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

Gomez Corporation is considering two alternative investment proposals with the following data: How long is the payback period for Proposal X?

When the profitability index is less than 1.00 for a project,that project has a positive net present value.

Bonneville Manufacturing is considering an investment that would require an initial net investment of $650,000.The following revenues/expenses relate exclusively to the investment: The investment will have a residual value of $50,000 at the end of its 15 year useful life.What is the payback period for this investment?

The payback method primarily focuses on profitability and not time.

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 Indiana proposal is closest to

When evaluating capital investment projects,if the internal rate of return is less than the required rate of return,the project will be accepted.

The following are all methods of analyzing capital investments except

(Present value tables are needed. )Family Fun Park is evaluating the purchase of a new game to be located on its Midway.Family Fun has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game.Financial data about the two choices follows. What is the total present value of future cash inflows and residual value from the Whack-A-Mole game?

The ________ capital budgeting methods are based on cash flows,profitability,and the time value of money.

The ARR allows managers to compare the present value of future cash generated by a project against the cost of investing in that project.

(Present value tables are required. )Maersk Metal Stamping is analyzing a special investment project.The project will require the purchase of two machines for $30,000 and $8,000 (both machines are required).The total residual value at the end of the project is $1,500.The project will generate cash inflows of $11,000 per year over its 8-year life.If Maersk requires a 6% return,what is the net present value (NPV)of this project?

(Present value tables are required. )Renfroe Corporation is considering the purchase of a machine that would cost $22,712 and would have a useful life of 5 years.The machine would generate $6,300 of net annual cash inflows per year for each of the 5 years of its life.The internal rate of return on the machine would be closest to

The ________ capital budgeting method uses accrual accounting income.

(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 net present value for the soda machines?

(Present value tables are needed. )Shaker Investments,a private investment holding company,is searching for a new investment opportunity.Shaker Investments has identified two potential investment opportunities: an upstart fast food chain and a growing organic grocery chain.Information for each investment follows: Required: a.Calculate the net present value of the Fast Food Chain. b.Calculate the net present value of the Organic Grocery Chain. c.Using the net present value method,which investment should Shaker select if it can select only one investment?

The accounting rate of return uses non-cash flow factors including depreciation in calculating the operating income of the asset.

Spinelli Company is deciding whether to automate one phase of its production process.The equipment has a six year life and will cost $450,000.The interest rate is 12%.Net cash inflows per year: a.What is the present value of the net inflow for year 1? b.What is the present value of the net inflow for year 5?

Which of the capital budgeting methods is the best?

The formula for calculating the accounting rate of return for a capital asset is

(Present value tables required)You win the lottery and must decide how to take the payout.Use an 8% discount rate.What is the present value of $15,000 a year received at the end of each of the next six years?