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

Interior Products, Inc. is evaluating the purchase of a new machine to use in its manufacturing process. The new machine would cost $37,000 and have a useful life of 5 years. At the end of the machine's life, it would have a residual value of $2600. Annual cost savings from the new machine would be $12,200 per year for each of the six years of its life. Interior Products, Inc. has a minimum required rate of return of 16% on all new projects. The net present value of the new machine would be closest to: (Round any intermediary calculations and your final answer to the nearest dollar.) Present Value of $1 Present Value of Annuity of $1

Cleveland Cove Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two: the B14 Model and the F54 Model. Financial data about the two choices follows. Using the net present value model, which alternative should the company select? Present Value of $1 Present Value of Annuity of $1

How does depreciation affect the calculation of a project's accounting rate of return (ARR)?

The Speedy-Delivery Company has two options for its delivery truck. The first option is to purchase a new truck for $14,000. The new truck will have a useful life of 6 years and a residual value of $2000. Operating costs for the new truck will be $200. The second option is to overhaul its existing truck. The cost of the overhaul will be $8000. The overhauled truck will have a useful life of 6 years and a residual value of $0. Operating costs for the overhauled truck will be $800. Using Speedy's discount rate of 4%, which option is better and by what amount? Present Value of $1 Present Value of Annuity of $1

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,810,000. 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 payback period for the Indiana proposal is closest to

Suppose Whole Foods is considering investing in warehouse-management software that costs $900,000, has $40,000 residual value and should lead to cash cost savings of $170,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation's denominator?

Assuming an interest rate of 14%, if you invest a lump sum of $8000 now, the balance of your investment in 7 years will be closest to: Future Value of $1 Future Value of Annuity of $1

Buller Manufacturing is considering acquiring another facility for a cost of $610,000. The required payback period is 4.5 years. Assume annual net cash inflows are $150,000 for the first two years and $125,000 for years 3 and 4. What must the inflow be in the fifth year to meet the 4.5 year payback period?

Which of the following is used as the equation's numerator when computing the payback period for a capital asset with equal annual net cash inflows?

A company would consider all of the following in computing the IRR of an investment, except

Cleveland Cove Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two: the B14 Model and the F54 Model. Financial data about the two choices follows. What is the net present value of the B14 Model? Present Value of $1 Present Value of Annuity of $1

The ________ capital budgeting model is generally the simplest to compute.

Westin Manufacturing is considering the purchase of a new machine to use in its packing department. The new machine will have an initial cost of $160,000, a useful life of 12 years and a $6000 residual value. Westin will realize $15,100 in annual savings for each of the machine's 12-year useful life. Given Westin's 5% required rate of return, the new machine will have a net present value (NPV)of: (Round any intermediary calculations and your final answer to the nearest dollar.) Present Value of $1 Present Value of Annuity of $1

A company finds that the residual value of $8,000 for the equipment in a capital budgeting project has been inadvertently omitted from the calculation of the net present value (NPV)for that project. How does this omission affect the NPV of that project?

Vino Winery is considering the purchase of a state-of-the-art bottling machine. The new machine will cost $20,790 and will have a useful life of 4 years. The new machine will provide net cash savings of $6000 per year. What is the internal rate of return (IRR)for the new bottling machine? Present Value of $1 Present Value of Annuity of $1

If you invest $6000 at the end of every year for nine years at an interest rate of 6%, the balance of your investment in 5 years will be closest to: Future Value of $1 Future Value of Annuity of $1

The Cookies Bakery Company managerial accountant considers the purchase of a new convection oven system. A preferred vendor offers two plausible options, the Tech-Smart convection system (TSCS)and the Perfection Convection Solution Series 3 (PCS3). Both convection systems have a useful life of 12 years. The TSCS requires an initial investment of $250,000 whereas the PCS3 requires an initial investment of $330,000. The energy efficient technology of the TSCS is projected to increase total revenue $38,000 annually while the precise production capability of the PCS3 is projected to increase revenue $52,000 annually. The Managerial accountant plans to invest the cash inflow in an annuity yielding 8%. Compare the net present value of each new system and state which investment is more beneficial to Cookies Bakery Company. Present Value of $1 Present Value of Annuity of $1

The Pantry 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 of $1 Present Value of Annuity of $1

Simple interest means that interest is calculated on

The net present value method does not incorporate the time value of money.