Exam 15: Capital Investment Analysis

Sommers Company is evaluating a project requiring a capital expenditure of $400,000.The project has an estimated life of 6 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 12%.The present value of $1 at compound interest of 12% is shown in the table below: Determine (a)the average rate of return on investment,giving effect to depreciation on the investment,and (b)the net present value.

A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity.

All of the following qualitative considerations may impact upon capital investments analysis EXCEPT

For years one through five,a proposed expenditure of $400,000 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 $120,000,$105,000,$100,000,$75,000,and $75,000,respectively.The cash payback period is 4 years.

The management of Hence Corporation is considering the purchase of a new machine costing $200,000.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 in this situation: -The cash payback period for this investment is

The process by which management plans,evaluates,and controls long-term investment decisions involving fixed assets is called capital investment analysis.

In capital rationing,alternative proposals that survive initial and secondary screening are normally evaluated in terms of

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

Crane Company is considering the acquisition of a machine that costs $60,000.The machine is expected to have a useful life of 5 years,a negligible residual value,an annual cash flow of $15,000,and annual operating income of $15,000.What is the estimated cash payback period for the machine?

The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

The primary advantages of the average rate of return method are its ease of computation and the fact that

If a proposed expenditure of $80,000 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.

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.

Proposals M and N each cost $800,000,have 6-year lives,and have expected total cash flows of $1,200,000.Proposal M is expected to provide equal annual net cash flows of $200,000,while the net cash flows for Proposal N are as follows: Determine the cash payback period for each proposal.

The amount of the estimated average income for a proposed investment of $60,000 in a fixed asset,giving effect to depreciation (straight-line method),with a useful life of four years,no residual value,and an expected total income yield of $22,300,is

The present value index is computed using which of the following formulas?

The expected average rate of return for a proposed investment of $540,000 in a fixed asset,with a useful life of four years,straight-line depreciation,no residual value,and an expected total net income of $216,000 for the 4 years,is

A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets for several future years.

If the minimum acceptable rate of return for investments exceeds the average rate of return on an asset,the asset should be purchased.

For years one through five,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 2.5 years.