Exam 25: Capital Investment Analysis

An anticipated purchase of equipment for $490,000 with a useful life of 8 years and no residual value is expected to yield the following annual net incomes and net cash flows: ​ What is the cash payback period?

The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1)methods that ignore present value and (2)present values methods.

Jimmy Co.is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value.Jimmy Co.seeks to earn an average rate of return of 18% on all capital projects.Determine the necessary average annual income (using straight-line depreciation)that must be achieved on this project for it to be acceptable to Jimmy Co.

Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4 years,cost $480,000,and has a $20,000 residual value.

Methods that ignore present value in capital investment analysis include the net present value method.

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

Methods that ignore present value in capital investment analysis include the internal rate of return method.

The net present value for this investment is

If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000,respectively,the cash payback period is 2.5 years.

Match each definition that follows with the term (a-f)it defines. -A measure of the average income as a percent of the average investment

Project A requires an original investment of $65,000.The project will yield cash flows of $15,000 per year for 7 years.Project B has a calculated net present value of $5,500 over a 5-year life.Project A could be sold at the end of 5 years for a price of $30,000.(a)Using the table below,determine the net present value of Project A over a 5-year life with salvage value assuming a minimum rate of return of 12%.(b)Which project provides the greatest net present value? Below is a table for the present value of $1 at compound interest. ​ Below is a table for the present value of an annuity of $1 at compound interest.

In calculating the present value of an investment in equipment,the present value of the residual value should be added to the cash inflows.

Which of the following is true of the cash payback period?

The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis.

The net present value has been computed for Proposals P and Q.Relevant data are as follows: ​ Determine the present value index for each proposal.Round your answers to two decimal places.

A qualitative characteristic that may impact upon capital investment analysis is market opportunities.

Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals.

For Years 1-5,a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000,$35,000,$25,000,$25,000,and $25,000,respectively,and net cash flows of $90,000,$85,000,$75,000,$75,000,and $75,000,respectively.The cash payback period is 3 years.

Proposals M and N each cost $550,000,have 6-year lives,and have expected total cash flows of $750,000.Proposal M is expected to provide equal annual net cash flows of $125,000,while the net cash flows for Proposal N are as follows: ​ ​ Determine the cash payback period for each proposal.

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.