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

Louise owns a golf course and wants to add some computers to the lounge.The computers would cost $14,000 and would have a 3 year life and no residual value.Louise expects the computers to generate $4,000 annual cash inflows for 3 years.The discount rate is 8%.What is the net present value of the investment?

You win the lottery and must decide how to take the payout.Use an 8% discount rate for all parts of this question. Required: a.What is the present value of $12,000 a year received at the end of each of the next six years? b.What is the present value of taking a $60,000 lump sum now? c.What is the present value of a $90,000 lump sum taken in 7 years?

(Present value tables are required. )Calby Enterprises is evaluating the purchase of a new computer network system.The new system would cost $25,000 and have a useful life of 6 years.At the end of the system's life,it would have a residual value of $3,000.Annual operating cost savings from the new system would be $8,800 per year for each of the six years of its life.Calby Enterprises has a minimum required rate of return of 12% on all new projects.The net present value of the new network system would be closest to

(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%. Is the internal rate of return of the investment equal to,higher than,or lower than 14%?

The net present value model differs from the IRR model in that it does NOT show the project's unique rate of return.

The interest rate that makes the net present value of the investment equal to zero is the internal rate of return.

Pitt Company is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: How long is the payback period for Investment B?

Post-audits of capital investments compare actual net cash inflows to projected net cash inflows.

(Present value tables are required. )Interior Products,Inc.is evaluating the purchase of a new machine to use in its manufacturing process.The new machine would cost $41,000 and have a useful life of 6 years.At the end of the machine's life,it would have a residual value of $2,500.Annual cost savings from the new machine would be $12,400 per year for each of the six years of its life.Interior Products,Inc.has a minimum required rate of return of 16% on all new projects.The net present value of the new machine would be closest to

Pitt Company is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: How long is the payback period for Investment A?

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 accounting rate of return for the Kentucky proposal is closest to

(Present value tables are required. )Westin Manufacturing is considering the purchase of a new machine to use in its packing department.The new machine will have an initial cost of $170,000,a useful life of 12 years and a $10,000 residual value.Westin will realize $15,750 in annual savings for each of the machine's 12-year useful life.Given Westin's 4% required rate of return,the new machine will have a net present value (NPV)of

Abdul Corporation bought a new machine,which cost $90,000,has a useful life of 10 years,and will generate annual cash inflows of $25,000.The residual value of the machine is $5,500.What is the payback period?

On a whim you purchased a scratch-off lottery ticket at the gas station.It must have been your lucky day because you won $1,000,000.Being logical and rational you decide to invest the money at 3% for 10 years until you are ready to start a family.At the end of 10 years,how much will your investment be worth?

(Present value tables required)You have been awarded a scholarship that will pay you $500 per semester at the end of each of the next 8 semesters that you earn a GPA of 3.5 or better.You are a very serious student and you anticipate receiving the scholarship every semester.Using a discount rate of 3% per semester,which of the following is the correct calculation for determining the present value of the scholarship?

Senseman Company has three potential projects from which to choose.Selected information on each of the three projects follows: Using the profitability index,rank the projects from most profitable to least profitable.

(Present value tables required)Assuming an interest rate of 10%,the present value of $50,000 to be received 8 years from now would be closest to

(Present value tables required)You won the lottery and have a number of choices as to how to take the money.Which choice yields a greater present value?

All else being equal,a company would choose to invest in a capital asset if which of the following is true?

Pro-Am Audio is a company that is contracted to DJ private events.Due to a recent increase in bookings,Pro-Am is considering the purchase of another mobile DJ unit.Pro-Am uses the payback method to evaluate its investments.The mobile DJ unit will cost $12,000,has a useful life of 10 years,and will generate $2,000 in net cash inflows per year.The residual value of the unit is $1,000.What is the payback period for the mobile DJ unit?