Exam 14: Capital Investment Decisions

An investment of $4,000 provides an average net cash flow of $960 with zero salvage value.Depreciation is $80 per year.What is the accounting rate of return using the original investment?

Most firms use one type of discounting model.

Darth Company is considering the purchase of new heavy construction equipment that will cost $2,000,000 and have a life of eight years with no expected salvage value. The expected cash flows associated with the project are as follows: Cash Cash Expenses \& Year Revenues Depreciation 1 \ 2,400,000 \ 1,900,000 2 \ 2,400,000 \ 1,900,000 3 \ 2,400,000 \ 1,900,000 5 \ 2,400,000 \ 1,900,000 6 \ 2,400,000 \ 1,900,000 7 \ 2,400,000 \ 1,900,000 8 \ 2,400,000 \ 1,900,000 \ 2,400,000 \ 1,900,000 -Refer to the Figure.What is the accounting rate of return for the project?

Match each item with the correct statement below. -Can be used as a rough measure of risk and liquidity

What capital investment decision-making model assumes that each cash inflow is reinvested at the project's own rate of return?

Before-tax cash flows must be forecasted and used in capital investment decision making.

Which of the following is a reason managers use the accounting rate of return to evaluate potential investment projects?

Figure 14-10 Present value of $1 Present value of an annuity of $1 Periods 4\% 6\% 8\% 10\% 12\% 14\% 1 0.962 0.943 0.926 0.909 0.893 0.877 2 0.925 0.890 0.857 0.826 0.797 0.769 3 0.889 0.840 0.794 0.751 0.712 0.675 4 0.855 0.792 0.735 0.683 0.636 0.592 5 0.822 0.747 0.681 0.621 0.567 0.519 6 0.790 0.705 0.630 0.564 0.507 0.456 7 0.760 0.665 0.583 0.513 0.452 0.400 8 0.731 0.627 0.540 0.467 0.404 0.351 9 0.703 0.592 0.500 0.424 0.361 0.308 10 0.676 0.558 0.463 0.386 0.322 0.270 Periods 4\% 6\% 8\% 10\% 12\% 14\% 1 0.962 0.943 0.926 0.909 0.893 0.877 2 1.886 1.833 1.783 1.736 1.690 1.647 3 2.775 2.673 2.577 2.487 2.402 2.322 4 3.630 3.465 3.312 3.170 3.037 2.914 5 4.452 4.212 3.993 3.791 3.605 3.433 6 5.242 4.917 4.623 4.355 4.111 3.889 7 6.002 5.582 5.206 4.868 4.564 4.288 8 6.733 6.210 5.747 5.335 4.968 4.639 9 7.435 6.802 6.247 5.759 5.328 4.946 10 8.111 7.360 6.710 6.145 5.650 5.216 -Refer to Figure 14-10.Eye Appeal is considering an investment costing $24,000.The investment would return $10,000per year in each of three years.Eye Appeal requires a minimum rate of return of 6%. A. What is the payback period for the investment? B. What is the net present value of the investment? C. The internal rate of return is greater than $\%$ _____ and less than $\%$ _____

An external auditor is usually the best choice for performing a postaudit of a capital investment.

Martin Brother is considering investing $20,000 in a project with the following cash revenues and expenses: Cash Expenses \& Revenues Depreciation Year 1 \ 8,000 \ 8,000 Year 2 \ 12,000 \ 8,000 Year 3 \ 15,000 \ 9,000 Year 4 \ 20,000 \ 10,000 Year 5 \ 20,000 \ 10,000 -Refer to the Figure.What is the accounting rate of return for the project?

Match each item with the correct statement below. -A series of equal future cash flows

The difference between the present value of the cash inflows and outflows associated with a project is the net present value model.

Which of the following is NOT characteristic of the internal rate of return for a project?

Which of the following factors must a manager estimate when making a capital investment decision?

Which of the following is NOT an advantage of postaudits?

Fill in the lettered blanks in the following table: Investment A Investment B Investment C Amount of investment \ 40,000 () \ 20,000 Economic life in years 10 5 8 Annual cash flow \ 5,000 (B) \ 2,500 Payback period in years () 4 () Present value of cash flows () \ 33,000 (F) Net present value \ 5,500 \ 3,000 (\ 1,000)

Kendra Van Cleve has just invested $200,000 in a coffee shop.She expects to receive cash income of $50,000 a year.What is the payback period?

Suppose the cash flows of a project are received evenly over the life of the project.What formula is used to calculate the payback period?

Charlotte Company invests in a new piece of equipment costing $80,000.The equipment is expected to yield the following amounts per year for the equipment's four-year useful life: What is the net present value of this investment in equipment? Cash revenues \ 120,000 Cash expenses (64,000) Depreciation expenses (straight-line) (20,000) Income provided from equipment \ 36,000 Cost of capital 14\%

What term refers to the interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost?