and the time value of money.

(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 present value of all future cash inflows from the snack machines and residual value?

The time value of money is explained by which of the following?

The net present value method does not incorporate the time value of money.

(Present value tables required)The present value of an investment is affected by which of the following?

When evaluating the cash flows from an investment,a reduction in cash outflows is treated as the same as an increase in cash inflows.

The term ________ is best described as a relationship among principal,interest rate,and time.

A company finds that the residual value of $8,000 for the equipment in a capital budgeting project has been inadvertently omitted from the calculation of the net present value (NPV)for that project.How does this omission affect the NPV of that project?

(Present value of annuity table required)The Cookies Bakery Company managerial accountant considers the purchase of a new convection oven system.A preferred vendor offers two plausible options,the Tech-Smart convection system (TSCS)and the Perfection Convection Solution Series 3 (PCS3).Both convection systems have a useful life of 12 years.The TSCS requires an initial investment of $250,000 whereas the PCS3 requires an initial investment of $330,000.The energy efficient technology of the TSCS is projected to increase total revenue $38,000 annually while the precise production capability of the PCS3 is projected to increase revenue $52,000 annually.The Managerial accountant plans to invest the cash inflow in an annuity yielding 8%.Compare the net present value of each new system and state which investment is more beneficial to Cookies Bakery Company.

The term ________ is described as a "formal means of analyzing long-range investment alternatives."