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

Accounting Rate of Return and Payback Period are methods better used for capital investments that have a relatively short lifespan such as computer equipment and software.

Assuming an interest rate of 5%, if you invest a lump sum of $6000 now, the balance of your investment in 7 years will be closest to: Future Value of $1 Future Value of Annuity of $1

Investments with longer payback periods are more desirable, all else being equal.

When you graduate from college, your mother plans to give you a gift of $40,000 to start you on your way. However, to determine what you learned in business school, your mother presents you with four options on how to receive the gift. Which of the four options presented by your mother will yield the greatest present value to you? Present Value of $1 Present Value of Annuity of $1

What would a project's profitability index be if the project has an internal rate of return which is equal to the company's discount rate?

Calculating interest on the principal and on all the interest earned to date is called compound interest.

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 $2,000,000. The following information is available: The accounting rate of return for the Indiana proposal is closest to (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. Using the net present value model, which alternative(s)should Family Fun Park select? Present Value of $1 Present Value of Annuity of $1

The accounting rate of return uses non-cash flow factors including depreciation in calculating the operating income of the asset.

Byer, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $47,000 and would have a residual value of $5000 at the end of its 6-year life. The annual operating expenses of the new extruder would be $4000. The other option that Byer has is to rebuild its existing extruder. The rebuilding would require an investment of $40,000 and would extend the life of the existing extruder by 6 years. The existing extruder has annual operating costs of $11,000 per year and does not have a residual value. Byer's discount rate is 12%. Using net present value analysis, which option is the better option and by how much? Present Value of $1 Present Value of Annuity of $1

You win the lottery and must decide how to take the payout. Use an 8% discount rate for all parts of this question. Present Value of $1 Present Value of Annuity of $1 Required: a. What is the present value of $12,000 a year received at the end of each of the next six years? b. What is the present value of taking a $60,000 lump sum now? c. What is the present value of a $90,000 lump sum taken in 7 years?

An annuity is best described as which of the following statements?

The ________ capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations.

Another name for the minimum desired rate of return is

Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. What is the total present value of future cash inflows and residual value from the Wacky Water Race game? Present Value of $1 Present Value of Annuity of $1

Somerville Corporation is considering investing in specialized equipment costing $616,000. The equipment has a useful life of 5 years and a residual value of $52,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are: Somerville Corporation's required rate of return is 12%. The net present value of the investment is closest to: 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 $1,850,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,600,000. The following information is available: The net present value of the Kentucky proposal is closest to: Present Value of $1 Present Value of Annuity of $1

On a whim you purchased a scratch-off lottery ticket at the gas station. It must have been your lucky day because you won $1,500,000. Being logical and rational you decide to invest the money at 6% for 11 years until you are ready to start a family. At the end of 11 years, how much will your investment be worth? Future Value of $1 Future Value of Annuity of $1

The Hawn Corporation bought a new machine that cost $150,000 with a 10-year life and a residual value of $20,000. The company plans to generate annual cash inflows of $40,000 over 10 years. Calculate the accounting rate of return.

The net present value with equal annual net cash inflows is calculated by