Exam 14: Capital Investment Decisions

Companies considering projects with shorter lives are interested in longer payback periods.

The interest rate that sets the present value of a project's cash inflows equal to the present values of the project's cost is called the accounting rate of return.

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.A company is considering two modifications to its current manufacturing process.The after-tax cash flows associated with the two investments are: Year Project I Project II 0 \ (37,500) \ (150,000) 1 \@cdots 91,075 2 \ 50,460 91,075 The company's cost of capital is 12%. A. Compute the net present value for each investment. B. Computer the internal rate of return for each investment. C. Which project is better? Explain your reasoning.

Which of the following statements is characteristic of capital investment decision making?

Randy Ritchie is considering investing $20,000 in a project with the following annual cash revenues and expenses: Depreciation will be $4,000 per year. What is the accounting rate of return on the investment? Cash Revenues Cash Expenses 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

What are the two types of capital budgeting projects will be considered: independent projects and mutually exclusive projects?

Figure 14-11 Present value of an annuity of $1 in arrears 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 4.433 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 14-11.Waterfall Country Club Company is considering two projects. Waterfall requires a minimum rate of return of 8%. Golf Course Clubhouse Upgrade Upgrade Initial investment \ 500,000 \ 100,000 Annual cash flows \ 88,500 \ 34,320 Life of the project 10 years 4 years Depreciation per year \ 50,000 \ 25,000 A. What is the accounting rate of return for each project? B. What is the net present value for each project? C. What is the internal rate of return for each project? D. Which project should be chosen? Explain your reasoning.

What is the formula for the accounting rate of return?

The maximum acceptable rate of return for a project is the required rate of return.

Match each item with the correct statement below. -Can be used to determine whether or not an investment will negatively affect key financial ratios

Two discounting models for capital investment decision making are net present value and internal rate of return.

What is the term for a series of equal future cash flows?

A firm is considering a project with an annual cash flow of $160,000.The project would have a 10-year life,and the company uses a discount rate of 8%.What is the maximum amount the company could invest in the project and have the project still be acceptable (rounded to the nearest whole number)?

In capital investment decision making,it is usually assumed that managers should select projects that attempt to maximize the wealth of the owners of the firm.

Match each item with the correct statement below. -The reduction of our net income for tax purposes is allowed through CCA deductions,this creates a reduction in income taxes payable.

The payback period considers the profitability of a project over its entire life span.

A disadvantage of postaudits is that they are inexpensive to perform.

A company is considering two projects. Froject I Froject II Initial investment \ 60,000 \ 60,000 Cash inflow Year 1 \ 30,000 \ 15,000 Cash inflow Year 2 \ 30,000 \ 15,000 Cash inflow Year 3 \ 30,000 \ 30,000 Cash inflow Year 4 \ 30,000 \ 70,000 Cash inflow Year 5 \ 30,000 \ 70,000 -Refer to the Figure.What is the payback period for Project I?

Ostead Company is considering an investment with the following data: Depreciation will be taken on a straight-line basis over the expected life of the investment. Initial cost \ 200,000 Annual net cash inflows \ 25,000 Expected life 10 years Salvage value none -Refer to the Figure.What is the accounting rate of return for the investment?

The following information pertains to an investment: What is the present value of the annual cash flow (rounded to the nearest whole number)? Investment \ 140,000 Annual revenues \ 96,000 Annual variable costs \ 32,000 Annual fixed out-of-pocket costs \ 20,000 Discount rate 12\% Expected life of project 8 years