Exam 28: Capital Investment Analysis

To use an annuity table, the cash flows for each interest period must be equal.

The proposals that will produce poor returns will have a positive impact on the organization's profitability.

Any proposal that fails to produce minimum rate but produces the hurdle rate will be accepted.

Management of Moore City Trust is in the process of evaluating the purchase of a new check sorting machine. The model under review will cost $44,000 and will require installation costs of $5,000. Similar machines have a ten-year life, and management has estimated that this sorter will have a residual value of $2,500 at the end of its life. Annual cost savings to be generated by the sorter will average $9,500 over the ten-year period. Management's minimum desired before-tax rate of return is 14 percent. Present value multipliers: 9 Percent Percent 16 Percent Present value of \ 1 at end of ten years .422 .270 .227 Present value of \ 1 received in each of the next ten 6.418 5.216 4.833 years a. Using before-tax information and the net present value method to evaluate this capital investment, determine whether the company should purchase the check sorting machine. Support your answer. b. If management had decided on a minimum desired before-tax rate of return of 16 percent, should the check sorting machine be purchased? Show all computations to support your answer. Round answers to nearest dollar.

The minimum rate of return is fixed by the stockholders.

Smile Industries capital structure consists of $1,000,000 of debt at 6 percent interest and 1,500,000 of stockholders equity at 2 percent. The proportion of Equity in the total capital structure is

You are given the following present value factors at 8 percent, the Rogers Company's minimum desired rate of return: End of Period Present Value of Present Value of an Annuity of 1 .926 926 2 .857 1.783 3 .794 2.577 4 .735 3.312 5 .681 3.993 6 .630 4.623 The Rogers Company is considering the replacement of a piece of equipment. The old machine has a carrying value of $800 and a remaining estimated life of five years, with no residual value at that time. Present residual value is $200. The new equipment will cost $1,200, including transportation and installation. It has an estimated life of five years, with no residual value then. Annual cash operating costs are $400 for the old machine and $150 for the new machine. a. Compute the present value of the operating cash outflows for the old machine. b. Compute the present value of the operating cash outflows for the new machine. c. Compute the present value of the cash operating savings if the new machine is purchased. d. What is the net present value of the replacement alternative?

The time value of money concept is given consideration in long-range investment decisions by

The payback period method measures

Capital facilities and projects are not expensive.

Net present value method, payback period method and accounting rate of return method are the three important decision variables used in the evaluation of proposals.

The discount rate used in net present value calculations is the company's minimum rate of return.

The financing structure of Taylor communications is as follows: Eaurce of Capital Propartion of Capital Cast of Capital Debt financing \ 300,000 30\% 6\% Preferred stack, \ 100,000 10\% 8\% Cammon stack, \ 400,000 40\% 12\% Retained earninge, \ 200,000 20\% 12\% The weighted cost of preferred stock is

A minimum rate of return will be set by the organizations to guard

Capital investment analysis involves all of the following except

The Cal-Fruit Company specializes in decorative fruit baskets. Currently, the company is analyzing purchase alternatives for a fruit-polishing machine. Data relevant to the decision are as follows: Machine A Machine B Cost \ 90,000 \ 82,000 Useful life 5 years 5 years Residual value \ 2,000 \ 3,000 Estimated annual net cash flows \ 35,000 \ 30,000 Present value multipliers at 12 percent: Dollar received at the end of five years $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad.567$ Dollar received at the end of each of the next five years $\quad$ $\quad3.605$ a. Compute the payback period for each of the alternatives. Round answers to two decimal places. b. Using the net present value method, prepare an analysis to determine which machine the company should purchase. (The company uses a 12 percent minimum desired rate of return.)

Memphis Co. is going to purchase a machine for $83,200 that will increase cash flows by $40,000 in the first year, $30,000 the second year, and $25,000 the third year. The machine will have no residual value. The minimum rate of return is 10 percent. The present value factors for the three years are 0.909, 0.826, and 0.751, respectively. The machine's net present value is

The key steps followed by the managers in capital investment analysis include all of the following except

Depreciation is a unique expense because it

A company is considering a project with annual after-tax cash flows of $5,700.00 per year for six years. The company's cost of capital is 14 percent. Present and future value factors for a 14 percent interest rate for six years are as follows: Future value of $\quad2.195$ Present value of $\quad0.456$ Future value of a series of equal payments $\quad8.536$ Present value of a series of equal payments $\quad3.889$ Using the net present value method, what is the maximum amount that the company should invest?