Exam 26: Capital Investment Decisions

Under conditions of limited resources,when a company is comparing several investments with different amounts of initial cost,the decision should be made on the basis of the ________.

Managers generally use payback as the sole method for deciding whether to invest in an asset.

Martin Production Co.is considering investing in specialized equipment costing $975,000.The equipment has a useful life of five years and a residual value of $75,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are given below: Year 1 \ 275,000 Year 2 220,000 Year 3 200,000 Year 4 200,000 Year 5 \ 1,075,000 Compute the accounting rate of return on the investment,Show your calculations and round to two decimal places.

Cortes Cargo,Inc.is considering three investment opportunities with the following payback periods: Project X Project Y Project Z Payback period 3 years 2.5 years 2.8 years Use the decision rule for payback to rank the projects from most desirable to least desirable,all else being equal.

The net present value and internal rate of return methods are appropriate for longer-term investments because they ignore the time value of money.

Compound interest means that interest is calculated only on the principal amount.

Nylan Tiles is considering an investment in new equipment costing $850,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to have a residual value of $54,000.The equipment is expected to generate net cash inflows of $1,000,000 in total during the five-year life.What is the accounting rate of return associated with the equipment investment? (Round your answer to two decimal places.)

If net cash inflows are unequal,how is the payback period (in years)of an investment is calculated?

Lobel Machines Company is evaluating an investment of $1,550,000 which will yield net cash inflows of $220,672 per year for 10 years with no residual value.What is the internal rate of return? Present value of ordinary annuity of $1: 5\% 6\% 7\% 8\% 1 0.952 0.943 0.935 0.926 2 1.859 1.833 1.808 1.783 3 2.723 2.673 2.624 2.577 4 3.546 3.465 3.387 3.312 5 4.329 4.212 4.100 3.993 6 5.076 4.917 4.767 4.623 7 5.786 5.582 5.389 5.206 8 6.463 6.21 5.971 5.747 9 7.108 6.802 6.515 6.247 10 7.722 7.36 7.024 6.71

The payback method is used only when the net cash inflows from a capital investment are the same for each period.

Software Hub is deciding whether to purchase new accounting software.The cost of the software package is $68,000,and its expected life is ten years.The payback for this investment is four years.Assuming equal yearly cash flows,what are the expected annual net cash savings from the new software? (Assume the investment has no residual value.)

Most capital budgeting methods focus on accrual-based income.

An investment today of $8,424 at 6% will yield total payments of $10,000 over five years.The reason for this increase is that the interest is being earned on principal that is left invested each year.

An opportunity cost is the benefit foregone by choosing an alternative course of action.

Cash flows used in net present value and internal rate of return analyses ignore ________.

The payback method provides management with valuable information about the time period in which the cash invested will be recouped.

The last step in the capital budgeting process is control,which compares the actual results with the projected results.These comparisons are known as ________.

List two strengths and one weakness of the accounting rate of return capital budgeting method.

Which of the following is a capital budgeting method used to screen potential investments?

Which of the following is a capital budgeting method?