Exam 26: Capital Investment Analysis

Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years.

Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment?

Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions.

A qualitative characteristic that may impact upon capital investment analysis is manufacturing flexibility.

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 discount period.

The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $21,600, is:

Which of the following is true of the cash payback period?

If in evaluating a proposal by use of the net present value method 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 is less than the rate used in the analysis.

The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. 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 cash payback period for this investment is:

A series of equal cash flows at fixed intervals is termed a(n):

The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) methods that ignore present value and (2) present values methods.

Which of the following are present value methods of analyzing capital investment proposals?

Using the following partial table of present value of $1 at compound interest, determine the present value of $30,000 to be received three years hence, with earnings at the rate of 12% a year:

The expected average rate of return for a proposed investment of $500,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is:

Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals.

A project has estimated annual cash flows of $90,000 for three years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. 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.

Briefly describe the time value of money. Why is the time value of money important in capital investment analysis?

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called cost-volume-profit analysis.

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

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 would be the present value of $15,000 (rounded to the nearest dollar) to be received four years from today, assuming an earnings rate of 10%?