Exam 26: Capital Investment Analysis

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

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 which of the proposals (if any) meet or exceed the company's policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has a estimated useful life of 10 years.

A project has estimated annual net cash flows of $50,000. It is estimated to cost $180,000. Determine the cash payback period.

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 37.5%.

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 $8,000 (rounded to the nearest dollar) to be received one year from today, assuming an earnings rate of 12%?

The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. 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 average rate of return for this investment is:

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

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

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 30%.

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.

Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?

A $400,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net cash flows are as follows: The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Determine the net present value.

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

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

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

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

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 computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

The management of California 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 present value index for this investment is:

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: The average rate of return for this investment is: