Exam 10: Capital Investment Analysis

A series of equal cash flows at fixed intervals is termed an annuity.

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

Using the tables above, what would be the present value of $15,000 to be received at the end of each of the next 2 years, assuming an earnings rate of 6%?

A qualitative characteristic that may impact upon capital investment analysis is market opportunities.

In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards.Which of the following evaluation methods are often used?

Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years.

Methods that ignore present value in capital investment analysis include the average rate of return method.

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 12 years.

The net present value for this investment is

An analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested.Which of the following statements best describes the results of this analysis?

Project A requires an original investment of $65,000.The project will yield cash flows of $15,000 per year for 7 years.Project B has a calculated net present value of $5,500 over a 5-year life.Project A could be sold at the end of 5 years for a price of $30,000.a Using the table below, determine the net present value of Project A over a 5- year life with salvage value assuming a minimum rate of return of 12%.b Which project provides the greatest net present value? Below is a table for the present value of $1 at compound interest. Below is a table for the present value of an annuity of $1 at compound interest.

The expected average rate of return for a proposed investment of $6,000,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $12,000,000 over the 20 years is

The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

Match each of the methods that follow with the correct category a-b. -Average rate of return method

Using the tables above, what would be the internal rate of return of an investment of $210,600 that would generate an annual cash inflow of $50,000 for the next 5 years?

For Years 1-5, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively.The cash payback period is 5 years.

The average rate of return for this investment is

All of the following qualitative considerations may impact upon capital investment analysis except

Methods that ignore present value in capital investment analysis include the internal rate of return method.