Exam 26: Capital Investment Decisions

The following details are provided by Dopler Company: Calculate the profitability index for Project A.

A company is considering an iron ore extraction project which requires an initial investment of $500,000 and will yield annual cash flows of $150,000 for 4 years. The company's hurdle rate is 9%. What is the NPV of the project?

The accounting rate of return method evaluates the lifetime return of an asset, whereas return on investment evaluates an annual return.

Capital rationing is a process adopted when a company has limited resources, and it must find ways to reduce operating expenses in all of its divisions and units.

Software Hub is deciding whether to purchase new accounting software. The cost of the software package is $55,000, and its expected life is 10 years. The payback for this investment is four years. Assuming equal yearly cash flows, what are the expected annual net cash savings from the new software? (Assume the investment has zero salvage value.)

Arriyana has just received an inheritance of $100,000, and she would like to put it into an investment portfolio for 20 years. Which of the following would be useful to calculate the value of the investment at the end of 20 years?

The following details are provided by a manufacturing company. Calculate the payback period for the investment.

A major criticism of the payback method is that it focuses only on time to recover the investment, and ignores profitability.

The payback method and the accounting rate of return method are often used to perform an initial screening of investments, rather than a detailed, in-depth analysis.

The accounting rate of return method focuses on net operating income instead of net cash inflow generated by an asset.

Which capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations?

Lara is going to receive $10,000 a year at the end of each of the next five years from her insurer to meet her education cost. Using a discount rate of 14%, the present value of the receipts can be stated as:

Paramount Company is considering purchasing new equipment costing $700,000. The company's management has estimated that the equipment will generate cash flows as follows: Residual value is zero. What is the payback period?

An annuity refers to a series of equal cash flows received or paid annually.

The only difference between present value and future value is the amount of interest that is earned in the intervening time span.

Which of the following describes the term time value of money?

Landmark Company is considering an investment in new equipment costing $500,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $120,000 the first year, $140,000 the second year, and $150,000 every year thereafter until the fifth year. What is the payback period for this investment? The residual value is zero.

Paramount Company is considering purchasing new equipment costing $700,000. Company's management has estimated that the equipment will generate cash flows as follows: Present value of $1: The company's required rate of return is 9%. Using the factors in the table, calculate the present value of the cash flows.

Management's minimum desired rate of return on a capital investment is known as the return on investment.

Dartis Company is considering investing in a specialized equipment costing $600,000. The equipment has a useful life of 5 years and a residual value of $60,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are given below. What is the accounting rate of return on the investment?