Exam 10: Capital Investment Analysis

A company is considering the purchase of a new machine for $48,000.Management expects that the machine can produce sales of $16,000 each year for the next 10 years.Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year.All revenues and expenses except depreciation are on a cash basis.The payback period for the machine is 6 years.

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected.

Match each definition that follows with the term a-f it defines. -The process by which management allocates funds among various capital investment proposals

The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation straight-line method, with a useful life of 4 years, no residual value, and an expected total income yield of $25,300, is

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called

Brunette Company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $180,000.The present value of the future cash flows generated by the project is $163,000.Should they invest in this project?

Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions.

Vanessa Company is evaluating a project requiring a capital expenditure of $480,000.The project has an estimated life of 4 years and no salvage value.The estimated net income and net cash flow from the project are as follows: The company's minimum desired rate of return for net present value analysis is 15%.The present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years is 0.870, 0.756, 0.658, and 0.572, respectively. Determine a the average rate of return on investment, using straight-line depreciation, and b the net present value.

Proposals L and K each cost $600,000, have 6-year lives, and have expected total cash flows of $720,000.Proposal L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal K are as follows: Determine the cash payback period for each proposal.Round your answers to two decimal places.

A project is estimated to cost $273,840 and provide annual net cash flows of $60,000 for 7 years.Determine the internal rate of return for this project, using the following present value of an annuity table.