Exam 25: Capital Investment Analysis

In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values.

Below is a table for the present value of $1 at Compound interest. Below is a table for the present value of an annuity of $1 at compound interest. Using the tables above, what is the present value of $4,000 (rounded to the nearest dollar) to be received at the end of each of the next four years, assuming an earnings rate of 12%?

The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines and have asked the accountant to analyze them to determine the best cash payback.

A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years.

Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: The company's minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years is .870, .756, .658, and .572, respectively. Determine (a) the average rate of return on investment, using straight line depreciation, and (b) the net present value.

What is the present value of $8,000 to be received at the end of six years, if the required rate of return is 15%? Below is a table for the present value of $1 at compound interest. Below is a table for the present value of an annuity of $1 at compound interest.

The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: The present value index for this investment is:

Proposals M and N each cost $600,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Determine the cash payback period for each proposal.

The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: The net present value for this investment is:

Methods that ignore present value in capital investment analysis include the internal rate of return method.

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $170,000. The present value of the future cash flows is $185,000. The company's desired rate of return used in the present value calculations was 10%. Which of the following statements is true?

A series of equal cash flows at fixed intervals is termed an annuity.

The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 is:

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.

Which of the following is not an advantage of the average rate of return method?

Methods that ignore present value in capital investment analysis include the net present value method.

Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality.

Hazard Company is considering the acquisition of a machine that costs $525,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual cash flow of $150,000, and annual operating income of $87,500. What is the estimated cash payback period for the machine?

For years one through five, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years.