Exam 26: Capital Investment Decisions

John wins the lottery and has the following three payout options for after-tax prize money: 1. $50,000 per year at the end of each of the next six years 2. $300,000 (lump sum)now 3. $500,000 (lump sum)six years from now The required rate of return is 9%. What is the present value if he selects the third option? Round to nearest whole dollar. Present value of $1:

Which of the following two methods are typically used for initial screening of investments, rather than for detailed, in-depth analysis?

The following details are provided by Dopler Company: What is the profitability index for Project C?

The term net present value means the difference between:

Gamma Company is considering an investment proposal that would require an initial outlay of $800,000, and would yield yearly cash flows of $200,000 for 9 years. The company uses a discount rate of 10%. What is the NPV of the investment? Present value of annuity of $1:

Gamma Company is considering an investment opportunity with the following expected net cash inflows: Year 1, $250,000; Year 2, $350,000; Year 3, $395,000. Residual value of the investment would be $50,000. The company uses a discount rate of 12% and the initial investment is $400,000. Calculate the NPV of the investment. Present value of $1:

The acquisition or construction of a capital asset is known as a capital investment.

The internal rate of return (IRR)is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset.

Logy Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available: Calculate the payback period for Investment A.

Following details are provided by VPN Company. Refer to the following table for PV factors: What is the NPV of the project?

All else being equal, the shorter the investment period, the higher the total amount of interest earned.

Which of the following would be the best basis on whether to accept an investment opportunity or not?

The accounting rate of return method of analyzing a potential capital investment considers the time value of money.

A company is evaluating three possible investments. Each uses straight-line method of depreciation. Following information is provided by the company. What is the accounting rate of return for Project B?

The accounting rate of return is also known as average rate of return or annual rate of return.

Which of the following is a capital budgeting method that is used to screen potential investments?

Following details are provided by Dopler Company. Refer to the following table for PV factors: Calculate the NPV of the project.

Discounted cash flow methods consider the time value of money while evaluating an investment proposal.

James has just won the lottery after purchasing one $10 lottery ticket. The state offers him the following three payout options for after-tax prize money: 1. $50,000 per year at the end of each of the next six years 2. $300,000 (lump sum)now 3. $400,000 (lump sum)six years from now Calculate the present value of each scenario using an 8% discount rate. Round to nearest whole dollar. Present value of annuity of $1: Present value of $1:

The residual value is discounted as a single lump sum because it will be received only once at the end of life of the asset.