Exam 12: Capital Investment Decisions

What is a problem with the Internal Rate of Return method?

All of the investment appraisal methods below use cash flows exclusively except:

Refer to Real World box on page 502 for survey referenced. The method of investment appraisal found in surveys to be used by 94% of Australian companies is:

The required rate of return is the ________ acceptable percentage return on an investment after taking into account the ________ of the investment.

Which of the following are practical issues that need to be considered when using investment appraisal methods?

What investment decision method takes the average profit and expresses it as a percentage of the average investment?

You have won a special type of lottery where you are to receive $250,000 in 4 years' time. The current interest rate is 6%. How much is the lottery win worth in today's dollars?

Which of the following would be a reason for preferring $100 now rather than $100 in one year's time?

Use the information below to answer the following questions. Han Ltd supplies chilli paste to large supermarket chains. The company is currently considering scrapping the old processor and investing in a new processor. Information about the investment is as follows: Initial investment in processor \ 105,000 Operating cash flows over next 5 years: Cash receipts \ 80,000 Cash payments \ 40,000 Residual value of processor in 5 years \ 5,000 Required rate of return 8\% Depreciation per antum \ 20,000 -Refer to the table above. The net present value (rounded)of the investment is:

George is considering setting up a business selling free-range chickens. He estimates his establishment costs will be $600,000 and his net cash flows for the first five years will be $100,000 in year 1, $200,000 in year 2, stabilising at $300,000 in year 3. The payback period for the investment is:

The Square Package Group is thinking of buying, at a cost of $220,000, some new packaging equipment that is expected to save $50,000 in costs per year. Its estimated useful life is 10 years and it will have zero disposal value. The required rate of return is 16%. Ignore income tax issues. REQUIRED: Compute the following: a)Net present value b)Payback period

In capital investment decision-making, what does PV stand for?

Depreciation is a non-cash expense, but it affects cash flows from an investment because:

The potential benefits forgone by rejecting one alternative while accepting another is known as a/an:

Use the information below to answer the following questions. Han Ltd supplies chilli paste to large supermarket chains. The company is currently considering scrapping the old processor and investing in a new processor. Information about the investment is as follows: Initial investment in processor \ 105,000 Operating cash flows over next 5 years: Cash receipts \ 80,000 Cash payments \ 40,000 Residual value of processor in 5 years \ 5,000 Required rate of return 8\% Depreciation per antum \ 20,000 -Refer to the table above. Using the Net Present Value approach the management of Han Ltd will make which of the following decisions?

Which of these is an advantage of the payback method?

Wishlist recently purchased a new packaging machine for $678,026. The machine has a remaining useful life of 10 years. Net cash flow per year will be $120,000. The internal rate of return is:

What is the formula for net present value per $1 of investment?

What is a disadvantage associated with the use of the accounting rate of return method for assessing investment opportunities?

An investor has the opportunity to invest at 15 per cent per year. Would they prefer to have $20,000 in a year's time or have any of the following sums now?