Exam 26: Capital Investment Decisions

Gladeer Company is evaluating an investment that will cost $520,000 and will yield cash flows of $300,000 in the first year, $200,000 in the second year, and $100,000 in the third and final year. Use the tables below and determine the internal rate of return. Present value of $1: The IRR of the project will be:

Net present value is defined as the difference between the present value of the project's net cash inflows and the cost of investment.

Which of the following is true of discounted cash flow methods like NPV and IRR?

The last step in the capital budgeting process is control which compares the actual results with the projected results. These comparisons are known as:

The payback period and accounting rate of return (ARR)methods are suitable to investments with a short time span.

Net cash inflows from a capital investment arise from an increase in revenues, a decrease in expenses, or both.

Which of the following best describes the term sensitivity analysis?

Canbera Company is considering investing $450,000 in telecommunications equipment which would have an estimated life of 5 years with zero residual value. The cash flows are as shown below: The present value of $1 factors are given below: The IRR of the project would be:

The benefit foregone by not choosing an alternative course of action is known as an opportunity cost.

A company is evaluating three possible investments. Following information is provided by the company. What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method.)

The accounting rate of return is calculated by dividing the average annual operating income by the average amount invested.

The following details are provided by Dopler Company: Which project has the highest profitability index?

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

Which of the following most accurately describes the term annuity?

All else being equal, investments with longer payback periods are preferable.

The NPV method of evaluating capital investments suggests that a project with positive net cash inflows that exceed the cost of the investment should be accepted.

Which of the following is a capital budgeting method?

The payback method is the most thorough and comprehensive way to choose the best investment among alternatives, than any other capital budgeting methods.

Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data: Calculate the payback period for Proposal X.

Which of the following situations suggests the acceptance of an investment proposal?