Exam 15: Capital Investment Analysis

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

When evaluating a proposal by use of the net present value method, if the present value is less than the amount to be invested, the rate of return on the proposal is more than the rate used in the analysis.

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and a $40,000 residual value, is expected to yield total net income of $500,000 for 5 years. The expected average rate of return is 50%.

The net present value has been computed for Proposals A and B. Relevant data are as follows: Proposal B Proposal A \1 25,000 \ 75,000 Amount to be invested 136,250 84,000 Total present value of net cash flow 11,250 9,000 Net present value Determine the present value index for each proposal.

Sommers Company is evaluating a project requiring a capital expenditure of $300,000. The project has an estimated life of 5 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Net Cash Net Income Flow Year \ 120,000 \ 60,000 1 110,000 50,000 2 105,000 45,000 4 90,000 30,000 4 80,000 20,000 5 The company's minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% is shown in the table below: Present Value Year of \ 1 at 12\% 1 0.893 2 0.797 3 0.712 4 0.636 5 0.567 Determine (a) the average rate of return on investment, giving effect to depreciation on the investment, and (b) the net present value.

The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

The management of Hence Corporation is considering the purchase of a new machine costing $200,000. 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: Net Income from Cash Flow Operations Year \ 90,000 \ 50,000 1 10,000 20,000 2 50,000 10,000 3 45,000 5,000 4 45,000 5,000 5 The average rate of return for this investment is:

All of the following qualitative considerations may impact upon capital investments analysis except:

Average rate of return equals estimated average annual income divided by average investment.

When evaluating a proposal by use of the net present value method, if there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.

The management of Hence Corporation is considering the purchase of a new machine costing $200,000. 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: Net Income from Cash Flow Operations Year \ 90,000 \ 50,000 1 60,000 20,000 2 50,000 10,000 3 45,000 5,000 4 45,000 5,000 5 The present value index for this investment is:

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period.

Both proposal M, and N cost $800,000, have a 6-year life, and have expected total cash flows of $1,200,000. Proposal M is expected to provide equal annual net cash flows of $200,000, while the net cash flows for Proposal N are as follows: \ 250,000 Year 1 \ 225,000 Year 2 \ 200,000 Year 3 \ 200,000 Year 4 \ 175,000 Year 5 \ 150,000 Year 6 Determine the cash payback period for each proposal.

The expected average rate of return for a proposed investment of $3,000,000 in a fixed asset giving effect to depreciation (straight-line method) with a useful life of 20 years, no residual value, and an expected total income of $6,000,000 is:

A company should purchase an asset when the minimum rate of return exceeds its average rate of return.

The expected average rate of return for a proposed investment of $540,000 in a fixed asset, with a useful life of four years, recognition is given to the effect of straight-line depreciation on the investment, no residual value, and an expected total net income of $216,000 for the 4 years, is:

Assume in analyzing alternative proposals that Proposal F has a useful life of six years and Proposal J has a useful life of nine years. What is one widely used method that makes the proposals comparable?

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

All of the following qualitative considerations may influence capital investments analysis except: