Exam 26: Capital Investment Analysis

Norton Company is considering a project that will require an initial investment of $750,000 and will return $200,000 each year for five years. Required: If taxes are ignored and the required rate of return is 9%, what is the project's net present value? Based on this analysis, should Norton Company proceed with the project? 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.

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 $6,000 (rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 10%?

A qualitative characteristic that may impact upon capital investment analysis is employee morale.

Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received four years hence, with earnings at the rate of 10% a year:

Proposals A and B each cost $500,000 and have 5-year lives. Proposal A is expected to provide equal annual net cash flows of $109,000, while the net cash flows for Proposal B are as follows: Determine the cash payback period for each proposal. Round answers to two decimal places.

The management of Charlton Corporation is considering the purchase of a new machine costing $380,000. 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 cash payback period for this investment is:

The cash payback method of capital investment analysis is one of the methods referred to as a present value method.

In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of:

Determine the average rate of return for a project that is estimated to yield total income of $250,000 over four years, cost $480,000, and has a $20,000 residual value.

In calculating the net present value of an investment in equipment, the required investment and its terminal residual value should be subtracted from the present value of all future cash inflows.

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

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

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 average rate of return.

The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method.

The accounting rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of four 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 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. Required: Determine the average rate of return on investment, including the effect of depreciation on the investment.

The amount of the average investment for a proposed investment of $90,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years, is:

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from the investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4), and $6,000 (year 5). The average income from operations over the 5-year life is $20,400. The payback period is 3.5 years.

The primary advantages of the average rate of return method are its ease of computation and the fact that:

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.