Exam 28: Capital Investment Analysis

The carrying value of the old asset in a machine replacement decision is irrelevant.

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 average cost of capital of Smile Industries is

The minimum rates of return or a minimum cash flow payback period are two standards established in capital investment analysis.

Why is the book value of equipment irrelevant when considering the replacement of equipment?

The most beneficial projects are the ones with the lowest net present value.

Omaha, Inc., is expected to have the following cash revenues and expenses (other than depreciation) in 2010: Sales \ 92,000 Depreciation exgense \ 5,000 Selling general and Income tax exgense 3,000 adrninistrative expenses Cost of goods sald 45,000 (excluding depreciation) 10,000 Omaha's estimated 2010 net cash flows are

When considering the time value of money, use compounding to find the __________ value of money now held.

Valprado Industries is thinking of purchasing a machine that will produce plastic kitchenware. The machine would be used for five years, would cost $35,000, would have a $5,000 residual value, and would increase annual net cash inflows by $8,800. Valprado uses the straight-line method of depreciation. Using the above facts and the present value factors below, calculate (a) the payback period (if necessary, round off and carry to one decimal place), (b) the accounting rate of return (if necessary, round off and carry to one decimal place), and (c) the machine's net present value (use parentheses to indicate a negative net present value) based on a 12 percent minimum desired rate of return (if necessary, round to the nearest dollar). Present Value of at 12 Percent Present Value of an Annuity of at Percent 1 .893 .893 2 .797 1.690 3 .712 2.402 4 .636 3.038 5 .567 3.605

The net present value method of evaluating proposed investments

The future value of a cash flow is always larger than the present value of that cash flow.

Chicago Co. is interested in purchasing a machine that would improve its operational efficiency. The cost is $200,000 with an estimated residual value of $20,000 and a useful life of eight years. Cash inflows are expected to increase by $40,000 a year. The company's minimum rate of return is 10 percent. The present value of $1 for eight years at 10 percent is 0.467, and the present value of an annuity of $1 at 10 percent and eight years is 5.335. The project earns a rate of return of

Capital investment analysis is also known as capital budgeting.

Chicago Co. is interested in purchasing a machine that would improve its operational efficiency. The cost is $200,000 with an estimated residual value of $20,000 and a useful life of eight years. Cash inflows are expected to increase by $40,000 a year. The company's minimum rate of return is 10 percent. The present value of $1 for eight years at 10 percent is 0.467, and the present value of an annuity of $1 at 10 percent and eight years is 5.335. The net present value of the project is

If an equipment replacement decision would not affect revenue, its benefits could still be measured by analyzing its

The company's minimum rate of return is also referred to as its cost of capital.

Why the residual value of equipment is relevant when considering the replacement of equipment?

Fresno Manufacturing Company specializes in the production of precision tools. Management is in the process of selecting a new drill press. The press under consideration will cost $92,000 plus necessary installation charges of $5,000. Experience indicates that the press will last for five years and should have a residual value at the end of that period of about $10,000. Expected annual cash revenues from the press should average $45,000, and related cash operating costs should be around $20,000. Management has decided on a minimum desired before-tax rate of return of 10 percent. Present value multipliers: a. Using before-tax information and the net present value method to evaluate this capital investment, determine whether the company should purchase the drill press. Support your answer. b. If management has decided on a minimum desired before-tax rate of return of 12 percent, should the drill press be purchased? Show all computations to support your answer.

Discounting calculates the __________ value of an amount to be received.

The most commonly used methods in the evaluation of capital investment proposals are net present value method, payback period method and the accounting rate-of-return method.

In the capital investment decision process, the management accountant's responsibilities lie in the area of