Mr.J's Bagels invested in a new oven for $14,000.The oven reduced the amount of time for baking which increased production and sales for five years by the following amounts of cash inflows: \[\begin{array} { l l l l l } \text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \\ \$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000 \end{array}\] Using the averaging method,the payback period for the investment in the oven would be:

A) 5.0 years. B) 2.3 years. C) 2.0 years. D) 0.5 years. A) 5.0 years. B) 2.3 years. C) 2.0 years. D) 0.5 years.

Young Corporation is considering purchasing equipment that costs $80,000 and is expected to provide the following cash inflows over its five-year useful life: \[\begin{array} { l r } \text { Year } & \text { Cash Inflow } \\ 1 & \$ 18,000 \\ 2 & \$ 22,000 \\ 3 & \$ 24,000 \\ 4 & \$ 16,000 \\ 5 & \$ 9,000 \end{array}\] What is the payback period of this investment project? (Rounded to the nearest year.)

A) 2 years B) 4 years C) 3 years D) 6 years A) 2 years B) 4 years C) 3 years D) 6 years

Exam 10: Planning for Capital Investments

If a company has to pay a given amount of income taxes over the life of a capital investment,managers of the company should seek to pay the taxes as early as possible in the investment's life.

Free

(True/False)

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Question 1

Correct Answer:

Verified

False

Select the incorrect statement concerning the internal rate of return (IRR)method of evaluating capital projects.

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(Multiple Choice)

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Question 2

Correct Answer:

Verified

B

In Year 1,Chandler Company purchased equipment with an expected useful life of 5 years.The initial cost of the equipment was $85,000.Chandler's cost of capital is 12%.At the time it purchased the equipment,Chandler projected the following cash inflows from use of the equipment: Year Projected Cash Inflow 1 \ 20,000 2 \ 30,000 3 \ 35,000 4 \ 25,000 5 \ 15,000 At the end of Year 5,the equipment had reached the end of its useful life.Chandler determined that it had actually generated the following cash flows: Year Actual Cash Inflow 1 \ 10,000 2 \ 20,000 3 \ 30,000 4 \ 30,000 5 \ 30,000 (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.) Required: 1)What was the net present value that Chandler calculated for the equipment when the company purchased the asset? 2)Calculate the net present value that the equipment achieved,based on the actual cash inflows. 3)Comment on the pattern of actual cash inflows,compared to the cash flows that had been projected. 4)Was the equipment in fact an acceptable investment,based on the cash flows actually achieved?

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(Essay)

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Question 3

Correct Answer:

Verified

1)Projected NPV
$\begin{array}{ccc}&&\text{Present Value of}\\&&\text{ Projected Cash}\\\text{Projected Cash Flow}&\text{Present Value Factor}&\text{Flow}\\\$ 20,000 & 0.892857 & \$ 17,857.14 \\\$ 30,000& 0.797194 & 23,915.82 \\\$ 35,000& 0.711780 & 24,912.30 \\\$ 25,000 & 0.635518 & 15,887.95 \\\$ 15,000& 0.567427 & 8,511.41\end{array}$
$\text { Present value of projected cash inflows over life of equipment } \$ 91,084.62$ Net present value = $91,085 ? $85,000 = $6,085
2)Net present value actually achieved
Actual NPV
$\begin{array} { c c r } & & \begin{array} { c } \text { Present Value of } \\\text { Projected Cash }\end{array} \\\text { Projected Cash Flow } & \text { Present Value Factor } & \text { Flow } \\\$ 10,000 & 0.892857 &8 , 9 2 8 . 5 7 \\\$ 20,000 & 0.797194 & 15,943.86 \\\$ 30,000 & 0.711780 & 21,353.40 \\\$ 30,000 & 0.63551 & 19,065.54 \\\$ 30,000 & 0.567427 & 17,022.81 \\\end{array}$
$\text { Present value of projected cash inflows over life of equiprnent } \qquad 8 2 , 3 1 4 . 2 0$ Net present value = $82,314 ? $85,000 = $(2,686)
3)Total cash flows were projected to be $125,000; actual cash inflows were $120,000,so the actual cash flows fell short of what had been projected.In addition,the cash flows tended to come later in the equipment's life than had been projected,reducing the present value of cash inflows due to the effects of the time value of money.
4)The equipment did not achieve the net present value that had been projected.The actual net present value was negative.Therefore,the investment in equipment turned out to be an unacceptable investment.

Southport Company is considering the purchase of a piece of equipment that costs $100,000.The equipment would be depreciated on a straight-line basis to its expected salvage value of $10,000 over its 10-year useful life.Assuming a tax rate of 40%,what is the annual amount of the depreciation tax shield provided by this investment?

(Multiple Choice)

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Question 4

Kerwin Company is considering a purchase of equipment that costs $50,000.If the useful life is expected to be 5 years and Kerwin's required rate of return is 12%,what is the minimum annual cash inflow that the equipment must offer for the investment to be acceptable? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your intermediate calculations.Round your final answer to the nearest dollar.)

(Multiple Choice)

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Question 5

Nguyen Company has an opportunity to purchase an asset that will cost the company $36,000.The asset is expected to add $12,000 per year to the company's net income.Assuming the asset has a five-year useful life and zero salvage value,the unadjusted rate of return based on the average investment will be:

(Multiple Choice)

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Question 6

Cash outflows generated by capital investments include all of the following except:

(Multiple Choice)

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Question 7

Langdon Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $10,000 per year for 3 years.Assuming that Langdon's required rate of return is 8%,what is the present value of these cash inflows? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your intermediate calculations.Round your final answer to the nearest dollar.)

(Multiple Choice)

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Question 8

Which of the following statements describes the cost of capital?

(Multiple Choice)

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Question 9

An investment that cost $30,000 provided annual cash inflows of $9,000 per year for five years.The desired rate of return is 10%.The internal rate of return from the investment is: (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

(Multiple Choice)

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Question 10

If a project has a positive net present value,its internal rate of return will exceed the firm's hurdle rate.

(True/False)

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Question 11

Saget Company is considering the purchase of equipment that would cost $35,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a required rate of return of 8%,what is the net present value of this investment opportunity? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

(Multiple Choice)

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Question 12

Mr.J's Bagels invested in a new oven for $14,000.The oven reduced the amount of time for baking which increased production and sales for five years by the following amounts of cash inflows: Year 1 Year 2 Year 3 Year 4 Year 5 \ 8,000 \ 6,000 \ 5,000 \ 6,000 \ 5,000 Using the averaging method,the payback period for the investment in the oven would be:

(Multiple Choice)

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Question 13

Janelle Bates has just inherited $250,000 from her uncle's estate.She is considering opening a small sewing and fabric shop.She would need to purchase inventory costing $50,000.Janelle plans to rent a shop in a local shopping center for $12,000 per year.Fixtures,display equipment,and furniture will cost $18,000 and will be depreciated $3,000 per year for 5 years to its expected salvage value of $3,000.Operating costs will amount to $25,000 per year.Janelle estimates her revenues from sales and sewing services will total $65,000.Because Janelle believes she can earn a 10% return by investing in mutual funds,she does not want to start the business unless she can earn at least this rate.Ignore income taxes. (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.) Required: 1)Prepare a schedule of expected cash flows for the proposed investment by completing the table provided below.In Column 1 enter a brief description of the cash flow.In Column 2 indicate whether the cash flow is an inflow (I)or an outflow (O).In Column 3 enter the years in which the cash flow will occur.For example,if the cash flow occurs immediately enter a 0.If the cash flow occurs each year,enter 1-5,etc.In Column 4 enter the cash flow amount. Item Description Inflow/Outflow Years Amount (Col. 1) (Col. 2) (Col. 3) (Col. 4) 2)What is the initial outlay for this capital investment (the amount of the cash flow at time = 0)? 3)What is the amount of the annual net cash flow for this capital investment? 4)What is the net present value of the proposed venture? Should Janelle proceed?

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Question 14

Pierce Company is considering the purchase of new equipment that will cost $150,000.The equipment will save the company $48,000 per year in cash operating costs.The equipment has an estimated useful life of five years and no expected salvage value.The company's cost of capital is 12%. (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.) Required: 1)Assuming the company is subject to a 40% tax rate,compute the net present value. 2)Compute the amount of the annual depreciation tax shield provided by the new equipment. 3)Should the equipment be purchased? Why or why not?

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Question 15

Capital investment decisions involve all of the following,except:

(Multiple Choice)

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Question 16

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow.Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

(Multiple Choice)

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Question 17

The present value index indicates the:

(Multiple Choice)

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Question 18

Young Corporation is considering purchasing equipment that costs $80,000 and is expected to provide the following cash inflows over its five-year useful life: Year Cash Inflow 1 \ 18,000 2 \ 22,000 3 \ 24,000 4 \ 16,000 5 \ 9,000 What is the payback period of this investment project? (Rounded to the nearest year.)

(Multiple Choice)

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Question 19

An investment that costs $40,000 will produce annual cash flows of $12,000 for a period of 4 years.Given a desired rate of return of 10%,what will the investment generate? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your intermediate calculations.Round your answer to the nearest whole dollar.)

(Multiple Choice)

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Question 20

If a company has to pay a given amount of income taxes over the life of a capital investment,managers of the company should seek to pay the taxes as early as possible in the investment's life.

Select the incorrect statement concerning the internal rate of return (IRR)method of evaluating capital projects.

Cash outflows generated by capital investments include all of the following except:

Which of the following statements describes the cost of capital?

An investment that cost $30,000 provided annual cash inflows of $9,000 per year for five years.The desired rate of return is 10%.The internal rate of return from the investment is: (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

If a project has a positive net present value,its internal rate of return will exceed the firm's hurdle rate.

Capital investment decisions involve all of the following,except:

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow.Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

The present value index indicates the:

Management Accounting and Corporate Governance

Cost Behavior, operating Leverage, and Profitability Analysis

Analysis of Cost, volume, and Pricing to Increase Profitability

Cost Accumulation,tracing,and Allocation

Cost Management in an Automated Business Environment: ABC, ABM, and TQM

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Product Costing in Service and Manufacturing Entities

Job-Order, process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

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