Door to Door Moving Company is considering purchasing new equipment that costs $720,000.Its management estimates that the equipment will generate cash inflows as follows: \[\begin{array} { | r | r | } \hline \text { Year } 1 & \$ 218,000 \\ \hline 2 & 218,000 \\ \hline 3 & 258,000 \\ \hline 4 & 258,000 \\ \hline 5 & 150,000 \\ \hline \end{array}\] Present value of $1: \[\begin{array} { | l | r | r | r | r | r | } \hline & { 6 \% } &{ 7 \% } &{ 8 \% } &{ 9 \% } & 10 \% \\ \hline 1 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \\ \hline 3 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \\ \hline 4 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \\ \hline 5 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \\ \hline \end{array}\] The company's annual required rate of return is 8%.Using the factors in the table,calculate the present value of the cash inflows.(Round all calculations to the nearest whole dollar.)

A) $38,804 B) $774,000 C) $884,000 D) $885,326 A) $38,804 B) $774,000 C) $884,000 D) $885,326

Dragonfly,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: \[\begin{array} { | l | r | r | } \hline & \text { Investment A } & \text { Investment B } \\ \hline \text { Initial capital investment } & \$ 101,000 & \$ 151,000 \\ \hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \\ \hline \text { Estimated residual value } & 0 & \$ 20,000 \\ \hline \text { Estimated annual net cash inflow for 10 years } & \$ 28,000 & \$ 47,000 \\ \hline \text { Required rate of return } & 12 \% & 12 \% \\ \hline \end{array}\] Calculate the payback period for Investment A.(Round your answer to two decimal places.)

A) 2.22 years B) 2.89 years C) 1.00 year D) 3.61 years A) 2.22 years B) 2.89 years C) 1.00 year D) 3.61 years

A company is considering an iron ore extraction project that requires an initial investment of $1,400,000 and will yield annual cash inflows of $613,228 for three years.The company's discount rate is 9%.Calculate IRR. Present value of ordinary annuity of $1: \[\begin{array} { | r | r | r | r | r | r | r | r | } \hline & 10 \% & 12 \% & 14 \% & 15 \% & 16 \% & 18 \% & 20 \% \\ \hline 1 & 0.909 & 0.893 & 0.877 & 0.870 & 0.862 & 0.847 & 0.833 \\ \hline 2 & 1.736 & 1.690 & 1.647 & 1.626 & 1.605 & 1.566 & 1.528 \\ \hline 3 & 2.487 & 2.402 & 2.322 & 2.283 & 2.246 & 2.174 & 2.106 \\ \hline 4 & 3.170 & 3.037 & 2.914 & 2.855 & 2.798 & 2.690 & 2.589 \\ \hline \end{array}\]

A) 15% B) 17% C) 14% D) 13% A) 15% B) 17% C) 14% D) 13%

Exam 26: Capital Investment Decisions

The following information is provided by Chelsa Building Systems: Project A Project B Project C Project D Initial investment \ 438,000 \ 218,000 \ 560,000 \ 516,000 PV of cash inflows \ 582,000 \ 388,000 \ 800,000 \ 394,000 Payback period (years) 3.6 3.2 4.0 2.0 NPV of project \ 144,000 \ 170,000 \ 240,000 (\ 122,000) Calculate the profitability index for Project B.Show your calculations and round to two decimal places.

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(Essay)

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Question 1

Correct Answer:

Verified

Profitability Index = Present value of net cash inflows / Initial investment = $388,000 / $218,000 = 1.78

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

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(True/False)

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Question 2

Correct Answer:

Verified

False

Which of the following situations suggests the acceptance of an investment proposal?

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(Multiple Choice)

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Question 3

Correct Answer:

Verified

A

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

(True/False)

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Question 4

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 5

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

(True/False)

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Question 6

Door to Door Moving Company is considering purchasing new equipment that costs $720,000.Its management estimates that the equipment will generate cash inflows as follows: Year 1 \ 218,000 2 218,000 3 258,000 4 258,000 5 150,000 Present value of $1: 6\% 7\% 8\% 9\% 10\% 1 0.943 0.935 0.926 0.917 0.909 2 0.890 0.873 0.857 0.842 0.826 3 0.840 0.816 0.794 0.772 0.751 4 0.792 0.763 0.735 0.708 0.683 5 0.747 0.713 0.681 0.650 0.621 The company's annual required rate of return is 8%.Using the factors in the table,calculate the present value of the cash inflows.(Round all calculations to the nearest whole dollar.)

(Multiple Choice)

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Question 7

When comparing several investments with the same initial cost,the decision should be made on the basis of the ________.

(Multiple Choice)

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Question 8

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 9

Capital budgeting involves ________.

(Multiple Choice)

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Question 10

Evergreen Lawnmowers is considering the purchase of a new machine costing $814,000.The company's management is estimating that the new machine will generate additional cash inflows of $194,000 a year for ten years and have a residual value of $52,000 at the end of ten years.What is the machine's payback period? (Round your answer to two decimal places.)

(Multiple Choice)

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Question 11

Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore the time value of money.

(True/False)

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Question 12

Dragonfly,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: Investment A Investment B Initial capital investment \ 101,000 \ 151,000 Estimated useful life 10 years 10 years Estimated residual value 0 \ 20,000 Estimated annual net cash inflow for 10 years \ 28,000 \ 47,000 Required rate of return 12\% 12\% Calculate the payback period for Investment A.(Round your answer to two decimal places.)

(Multiple Choice)

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Question 13

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

(True/False)

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Question 14

Sayer Tool Co.is considering investing in specialized equipment costing $610,000.The equipment has a useful life of five years and a residual value of $69,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are given below: Year 1 \ 210,000 2 159,000 3 160,000 4 95,000 5 \ 760,000 What is the accounting rate of return on the investment? (Round your answer to two decimal places.)

(Multiple Choice)

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Question 15

When the internal rate of return is the same as the required rate of return,the net present value of an investment will be positive.

(True/False)

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Question 16

Gateway Graphics is considering an investment in new printing equipment costing $502,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $122,000 the first year,$158,000 the second year,and $160,000 every year thereafter until the fifth year.What is the payback period for this investment? The residual value is zero.(Round your answer to two decimal places.)

(Multiple Choice)

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Question 17

A company is considering an iron ore extraction project that requires an initial investment of $1,400,000 and will yield annual cash inflows of $613,228 for three years.The company's discount rate is 9%.Calculate IRR. Present value of ordinary annuity of $1: 10\% 12\% 14\% 15\% 16\% 18\% 20\% 1 0.909 0.893 0.877 0.870 0.862 0.847 0.833 2 1.736 1.690 1.647 1.626 1.605 1.566 1.528 3 2.487 2.402 2.322 2.283 2.246 2.174 2.106 4 3.170 3.037 2.914 2.855 2.798 2.690 2.589

(Multiple Choice)

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Question 18

The following formula is used to compute the present value of a lump sum: Future value = Present value × PV factor for i = X%,n = X periods

(True/False)

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Question 19

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 20

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

Which of the following situations suggests the acceptance of an investment proposal?

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

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

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

When comparing several investments with the same initial cost,the decision should be made on the basis of the ________.

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

Capital budgeting involves ________.

Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore the time value of money.

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

When the internal rate of return is the same as the required rate of return,the net present value of an investment will be positive.

The following formula is used to compute the present value of a lump sum: Future value = Present value × PV factor for i = X%,n = X periods

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.

Accounting and the Business Environment

Recording Business Transactions

The Adjusting Process

Completing the Accounting Cycle

Merchandising Operations

Merchandise Inventory

Accounting Information Systems

Internal Control and Cash

Receivables

Plant Assets,natural Resources,and Intangibles

Current Liabilities and Payroll

Partnerships

Corporations

Long-Term Liabilities

Investments

The Statement of Cash Flows

Financial Statement Analysis

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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