Glades Thread Company is evaluating an investment that will cost $760,000 and will yield cash flows of $255,000 in the first year,$360,000 in the second year,and $380,000 in the third and the final year.Use the table below and determine the internal rate of return. Present value of $1: \[\begin{array} { | c | c | c | c | c | c | } \hline & 8 \% & 9 \% & 10 \% & 11 \% & 12 \% \\ \hline 1 & 0.926 & 0.917 & 0.909 & 0.901 & 0.893 \\ \hline 2 & 0.857 & 0.842 & 0.826 & 0.812 & 0.797 \\ \hline 3 & 0.794 & 0.772 & 0.751 & 0.731 & 0.712 \\ \hline 4 & 0.735 & 0.708 & 0.683 & 0.659 & 0.636 \\ \hline 5 & 0.681 & 0.65 & 0.621 & 0.593 & 0.567 \\ \hline \end{array}\] The IRR of the project will be ________.

A) between 10% and 11% B) less than 9% C) less than 10%, more than 9% D) more than 11% A) between 10% and 11% B) less than 9% C) less than 10%, more than 9% D) more than 11% A

Tampa Corporation is considering an investment proposal that will require an initial outlay of $820,000 and would yield yearly cash inflows of $216,000 for nine years.The company uses a discount rate of 10%.What is the NPV of the investment? Present value of an ordinary annuity of $1: \[\begin{array} { | l | r | r | r | } \hline & { 8 \% } &{ 9 \% } & { 10 \% } \\ \hline 1 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 1.783 & 1.759 & 1.736 \\ \hline 3 & 2.577 & 2.531 & 2.487 \\ \hline 4 & 3.312 & 3.24 & 3.17 \\ \hline 5 & 3.993 & 3.89 & 3.791 \\ \hline 6 & 4.623 & 4.486 & 4.355 \\ \hline 7 & 5.206 & 5.033 & 4.868 \\ \hline 8 & 5.747 & 5.535 & 5.335 \\ \hline 9 & 6.247 & 5.995 & 5.759 \\ \hline \end{array}\]

A) $378,000 B) $410,000 C) $423,944 D) $251,667 A) $378,000 B) $410,000 C) $423,944 D) $251,667

Gregory Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of five years with no residual value.The cash flows are as shown below: \[\begin{array} { | r | r | } \hline \text { Year 1 } & \$ 120,000 \\ \hline 2 & 235,000 \\ \hline 3 & 140,000 \\ \hline 4 & \$ 98,000 \\ \hline \end{array}\] Present value of an ordinary annuity of $1: \[\begin{array} { | c | c | c | c | c | } \hline & 12 \% & 13 \% & 14 \% & 15 \% \\ \hline 1 & 0.893 & 0.885 & 0.877 & 0.87 \\ \hline 2 & 1.69 & 1.668 & 1.647 & 1.626 \\ \hline 3 & 2.402 & 2.361 & 2.322 & 2.283 \\ \hline 4 & 3.037 & 2.974 & 2.914 & 2.855 \\ \hline 5 & 3.605 & 3.517 & 3.433 & 3.352 \\ \hline \end{array}\] Present value of $1: \[\begin{array} { | c | c | c | c | c | } \hline & 12 \% & 13 \% & 14 \% & 15 \% \\ \hline 1 & 0.893 & 0.885 & 0.877 & 0.87 \\ \hline 2 & 0.797 & 0.783 & 0.769 & 0.756 \\ \hline 3 & 0.712 & 0.693 & 0.675 & 0.658 \\ \hline 4 & 0.636 & 0.613 & 0.592 & 0.572 \\ \hline 5 & 0.567 & 0.543 & 0.519 & 0.497 \\ \hline \end{array}\] \[\text { Calculate the IRR of the project. Show your computations. }\]

The IRR is between 12% and 13%. \[\begi

The following information is provided by Horowitz Systems: \[\begin{array} { | l | r | r | r | r | } \hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \\ \hline \text { Initial investment } & \$ 426,000 & \$ 218,000 & \$ 554,000 & \$ 502,000 \\ \hline \text { PV of cash inflows } & \$ 586,000 & \$ 386,000 & \$ 820,000 & \$ 408,000 \\ \hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \\ \hline \text { NPV of project } & \$ 160,000 & \$ 168,000 & \$ 266,000 & \$ 94,000 \\ \hline \end{array}\] What is the profitability index for Project C? (Round your answer to two decimal places.)

A) 1.48 B) 1.38 C) 1.26 D) 1.22 A) 1.48 B) 1.38 C) 1.26 D) 1.22

Exam 26: Capital Investment Decisions

Glades Thread Company is evaluating an investment that will cost $760,000 and will yield cash flows of $255,000 in the first year,$360,000 in the second year,and $380,000 in the third and the final year.Use the table below and determine the internal rate of return. Present value of $1: 8\% 9\% 10\% 11\% 12\% 1 0.926 0.917 0.909 0.901 0.893 2 0.857 0.842 0.826 0.812 0.797 3 0.794 0.772 0.751 0.731 0.712 4 0.735 0.708 0.683 0.659 0.636 5 0.681 0.65 0.621 0.593 0.567 The IRR of the project will be ________.

Free

(Multiple Choice)

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Question 1

Correct Answer:

Verified

A

Sensitivity analysis is a technique that ________.

Free

(Multiple Choice)

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Question 2

Correct Answer:

Verified

D

The fact that invested cash earns income over time is called the time value of money.

Free

(True/False)

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Question 3

Correct Answer:

Verified

True

Tampa Corporation is considering an investment proposal that will require an initial outlay of $820,000 and would yield yearly cash inflows of $216,000 for nine years.The company uses a discount rate of 10%.What is the NPV of the investment? Present value of an ordinary annuity of $1: 8\% 9\% 10\% 1 0.926 0.917 0.909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 4 3.312 3.24 3.17 5 3.993 3.89 3.791 6 4.623 4.486 4.355 7 5.206 5.033 4.868 8 5.747 5.535 5.335 9 6.247 5.995 5.759

(Multiple Choice)

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Question 4

The following information is provided by Westwind Systems: Calculate the profitability index for Project A.Show your calculations and round to two decimal places.

(Essay)

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Question 5

When projecting future cash flows of an investment ________.

(Multiple Choice)

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Question 6

Gregory Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of five years with no residual value.The cash flows are as shown below: Year 1 \ 120,000 2 235,000 3 140,000 4 \ 98,000 Present value of an ordinary annuity of $1: 12\% 13\% 14\% 15\% 1 0.893 0.885 0.877 0.87 2 1.69 1.668 1.647 1.626 3 2.402 2.361 2.322 2.283 4 3.037 2.974 2.914 2.855 5 3.605 3.517 3.433 3.352 Present value of $1: 12\% 13\% 14\% 15\% 1 0.893 0.885 0.877 0.87 2 0.797 0.783 0.769 0.756 3 0.712 0.693 0.675 0.658 4 0.636 0.613 0.592 0.572 5 0.567 0.543 0.519 0.497 $\text { Calculate the IRR of the project. Show your computations. }$

(Essay)

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Question 7

Dartis Tools Co.is considering investing in specialized equipment costing $670,000.The equipment has a useful life of five years and a residual value of $61,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are given below: Year 1 \ 201,000 2 159,000 3 163,000 4 100,000 5 \ 780,000 What is the accounting rate of return on the investment? (Round your answer to two decimal places.)

(Multiple Choice)

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Question 8

The accounting rate of return is calculated by dividing the average annual operating income by the average amount invested.

(True/False)

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Question 9

The payback and accounting rate of return methods are often used to perform an initial screening of investments.

(True/False)

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Question 10

Discounted cash flow methods typically ________.

(Multiple Choice)

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Question 11

The accounting rate of return shows the effect of the investment on the company's accrual-based income.

(True/False)

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Question 12

The payback and accounting rate of return (ARR)methods are suitable for investments with a relatively short time span.

(True/False)

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Question 13

The discounted cash flow methods of evaluating capital investments are superior because they consider both the time value of money and the profitability of the investment.

(True/False)

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Question 14

Both the payback and the accounting rate of return methods focus on cash flows that an asset generates.

(True/False)

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Question 15

Net present value is defined as the difference between the present value of the investment's net cash inflows and the investment's initial cost.

(True/False)

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Question 16

The residual value is discounted as a single lump sum because it will be received only once,when the asset is sold.

(True/False)

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Question 17

A post-audit in capital budgeting is a comparison of the actual results of capital investments with the projected results.

(True/False)

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Question 18

The following information is provided by Dinovo Systems: Calculate the profitability index for Project B.Show your calculations and round to two decimal places.

(Essay)

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Question 19

The following information is provided by Horowitz Systems: Project A Project B Project C Project D Initial investment \ 426,000 \ 218,000 \ 554,000 \ 502,000 PV of cash inflows \ 586,000 \ 386,000 \ 820,000 \ 408,000 Payback period (years) 3.6 3.2 4.0 2.0 NPV of project \ 160,000 \ 168,000 \ 266,000 \ 94,000 What is the profitability index for Project C? (Round your answer to two decimal places.)

(Multiple Choice)

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Question 20

Sensitivity analysis is a technique that ________.

The fact that invested cash earns income over time is called the time value of money.

The following information is provided by Westwind Systems: Calculate the profitability index for Project A.Show your calculations and round to two decimal places.

When projecting future cash flows of an investment ________.

The accounting rate of return is calculated by dividing the average annual operating income by the average amount invested.

The payback and accounting rate of return methods are often used to perform an initial screening of investments.

Discounted cash flow methods typically ________.

The accounting rate of return shows the effect of the investment on the company's accrual-based income.

The payback and accounting rate of return (ARR)methods are suitable for investments with a relatively short time span.

The discounted cash flow methods of evaluating capital investments are superior because they consider both the time value of money and the profitability of the investment.

Both the payback and the accounting rate of return methods focus on cash flows that an asset generates.

Net present value is defined as the difference between the present value of the investment's net cash inflows and the investment's initial cost.

The residual value is discounted as a single lump sum because it will be received only once,when the asset is sold.

A post-audit in capital budgeting is a comparison of the actual results of capital investments with the projected results.

The following information is provided by Dinovo Systems: Calculate the profitability index for Project B.Show your calculations and round to two decimal places.

Introduction to Managerial Accounting

Job Order Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets

Flexible Budgets and Standard Cost Systems

Cost Allocation and Responsibility Accounting

Short-Term Business Decisions

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