Exam 25: Capital Investment Analysis

What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $100,000.The present value of the future cash flows at the company's desired rate of return is $105,000.The IRR on the project is 12%.Which of the following statements is true?

A project has estimated annual cash flows of $95,000 for 4 years and is estimated to cost $260,000.Assume a minimum acceptable rate of return of 10%.Using the following tables determine the (a)net present value of the project and (b)the present value index,rounded to two decimal places. 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.

The average rate of return for this investment is

BAM Co.is evaluating a project requiring a capital expenditure of $806,250.The project has an estimated life of 4 years and no salvage value.The estimated net income and net cash flow from the project are as follows: ​ ​ The company's minimum desired rate of return is 12%.The present value of $1 at compound interest of 12% for 1,2,3,and 4 years is 0.893,0.797,0.712,and 0.636,respectively. Determine: (a)the average rate of return on investment,including the effect of depreciation on the investment,and (b)the net present value.

The cash payback period for this investment is

A company is planning to purchase a machine that will cost $24,000,have a 6-year life,and have no salvage value.The company expects to sell the machine's output of 3,000 units evenly throughout each year.Total income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.The payback period for the machine is 4 years.

A company is considering the purchase of a new machine for $48,000.Management expects that the machine can produce sales of $16,000 each year for the next 10 years.Expenses are expected to include direct materials,direct labor,and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year.All revenues and expenses except depreciation are on a cash basis.The payback period for the machine is 6 years.

The management of Idaho Corporation is considering the purchase of a new machine costing $430,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909,0.826,0.751,0.683,and 0.621,respectively.In addition to the foregoing information,use the following data in determining the acceptability of this investment: ​ The net present value for this investment is

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

Which of the following is a present value method of analyzing capital investment proposals?

A company is considering the purchase of a new machine for $48,000.Management expects that the machine can produce sales of $16,000 each year for the next 10 years.Expenses are expected to include direct materials,direct labor,and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year.All revenues and expenses except depreciation are on a cash basis.The payback period for the machine is 12 years.

The management of Dakota Corporation is considering the purchase of a new machine costing $420,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909,0.826,0.751,0.683,and 0.621,respectively.In addition to the foregoing information,use the following data in determining the acceptability of this investment: ​ The present value index for this investment is

For Years 1-5,a proposed expenditure of $500,000 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 5 years.

The internal rate of return method of analyzing capital investment proposals uses present value concepts to compute a rate of return expected from the proposals.

Vanessa Company is evaluating a project requiring a capital expenditure of $480,000.The project has an estimated life of 4 years and no salvage value.The estimated net income and net cash flow from the project are as follows: ​ The company's minimum desired rate of return for net present value analysis is 15%.The present value of $1 at compound interest of 15% for 1,2,3,and 4 years is 0.870,0.756,0.658,and 0.572,respectively. Determine (a)the average rate of return on investment,using straight-line depreciation,and (b)the net present value.

Using the tables above,what would be the present value of $30,000 to be received 3 years from today,assuming an earnings rate of 6%?

A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for 8 years.Determine the internal rate of return for this project,using the following present value of an annuity table.

The management of Indiana Corporation is considering the purchase of a new machine costing $400,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909,0.826,0.751,0.683,and 0.621,respectively.In addition to the foregoing information,use the following data in determining the acceptability of this investment: ​ The average rate of return for this investment is

Hayden Company is considering the acquisition of a machine that costs $675,000.The machine is expected to have a useful life of 6 years,a negligible residual value,an annual net cash flow of $150,000,and annual operating income of $87,500.What is the estimated cash payback period for the machine?