Exam 14: Capital Investment Decisions

Which of the following provides an absolute dollar measure?

Which model is better for independent projects,net present value or internal rate of return? Which is better for mutually exclusive projects? Explain your reasoning for each case.

The Canadian Division manager is choosing between two mutually exclusive projects. The company requires any project to earn at least 13%.The manager believes that cash inflows from the project can be reinvested at the rate of 13%.Which project will the manager likely choose? Project 123 Project 456 Net present value \ 235,000 \ 210,000 Internal rate of return 14\% 16\%

A division manager is considering a project that requires a significant initial investment.If accepted,the project could have a negative impact on certain financial ratios that the firm is required to maintain to satisfy bond contracts.The manager wants to ensure that the ratios will NOT be adversely affected by the investment.Which capital investment model should the manager use?

In what way does the payback period provide information to help managers?

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 the Figure.Ramona Kruss is considering two investments.Each will cost $20,000 initially.Project 1 will return annual cash flows of $10,000 in each of three years.Project 2 will return $5,000 in year 1,$10,000 in year 2,and $15,000 in year 3.Ramona Kruss requires a minimum rate of return of 10%.What is the net present value of Project 1? (Note: there may be a rounding error depending on the table you use to compute your answer.Choose the answer closest to the result you calculate.)

Which of the following measure results in the time required for a firm to recover its original investment?

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 average annual income for this project?

Companies that perform postaudits of capital projects do NOT experience any benefits.

What is the preferred model for choosing the best of several competing projects?

What is a postaudit? What are the advantages and disadvantages of the postaudit?

What is a capital investment decision,and how does it differ from a tactical decision? Give an example of each.

A firm is evaluating a project that has a net present value of $0 when a discount rate of 10% is used.What will be the result of a discount rate of 8%?

Today Production Company is considering the purchase of a flexible manufacturing system.The cash benefits/savings associated with the system are as follows: The system will cost $1,500,000 and will last 10 years.The company's cost of capital is 10%. Required: Decreased waste \ 150,000 Increased quality 200,000 Decrease in operating costs 125,000 Increase in on-time deliveries 25,000 A. What is the payback period for the flexible manufacturing system? B. What is the NPV for the flexible manufacturing system?

Postaudits ensure that resources are used wisely by evaluating profitability.

What are the limitations of Accounting Rate of Return?

What is the difference between NPV and IRR?

Cary Swenson is considering investing $30,000 in a project with the following cash revenues and expenses: Cash Expenses \& Revenues Depreciation Year 1 \ 10,000 \ 12,000 Year 2 \ 12,000 \ 11,000 Year 3 \ 15,000 \ 12,000 Year 4 \ 20,000 \ 12,000 Year 5 \ 22,000 \ 12,000 Year 6 \ 25,000 \ 15,000 Year 7 \ 25,000 \ 15,000 Year 8 \ 25,000 \ 15,000 -Refer to the Figure.What is the accounting rate of return for the project?

If cash flows are uneven,the payback period assumes that the inflows during the last fraction of a year occur evenly.

An advantage of the payback period is that it considers the time value of money.