Felice Lucas has just won the state lottery and has the following three payout options for after-tax prize money: 1.$170,000 per year at the end of each of the next six years 2)$312,000 (lump sum)now 3)$508,000 (lump sum)six years from now The annual discount rate is 9%.Compute the present value of the first option.(Round your answer to the nearest whole dollar.) Present value of an ordinary annuity of $1: \[\begin{array} { | r | r | r | r | } \hline & 8 \% & 9 \% & 10 \% \\ \hline 1 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 1.783 & 1.759 & 1.736 \\ \hline 3 & 2.577 & 2.531 & 2.487 \\ \hline 4 & 3.312 & 3.240 & 3.170 \\ \hline 5 & 3.993 & 3.890 & 3.791 \\ \hline 6 & 4.623 & 4.486 & 4.355 \\ \hline 7 & 5.206 & 5.033 & 4.868 \\ \hline \end{array}\] Present value of $1: \[\begin{array} { | l | r | r | r | } \hline & 8 \% & 9 \% & 10 \% \\ \hline 1 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 0.857 & 0.842 & 0.826 \\ \hline 3 & 0.794 & 0.772 & 0.751 \\ \hline 4 & 0.735 & 0.708 & 0.683 \\ \hline 5 & 0.681 & 0.650 & 0.621 \\ \hline 6 & 0.630 & 0.596 & 0.564 \\ \hline 7 & 0.583 & 0.547 & 0.513 \\ \hline \end{array}\]

A) $850,000 B) $762,620 C) $482,000 D) $457,251 A) $850,000 B) $762,620 C) $482,000 D) $457,251

Clear Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of four years with no residual value.The cash inflows 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 Cupola Systems: \[\begin{array} { | l | r | r | r | r | } \hline &{ \text { Project A } } & { \text { Project B } } & \text { Project C } & \text { Project D } \\ \hline \text { Initial investment } & \$ 426,000 & \$ 214,000 & \$ 558,000 & \$ 516,000 \\ \hline \text { PV of cash inflows } & \$ 584,000 & \$ 382,000 & \$ 806,000 & \$ 390,000 \\ \hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \\ \hline \text { NPV of project } & \$ 158,000 & \$ 168,000 & \$ 248,000 & ( \$ 126,000 ) \\ \hline \end{array}\] Calculate the profitability index for Project A.(Round your answer to two decimal places.)

A) 1.01 B) 1.08 C) 1.37 D) 1.67 A) 1.01 B) 1.08 C) 1.37 D) 1.67

Glossimer Thread Company is evaluating an investment that will cost $760,000 and will yield cash inflows of $255,000 in the first year,$325,000 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 11% C) less than 10%, more than 11% D) more than 11% A) between 10% and 11% B) less than 11% C) less than 10%, more than 11% D) more than 11%

Learn Safe Driving School is considering purchasing new autos costing $235,000.The company's management has estimated that the autos will generate cash inflows as follows: $\begin{array}{llr} \text {Year 1 } &\$80,000\\ \text {Year 2 } &\$85,000\\ \text { Year 3} &\$95,000\\ \text {Year 4 } &\$45,000\\ \end{array}$ Considering the residual value is zero,calculate the payback period.Round to one decimal place

By the end of 2 years,Learn Safe Driving

The following details are provided by a manufacturing company: \[\begin{array} { | l | r | } \hline & \text { Product line } \\ \hline \text { Investment } & \$ 1,100,000 \\ \hline \text { Useful life } & 12 \text { years } \\ \hline \text { Estimated annual net cash inflows for first year } & \$ 400,000 \\ \hline \text { Estimated annual net cash inflows for second year } & \$ 390,000 \\ \hline \text { Estimated annual net cash inflows for next ten years } & \$ 380,000 \\ \hline \text { Residual value } & \$ 70,000 \\ \hline \text { Depreciation method } & \text { Straight-line } \\ \hline \text { Required rate of return } & 14 \% \\ \hline \end{array}\] Calculate the payback period for the investment.(Round your answer to two decimal places.)

A) 2.75 years B) 2.82 years C) 2.55 years D) 2.77 years A) 2.75 years B) 2.82 years C) 2.55 years D) 2.77 years

The following details are provided by Beckett Company: \[\begin{array} { | c | r | } \hline \text { Initial investment } & \$ 2,020,000 \\ \hline \text { Discount rate } & 12 \% \\ \hline \text { Yearly cash inflows } & \\ \hline 1 & \$ 786,000 \\ \hline 2 & \$ 678,000 \\ \hline 3 & \$ 678,000 \\ \hline 4 & \$ 678,000 \\ \hline 5 & \$ 786,000 \\ \hline \end{array}\] Present Value of $1: \[\begin{array} { | l | r | r | r | r | } \hline &{ \mathbf { 1 0 } \% } & { \mathbf { 1 1 } \% } &{ \mathbf { 1 2 } \% } & { \mathbf { 1 3 } \% } \\ \hline 1 & 0.909 & 0.901 & 0.893 & 0.885 \\ \hline 2 & 0.826 & 0.812 & 0.797 & 0.783 \\ \hline 3 & 0.751 & 0.731 & 0.712 & 0.693 \\ \hline 4 & 0.683 & 0.659 & 0.636 & 0.613 \\ \hline 5 & 0.621 & 0.593 & 0.567 & 0.543 \\ \hline \end{array}\] Calculate the NPV of the project.

A) $959,500 B) $581,870 C) $1,015,050 D) $252,500 A) $959,500 B) $581,870 C) $1,015,050 D) $252,500

The following details are provided by Ferrous Foundry Company: \[\begin{array} { | c | r | } \hline \text { Initial investment } & \$ 5,000,000 \\ \hline \text { Discount rate } & 15 \% \\ \hline \text { Yearly cash inflows } & \\ \hline 1 & \$ 1,256,000 \\ \hline 2 & \$ 1,360,000 \\ \hline 3 & \$ 2,402,000 \\ \hline 4 & \$ 1,158,000 \\ \hline \end{array}\] PV of $1: \[\begin{array} { | c | c | c | c | } \hline & 13 \% & 14 \% & 15 \% \\ \hline 1 & 0.885 & 0.877 & 0.87 \\ \hline 2 & 0.783 & 0.769 & 0.756 \\ \hline 3 & 0.693 & 0.675 & 0.658 \\ \hline 4 & 0.613 & 0.592 & 0.572 \\ \hline \end{array}\] What is the NPV of the project?

A) $(636,228) B) $590,000 C) $618,409 D) $(594,486) A) $(636,228) B) $590,000 C) $618,409 D) $(594,486)

Stellan Manufacturing is considering the following two investment proposals: \[\begin{array} { | l | l | l | } \hline & \text { Proposal } \mathbf { X } & \text { Proposal } \mathbf { Y } \\ \hline \text { Investment } & \$ 738,000 & \$ 508,000 \\ \hline \text { Useful life } & 5 \text { years } & 4 \text { years } \\ \hline \text { Estimated annual net cash inflows received } & & \\ \text { at the end of each year } & \$ 152,000 & \$ 100,000 \\ \hline \text { Residual value } & \$ 62,000 & \$ 0 \\ \hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \\ \hline \text { Annual discount rate } & 10 \% & \$ \% \\ \hline \end{array}\] Compute the present value of the future cash inflows from Proposal Y. Present value of an ordinary annuity of $1: \[\begin{array} { | l | r | r | r | } \hline & { 8 \% } & { 9 \% } & 10 \% \\ \hline 1 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 1.783 & 1.759 & 1.736 \\ \hline 3 & 2.577 & 2.531 & 2.487 \\ \hline 4 & 3.312 & 3.240 & 3.170 \\ \hline 5 & 3.993 & 3.809 & 3.791 \\ \hline 6 & 4.623 & 4.486 & 4.355 \\ \hline \end{array}\]

A) $271,018 B) $324,000 C) $294,640 D) $254,000 A) $271,018 B) $324,000 C) $294,640 D) $254,000

A company is evaluating three possible investments.The following information is provided by the company: \[\begin{array} { | l | r | r | r | } \hline & \text { Project A } & \text { Project B } & \text { Project C } \\ \hline \text { Investment } & \$ 240,000 & \$ 54,000 & \$ 240,000 \\ \hline \text { Residual value } & 0 & 18,000 & 38,000 \\ \hline \text { Net cash inflows: } & & & \\ \hline \text { Year 1 } & 62,000 & 34,000 & 98,000 \\ \hline \text { Year 2 } & 62,000 & 25,000 & 68,000 \\ \hline \text { Year 3 } & 62,000 & 21,000 & 78,000 \\ \hline \text { Year 4 } & 62,000 & 18,000 & 38,000 \\ \hline \text { Year 5 } & 62,000 & 0 & 0 \\ \hline \end{array}\] What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method.)(Round your answer to two decimal places.)

A) 2.87 years B) 1.59 years C) 3.87 years D) 5.00 years A) 2.87 years B) 1.59 years C) 3.87 years D) 5.00 years

Exam 26: Capital Investment Decisions

Felice Lucas has just won the state lottery and has the following three payout options for after-tax prize money: 1.$170,000 per year at the end of each of the next six years 2)$312,000 (lump sum)now 3)$508,000 (lump sum)six years from now The annual discount rate is 9%.Compute the present value of the first option.(Round your answer to the nearest whole dollar.) 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 3.240 3.170 5 3.993 3.890 3.791 6 4.623 4.486 4.355 7 5.206 5.033 4.868 Present value of $1: 8\% 9\% 10\% 1 0.926 0.917 0.909 2 0.857 0.842 0.826 3 0.794 0.772 0.751 4 0.735 0.708 0.683 5 0.681 0.650 0.621 6 0.630 0.596 0.564 7 0.583 0.547 0.513

(Multiple Choice)

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Question 81

Discounted cash flow methods typically ________.

(Multiple Choice)

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Question 82

Walden Industries is considering investing in production-management software that costs $630,000,has $67,000 residual value,and leads to cost savings of $1,650,000 per year over its five-year life.Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return.

(Multiple Choice)

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Question 83

Most capital budgeting methods focus on accrual-based income.

(True/False)

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Question 84

Clear Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of four years with no residual value.The cash inflows 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 $\text { Calculate the IRR of the project. Show your computations. }$

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Question 85

The following information is provided by Cupola Systems: Project A Project B Project C Project D Initial investment \ 426,000 \ 214,000 \ 558,000 \ 516,000 PV of cash inflows \ 584,000 \ 382,000 \ 806,000 \ 390,000 Payback period (years) 3.6 3.2 4.0 2.0 NPV of project \ 158,000 \ 168,000 \ 248,000 (\ 126,000) Calculate the profitability index for Project A.(Round your answer to two decimal places.)

(Multiple Choice)

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Question 86

Glossimer Thread Company is evaluating an investment that will cost $760,000 and will yield cash inflows of $255,000 in the first year,$325,000 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 ________.

(Multiple Choice)

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Question 87

A major criticism of the payback method is that it focuses only on the time to recover the investment and ignores profitability.

(True/False)

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Question 88

Learn Safe Driving School is considering purchasing new autos costing $235,000.The company's management has estimated that the autos will generate cash inflows as follows: Year 1 \8 0,000 Year 2 \8 5,000 Year 3 \9 5,000 Year 4 \4 5,000 Considering the residual value is zero,calculate the payback period.Round to one decimal place

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Question 89

The following details are provided by a manufacturing company: Product line Investment \ 1,100,000 Useful life 12 years Estimated annual net cash inflows for first year \ 400,000 Estimated annual net cash inflows for second year \ 390,000 Estimated annual net cash inflows for next ten years \ 380,000 Residual value \ 70,000 Depreciation method Straight-line Required rate of return 14\% Calculate the payback period for the investment.(Round your answer to two decimal places.)

(Multiple Choice)

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Question 90

Cash inflows include future cash revenue generated from an investment and any future residual value of the asset but exclude any future savings in ongoing cash operating costs resulting from the investment.

(True/False)

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Question 91

The net present value method of evaluating capital investments suggests that an investment with discounted net cash inflows which exceed the initial cost of the investment is desirable.

(True/False)

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Question 92

The following details are provided by Beckett Company: Initial investment \ 2,020,000 Discount rate 12\% Yearly cash inflows 1 \ 786,000 2 \ 678,000 3 \ 678,000 4 \ 678,000 5 \ 786,000 Present Value of $1: \% \% \% \% 1 0.909 0.901 0.893 0.885 2 0.826 0.812 0.797 0.783 3 0.751 0.731 0.712 0.693 4 0.683 0.659 0.636 0.613 5 0.621 0.593 0.567 0.543 Calculate the NPV of the project.

(Multiple Choice)

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Question 93

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

(Multiple Choice)

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Question 94

Many service,merchandising,and manufacturing firms use discounted cash flow methods to make capital investment decisions.

(True/False)

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Question 95

The following details are provided by Ferrous Foundry Company: Initial investment \ 5,000,000 Discount rate 15\% Yearly cash inflows 1 \ 1,256,000 2 \ 1,360,000 3 \ 2,402,000 4 \ 1,158,000 PV of $1: 13\% 14\% 15\% 1 0.885 0.877 0.87 2 0.783 0.769 0.756 3 0.693 0.675 0.658 4 0.613 0.592 0.572 What is the NPV of the project?

(Multiple Choice)

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Question 96

The acquisition or construction of a capital asset is known as a capital investment.

(True/False)

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Question 97

Stellan Manufacturing is considering the following two investment proposals: Proposal Proposal Investment \ 738,000 \ 508,000 Useful life 5 years 4 years Estimated annual net cash inflows received at the end of each year \ 152,000 \ 100,000 Residual value \ 62,000 \ 0 Depreciation method Straight-line Straight-line Annual discount rate 10\% \ \% Compute the present value of the future cash inflows from Proposal Y. 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 3.240 3.170 5 3.993 3.809 3.791 6 4.623 4.486 4.355

(Multiple Choice)

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Question 98

Capital budgeting is the ________.

(Multiple Choice)

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Question 99

A company is evaluating three possible investments.The following information is provided by the company: Project A Project B Project C Investment \ 240,000 \ 54,000 \ 240,000 Residual value 0 18,000 38,000 Net cash inflows: Year 1 62,000 34,000 98,000 Year 2 62,000 25,000 68,000 Year 3 62,000 21,000 78,000 Year 4 62,000 18,000 38,000 Year 5 62,000 0 0 What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method.)(Round your answer to two decimal places.)

(Multiple Choice)

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Question 100

Discounted cash flow methods typically ________.

Most capital budgeting methods focus on accrual-based income.

A major criticism of the payback method is that it focuses only on the time to recover the investment and ignores profitability.

Cash inflows include future cash revenue generated from an investment and any future residual value of the asset but exclude any future savings in ongoing cash operating costs resulting from the investment.

The net present value method of evaluating capital investments suggests that an investment with discounted net cash inflows which exceed the initial cost of the investment is desirable.

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

Many service,merchandising,and manufacturing firms use discounted cash flow methods to make capital investment decisions.

The acquisition or construction of a capital asset is known as a capital investment.

Capital budgeting is the ________.

Accounting and the Business Environment

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Accounting Information Systems

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The Statement of Cash Flows

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