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

The discounted cash flow methods for capital budgeting are generally considered inferior to the payback period and the ARR because they consider the time value of money.

The ARR is the only method that uses accrual accounting figures and thus making it important to financial statement users.

The Crystal Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated: The accounting rate of return is closest to

Companies often use more than one capital budgeting method to determine which capital investment to make.

When selecting a capital investment project from three alternatives, the project with the highest net present value will always be preferable.

Jennifer recently earned a degree in accounting and her first employment opportunity is an accountant at a major corporation. The 401K portion of her employment package has a personal investment cap at 20% of her salary and the employer contribution portion is 50% of her contribution. Her annual salary is $56,500 and she chose to invest 14% annually. Calculate the value of her 401K after 10 years at 4%, and then calculate the value of her 401K had she invested the maximum amount that her employer would match. Future Value of $1 Future Value of Annuity of $1

Ryker Manufacturing is evaluating investing in a new metal stamping machine costing $80,458. Ryker estimates that it will realize $14,000 in annual cash inflows for each year of the machine's 8-year useful life. The internal rate of return (IRR)for the machine is approximately: Present Value of $1 Present Value of Annuity of $1

Tinker Toy Corporation bought a new machine, which cost $90,000, has a useful life of 10 years, and will generate annual cash inflows of $25,000. The residual value of the machine is $5,500. What is the payback period?

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,890,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,900,000 .The following information is available: The payback period for the Kentucky proposal is closest to

Assuming an interest rate of 5%, the present value of $15,000 received at the end of each year for 8 years would be closest to: Present Value of $1 Present Value of Annuity of $1

Landrum Corporation is considering investing in specialized equipment costing $260,000. The equipment has a useful life of 5 years and a residual value of $15,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are: Landrum Corporation's required rate of return on investments is 20%. What is the accounting rate of return on the investment?

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 snack machines? Present Value of $1 Present Value of Annuity of $1

Cowell Corporation is considering an investment in new equipment costing $160,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $40,000 the first year, $35,000 the second year, and $82,000 every year thereafter until the fifth year. What is the payback period for this investment? The equipment has no residual value.

You recently won a contest sponsored by a local radio station. The radio station will pay you $3000 at the end of each of the next 11 years. Assuming an interest rate of 3%, what is the present value of this prize? Present Value of $1 Present Value of Annuity of $1

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

The Silverside Company is considering investing in two alternative projects: What is the accounting rate of return for Project 1?

Justice Enterprises is evaluating the purchase of a new computer network system. The new system would cost $24,000 and have a useful life of 5years. At the end of the system's life, it would have a residual value of $2000. Annual operating cost savings from the new system would be $8500 per year for each of the five years of its life. Justice Enterprises has a minimum required rate of return of 12% on all new projects. The net present value of the new network system 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

Glassworks Inc. is considering the purchase of a special blow-molding machine that would cost $59,752 and would have a useful life of 8 years. The machine would generate $11,200 of net annual cash inflows per year for each of the 8 years of its life. The internal rate of return on the machine would be closest to: Present Value of $1 Present Value of Annuity of $1

Capital budgeting methods will not work with unequal cash flows during the capital asset's life. Other methods must be utilized in those cases.

GlenGary Investment Corporation is analyzing a proposal to build condo units in southern Florida. The project will require an initial investment of $300,000. The building has a useful life of 25 years, a residual value of $100,000, and is depreciated on a straight-line basis. GlenGary uses the accounting rate of return model to evaluate investment projects. What is the minimum annual operating income that must be generated by this project to achieve the 9% accounting return required by GlenGary?