Exam 14: Capital Investment Decisions

One drawback to the internal rate of return model is that cash inflows must occur evenly over the life of the investment.

For independent projects,net present value analysis and internal rate of return analysis yield completely different decisions.

Sarah Lindsay invested $300,000 in a project that pays her an even amount per year for 10 years.The payback period is 8 years.What are Sarah's yearly cash inflows from the project?

Match each item with the correct statement below. -Assumes that all future cash inflows earn the minimum rate of return

Match each item with the correct statement below. -Interest rate used to discount future cash flows

Taxes are NOT an important consideration in forecasting cash flows.

Which of the following is NOT an advantage of the payback period?

A firm is considering a project with an annual cash flow of $400,000.The project would have a seven-year life,and the company uses a discount rate of 10%.What is the maximum amount the company could invest in the project and have the project still be acceptable?

A disadvantage of the payback period is that it ignores a project's total profitability.

Joseph Giovine invested in a project with a payback period of six years.The project brings $40,000 per year for a period of twelve years.What was the initial investment?

Cooper Industries is considering a project that would require an initial investment of $101,000.The project would result in cost savings of $62,000 in year 1 and $70,000 in year 2.What is the internal rate of return for the project?

Match each item with the correct statement below. -Assumes that all future cash inflows earn the same rate of return as the project itself

A postaudit evaluates the overall outcome of the investment and proposes corrective action if needed.

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 2?

Both the net present value and the accounting rate of return ignore the time value of money.

The process of planning,setting goals and priorities,arranging financing,and using certain criteria to select long-term assets is called tactical decision making.

Match each item with the correct statement below. -The value that will accumulate by the end of an investment's life if the investment earns a specified compounded return.

Match each item with the correct statement below. -Earning of interest on interest

Which of the following is a follow-up analysis of a capital investment after it is implemented?

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.Pitcher Company is considering an investment costing $120,000.The investment would return $50,000 per year in each of three years.Pitcher requires a minimum rate of return of 10%. A. What is the payback period for the investment? B. Using the Present Value of $1 table, calculate the net present value of the investment. C. The internal rate of return is greater than __________________% and less than __________________%. D. Now assume that the investment includes equipment that can be sold at the end of the third year for $10,000. What is the present value of this investment?