Exam 24: Capital Investment Analysis

While making capital investment decisions,companies set a minimum rate of return to

Jymo Company has a tax rate of 25 percent and is considering a capital project that will make the following annual contribution to operating income: Using the income adjustment procedure,net cash inflows are

Cost-benefit is an accounting convention or rule of thumb that supports long-run decision making.

If revenues (cash inflows)are the same among alternatives,cost savings are used as the basis for evaluation.

Management of the Krausse Savings and Loan Association is in the process of evaluating the purchase of a new check sorting machine.The model under review will cost $70,000 and will require installation costs of $10,000.Similar machines have a ten-year life,and management has estimated that this sorter will have a residual value of $10,000 at the end of its life.Annual cost savings to be generated by the sorter will average $14,000 over the ten-year period.Management's minimum desired rate of return is 12 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 check sorting machine.Support your answer. b.If management had decided on a minimum desired before-tax rate of return of 14 percent,should the check sorting machine be purchased? Show all computations to support your answer.

Making capital investment decisions based on the availability of funds falls under which stage of the management process?

Describe the net present value method of evaluating capital investment proposals.What is its main advantage?

Rodriguez Inc.is considering a project that costs $200,000.The company expects the annual cash revenues to be $75,000 and annual expenses (including depreciation)to be $30,000.The project has a ten-year useful life and a residual value of $25,000.Assume Rodriguez Inc.uses the straight-line method of depreciation. -Using the above information for Rodriguez,the accounting rate of return for the project is (Round your answer to a whole percent)

Capital investment analysis involves all of the following except

The following data have been gathered for a capital investment decision. Cash inflows: The minimum rate of return for this investment is 14 percent.The present value factors for a 14 percent discount rate are as follows: a.Compute the present value of each of the cash inflows of the investment. b.What would have been the present value of the cash flows if they were received in equal installments over the five-year period at the same discount rate? (Assume the total cash inflows remain same. ) c.If the answers to parts (a)and (b)differ,explain the reason(s)why.

Which of the following is not an appropriate method used in evaluating proposed capital investments?

When using the net present value method to compare keeping an old building or disposing it and acquiring a new building,the current cash residual value of the old building should be

Regis Company has a tax rate of 25 percent and is considering a capital project that will make the following annual contribution to operating income: Determine the net cash inflows for this project using the: a.receipts and disbursements method (show calculations). b.income adjustment procedure (show calculations).

When deciding whether to keep or replace a fixed asset,the asset's carrying value could be relevant to the decision.

Memphis Co.is considering purchasing a machine for $83,200 that will increase cash inflows 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,at 10 percent,for the three years are 0.909,0.826,and 0.751,respectively. -Using the above information for Memphis,the machine's actual rate of return is

Lopez Co.is interested in purchasing equipment that would improve its operational efficiency.The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years.The equipment is expected to generate cash inflows of $60,000 a year.The company's minimum rate of return is 8 percent.The present value of $1 for ten years at 8 percent is 0.463,and the present value of an annuity of $1 at 8 percent and ten years is 6.710. -Using the above information for Lopez,the net present value of the project is

The undepreciated portion of the original cost of a fixed asset is the

Which of the following is true of cost-benefit analysis?

The salvage value of an old asset in a machine replacement decision is irrelevant.

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