List three cash inflows and three cash outflows for capital investments. \[\begin{array} { | c | c | } \hline \text { Cash inflows } & \text { Cash outflows } \\ \hline & \\ \hline & \\ \hline & \\ \hline \end{array}\]

\[\begin{array} { | l | l | } \hline {

Carolyn Fields has just won the state lottery.The state offers the following three payout options for after-tax prize money: 1.$50,000 per year at the end of each of the next six years 2.$300,000 (lump sum)now 3.$400,000 (lump sum)six years from now Calculate the present value of each scenario using an 8% annual discount rate.Round to nearest whole dollar. Present value of an ordinary annuity of $1: \[\begin{array} { | c | r | r | r | } \hline & { 7 \% } & { 8 \% } & { 9 \% } \\ \hline 1 & 0.935 & 0.926 & 0.917 \\ \hline 2 & 1.808 & 1.783 & 1.759 \\ \hline 3 & 2.624 & 2.577 & 2.531 \\ \hline 4 & 3.387 & 3.312 & 3.240 \\ \hline 5 & 4.100 & 3.993 & 3.890 \\ \hline 6 & 4.767 & 4.623 & 4.486 \\ \hline \end{array}\] Present value of $1: \[\begin{array} { | c | r | r | r | } \hline & { 7 \% } & { 8 \% } &{ 9 \% } \\ \hline 1 & 0.935 & 0.926 & 0.917 \\ \hline 2 & 0.873 & 0.857 & 0.842 \\ \hline 3 & 0.816 & 0.794 & 0.772 \\ \hline 4 & 0.763 & 0.735 & 0.708 \\ \hline 5 & 0.713 & 0.681 & 0.650 \\ \hline 6 & 0.666 & 0.630 & 0.596 \\ \hline \end{array}\]

Scenario 1: Present value of lottery pay

Home Express Moving Company is considering purchasing new equipment that costs $728,000.Its management estimates that the equipment will generate cash inflows as follows: \[\begin{array} { | r | r | } \hline \text { Year } 1 & \$ 214,000 \\ \hline 2 & 214,000 \\ \hline 3 & 264,000 \\ \hline 4 & 264,000 \\ \hline 5 & 150,000 \\ \hline \end{array}\] 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 9%.Using the factors in the table,calculate the present value of the cash flows.(Round all calculations to the nearest whole dollar.)

A) $892,000 B) $864,646 C) $853,320 D) $894,000 A) $892,000 B) $864,646 C) $853,320 D) $894,000

The following information is provided by Kilmer Systems: \[\begin{array} { | l | r | r | r | r | } \hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \\ \hline \text { Initial investment } & \$ 422,000 & \$ 206,000 & \$ 550,000 & \$ 500,000 \\ \hline \text { PV of cash inflows } & \$ 580,000 & \$ 392,000 & \$ 814,000 & \$ 408,000 \\ \hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \\ \hline \text { NPV of project } & \$ 158,000 & \$ 186,000 & \$ 264,000 & ( \$ 92,000 ) \\ \hline \end{array}\] 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) 1.23 A) 1.48 B) 1.38 C) 1.26 D) 1.23

A company seeking investment opportunities has collected the following information: \[\begin{array} { | l | r | r | r | r | } \hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \\ \hline \text { Initial investment } & \$ 400,000 & \$ 250,000 & \$ 150,000 & \$ 270,000 \\ \hline \text { PV of cash inflows } & \$ 570,000 & \$ 295,000 & \$ 210,000 & \$ 282,000 \\ \hline \text { Payback period (years) } & 3.6 & 3.0 & 4.75 & 3.5 \\ \hline \text { NPV of project } & \$ 170,000 & \$ 45,000 & \$ 60,000 & \$ 12,000 \\ \hline \text { Profitability index } & 1.43 & 1.18 & 1.40 & 1.04 \\ \hline \end{array}\] If the company makes a decision based on the net present value,which project will be selected?

A) Project A B) Project B C) Project C D) Project D A) Project A B) Project B C) Project C D) Project D

Exam 26: Capital Investment Decisions

Accelerated Finance is deciding whether to purchase new accounting software.The cost of the software package is $59,000,and its expected life is ten years.The payback for this investment is four years.Assuming equal yearly cash inflows,what are the expected annual net cash savings from the new software? (Assume the investment has no residual value.)

(Multiple Choice)

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Question 101

The accounting rate of return method considers the time value of money.

(True/False)

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Question 102

The Accounting Rate of Return method evaluates the lifetime return of an investment,whereas Return on Investment evaluates the annual return of an investment.

(True/False)

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Question 103

Which of the following is a capital budgeting method that ignores the time value of money?

(Multiple Choice)

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Question 104

The following information is provided by Bethel Company: 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 A.Show your calculations and round to two decimal places.

(Essay)

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Question 105

List three cash inflows and three cash outflows for capital investments. Cash inflows Cash outflows

(Essay)

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Question 106

An investment today of $8,424 at 6% will yield payments of $2,000 per year for five years,or 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.

(True/False)

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Question 107

Mosaic Tile Company is considering an investment in new equipment costing $858,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to have a residual value of $62,000.The equipment is expected to generate net cash inflows of $1,002,000 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.)

(Multiple Choice)

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Question 108

The only difference between the present value and future value of a lump sum is the amount of interest that is earned in the intervening time span.

(True/False)

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Question 109

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 ________.

(Multiple Choice)

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Question 110

Carolyn Fields has just won the state lottery.The state offers the following three payout options for after-tax prize money: 1.$50,000 per year at the end of each of the next six years 2.$300,000 (lump sum)now 3.$400,000 (lump sum)six years from now Calculate the present value of each scenario using an 8% annual discount rate.Round to nearest whole dollar. Present value of an ordinary annuity of $1: 7\% 8\% 9\% 1 0.935 0.926 0.917 2 1.808 1.783 1.759 3 2.624 2.577 2.531 4 3.387 3.312 3.240 5 4.100 3.993 3.890 6 4.767 4.623 4.486 Present value of $1: 7\% 8\% 9\% 1 0.935 0.926 0.917 2 0.873 0.857 0.842 3 0.816 0.794 0.772 4 0.763 0.735 0.708 5 0.713 0.681 0.650 6 0.666 0.630 0.596

(Essay)

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Question 111

A company is evaluating an investment.The company uses the straight-line method of depreciation.Use the following information to compute the accounting rate of return.Show your calculations and round to one decimal place. Project Investment \8 75,000 Residual value 0 Operating income: Year 1 120,000 Year 2 120,000 Year 3 120,000 Year 4 120,000 Year 5 120,000

(Essay)

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Question 112

Home Express Moving Company is considering purchasing new equipment that costs $728,000.Its management estimates that the equipment will generate cash inflows as follows: Year 1 \ 214,000 2 214,000 3 264,000 4 264,000 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 9%.Using the factors in the table,calculate the present value of the cash flows.(Round all calculations to the nearest whole dollar.)

(Multiple Choice)

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Question 113

An annuity is a stream of equal cash payments made at equal time intervals.

(True/False)

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Question 114

The following information is provided by Kilmer Systems: Project A Project B Project C Project D Initial investment \ 422,000 \ 206,000 \ 550,000 \ 500,000 PV of cash inflows \ 580,000 \ 392,000 \ 814,000 \ 408,000 Payback period (years) 3.6 3.2 4.0 2.0 NPV of project \ 158,000 \ 186,000 \ 264,000 (\ 92,000) What is the profitability index for Project C? (Round your answer to two decimal places.)

(Multiple Choice)

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Question 115

What are the strengths of the net present value capital budgeting method?

(Essay)

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Question 116

When evaluating a potential investment,managers should use only one measure for making a sound investment decision.

(True/False)

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Question 117

At the internal rate of return,the present value of net cash inflows will equal the ________.

(Multiple Choice)

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Question 118

A company seeking investment opportunities has collected the following information: Project A Project B Project C Project D Initial investment \ 400,000 \ 250,000 \ 150,000 \ 270,000 PV of cash inflows \ 570,000 \ 295,000 \ 210,000 \ 282,000 Payback period (years) 3.6 3.0 4.75 3.5 NPV of project \ 170,000 \ 45,000 \ 60,000 \ 12,000 Profitability index 1.43 1.18 1.40 1.04 If the company makes a decision based on the net present value,which project will be selected?

(Multiple Choice)

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Question 119

The internal rate of return (IRR)is the rate of return,based on discounted cash flows,of a capital investment.

(True/False)

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Question 120

The accounting rate of return method considers the time value of money.

The Accounting Rate of Return method evaluates the lifetime return of an investment,whereas Return on Investment evaluates the annual return of an investment.

Which of the following is a capital budgeting method that ignores the time value of money?

List three cash inflows and three cash outflows for capital investments. Cash inflows Cash outflows

An investment today of $8,424 at 6% will yield payments of $2,000 per year for five years,or 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.

The only difference between the present value and future value of a lump sum is the amount of interest that is earned in the intervening time span.

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 ________.

An annuity is a stream of equal cash payments made at equal time intervals.

What are the strengths of the net present value capital budgeting method?

When evaluating a potential investment,managers should use only one measure for making a sound investment decision.

At the internal rate of return,the present value of net cash inflows will equal the ________.

The internal rate of return (IRR)is the rate of return,based on discounted cash flows,of a capital investment.

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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