Exam 15: Capital Investment Analysis

When evaluating a proposal by use of the net present value method, if there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called:

Periods experiencing increase in price levels are known as periods of:

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 2.5 years.

The present value index is computed using which of the following formulas?

Proposals L and K each cost $500,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal L is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal K are as follows: \ 250,000 Year 1 200,000 Year 2 100,000 Year 3 90,000 Year 4 60,000 Year 5 Year 6 \ 750,000 Determine the cash payback period for each proposal.

Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows expected from capital investment proposals?

Crane Company is considering the acquisition of a machine that costs $60,000. The machine is expected to have a useful life of 5 years, a negligible residual value, an annual cash flow of $15,000, and annual operating income of $15,000. What is the estimated cash payback period for the machine?

If the rate of earnings is 10% and the cash to be received in two years is $10,000, determine the present value amount, using the following partial table of present value of $1 at compound interest. 12\% 10\% 6\% Year 0.893 0.909 0.943 1 0.797 0.826 0.890 2 0.712 0.751 0.840 3 0.636 0.683 0.792 4

A qualitative characteristic that influences capital investment analysis is manufacturing productivity.

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

One of the qualitative characteristics that influence capital investment analysis is product quality.

The management of London Corporation is considering the purchase of a new machine costing $750,000. The company's desired rate of return is 6%. The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively. In addition to this information, use the following data in determining the acceptability in this situation: Net Income from Cash Flow Operations Year \ 187,500 \ 37,500 1 187,500 37,500 2 187,500 37,500 3 187,500 37,500 4 187,500 37,500 5 The net present value for this investment is:

The process by which management allocates available investment funds among competing investment proposals is called:

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 $200,000 for 5 years. The expected average rate of return on investment is 18.2%.

The methods of evaluating capital investment proposals can be grouped into two general categories: (1) average rate of return method and (2) cash payback method.

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 net present value for this investment is:

In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods.

An analysis of a proposal by the net present value method indicated that the present value exceeded the amount to be invested. Which of the following statements best describes the results of this analysis?

The internal rate of return method is used to analyze a $831,500 capital investment proposal with annual net cash flows of $250,000 for each of the six years of its useful life. 20\% 15\% 10\% Year 0.833 0.870 0.909 1 1.528 1.626 1.736 2 2.106 2.283 2.487 3 2.589 2.855 3.170 4 2.991 3.353 3.791 5 3.326 3.785 4.355 6 3.605 4.160 4.868 7