Exam 14: Capital Investment Decisions

If the net present value of an investment is zero, the investment earns less than the minimum required rate of return.

What is NOT an advantage of postaudits?

Kendra Van Cleve has just invested $200,000 in a coffee shop. She expects to receive cash income of $50,000 a year. What is the payback period?

A key element in the capital investment process is called a preaudit.

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all. -Can be used to determine whether or not an investment will negatively affect key financial ratios

What is a follow-up analysis of a capital investment after it is implemented?

A company is considering a project with an annual cash flow of $400,000. The project would have a seven-year life, and the company uses a discount rate of 10%. What is the maximum amount the company could invest in the project and have the project still be acceptable?

Cary Swenson Cary Swenson is considering investing $30,000 in a project with the following cash revenues and expenses: Cash Expenses \& Revenues Depreciation Year 1 \ 10,000 \ 12,000 Year 2 \ 12,000 \ 11,000 Year 3 \ 15,000 \ 12,000 Year 4 \ 20,000 \ 12,000 Year 5 \ 22,000 \ 12,000 Year 6 \ 25,000 \ 15,000 Year 7 \ 25,000 \ 15,000 Year 8 \ 25,000 \ 15,000 -Refer to Cary Swenson. What is the average income for the project?

Present Value Tables Present value of $1 Periads 4\% 6\% 8\% 10\% 12\% 14\% 1 0.962 0.943 0.926 0.909 0.893 0.877 2 0.925 0.890 0.857 0.826 0.797 0.769 3 0.889 0.840 0.794 0.751 0.712 0.675 4 0.855 0.792 0.735 0.683 0.636 0.592 5 0.822 0.747 0.681 0.621 0.567 0.519 6 0.790 0.705 0.630 0.564 0.507 0.456 7 0.760 0.665 0.583 0.513 0.452 0.400 8 0.731 0.627 0.540 0.467 0.404 0.351 9 0.703 0.592 0.500 0.424 0.361 0.308 10 0.676 0.558 0.463 0.386 0.322 0.270 Present value of an annuity of $1 Periads 4\% 6\% 8\% 10\% 12\% 14\% 1 0.962 0.943 0.926 0.909 0.893 0.877 2 1.886 1.833 1.783 1.736 1.690 1.647 3 2.775 2.673 2.577 2.487 2.402 2.322 4 3.630 3.465 3.312 3.170 3.037 2.914 5 4.452 4.212 3.993 3.791 3.605 3.433 6 5.242 4.917 4.623 4.355 4.111 3.889 7 6.002 5.582 5.206 4.868 4.564 4.288 8 6.733 6.210 5.747 5.335 4.968 4.639 9 7.435 6.802 6.247 5.759 5.328 4.946 10 8.111 7.360 6.710 6.145 5.650 5.216 -Refer to Presesnt Value Tables. Garlic Company is considering two investments. Each will cost $20,000 initially. Project 1 will return annual cash flows of $10,000 in each of three years. Project 2 will return $5,000 in year 1, $10,000 in year 2, and $15,000 in year 3. The company requires a minimum rate of return of 10%. What is the net present value of Project 2?

What capital investment decision-making model assumes that each cash inflow is reinvested at the required rate of return?

Which payback period will managers want when the risk of obsolescence is high?

An internal auditor is usually the best choice for performing a postaudit of a capital investment.

Explain the concept of postaudit? What are the advantages and disadvantages of the postaudit?

Explain the concept of capital investment decision. Give an example of each.

Refer to Present Value Tables. Mattress Firm is considering an investment in equipment that will have an initial cost of $600,000 yielding annual net cash inflows of $110,000. Yearly depreciation will be $60,000. The equipment is expected to be useful for 10 years, then it will be scrapped. The company requires a minimum rate of return of 10%. Required: A. Calculate the payback period. B. Calculate the accounting rate of return. C. Calculate the net present value. D. Calculate the approximate internal rate of return.

Ostead Company Ostead Company is considering an investment with the following data: Initial cost $200,000 Annual net cash inflows $ 25,000 Expected life 10 years Salvage value none Depreciation will be taken on a straight-line basis over the expected life of the investment.The company requires a minimum rate of return of 4%. The present value of an annuity of $1 in arrears for 4% for 10 years is as follows: Period 1 2 3 4 5 6 7 8 9 10 4\% 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.773 7.435 8.111 -Refer to Ostead Company. What is the accounting rate of return for the investment?

The difference between the present value of the cash inflows and outflows associated with a project is the net present value model.

Sometimes firms require riskier projects to have shorter payback periods.

What is the most widely used non-discounting model for capital investment decision making?

Postaudits supply feedback to managers that should help improve future decision making.