Exam 10: Planning for Capital Investments

Connor has $300,000 to invest in a 5-year annuity. Assuming the time value of money is 10%, what amount will Connor receive in cash each year? (Do not round your PV factors. Round your answer to the nearest dollar.)

Capital investment decisions involve all of the following, except:

Describe the approach that managers may take in making capital investment decisions.

Mary needs to have $20,000 one year from today. The formula to compute the amount of money that must be invested today is future value ÷ (1 - interest rate).

If the net present value for a capital investment is equal to zero, the internal rate of return for the investment is equal to the required rate of return.

Indicate whether each of the following statements is true or false.In analysis of a capital investment, a cost saving is treated as a cash inflow.The expected salvage value of an asset is a source of a cash outflow that should be considered in capital investment analyses.Many capital investments require an increase in the amount of a company's working capital.Incremental revenues are treated as cash outflows in capital investment analyses.An increase in working capital, which may occur near the beginning of a capital investment project, is treated as a cash outflow.

An investment that costs $40,000 will produce annual cash flows of $12,000 for a period of 4 years. Given a desired rate of return of 10%, what will the investment generate? (Do not round your intermediate calculations. Round your answer to nearest whole dollar.)

Bristles Hair Salon is considering installing spray tanning booths. The booths cost $220,000 and have an estimated five-year useful life. Ignore income taxes. The following pro forma income statement is provided: Required: 1) Bristles would like to recoup its original investment in less than four years. Compute the payback period for the tanning booth investment. Would you recommend that the booths be purchased? Why or why not? 2) Bristles' minimum acceptable unadjusted rate of return is 11%. Compute the unadjusted rate of return on the original investment. Would you recommend that the booths be purchased? Why or why not?

Describe what is meant by the time value of money.

Which of the following is not a criteria that is used to determine whether a project is acceptable under the net present value method?

Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below: The company's hurdle rate is 12%. What is the present value index of Investment B? (Do not round your intermediate calculations. Round your answer to two decimal points.) Year Investment Investment B 0 (\ 15,000) (\ 9,000) 1 5,000 5,000 2 5,000 4,000 3 5,000 3,000 4 4,000 1,000

Five years ago, Burton Company purchased equipment with an expected useful life of 5 years. The initial cost of the equipment was $160,000. Burton's cost of capital is 12%; when it purchased the equipment, Burton computed a net present value of $15,824 for the investment. During the current year, the equipment reached the end of its useful life. Burton determined that, over the 5-year life, the equipment had generated annual cash inflows of $46,000.Required: Conduct a post-audit to determine whether the equipment achieved the net present value the company had expected. Based on the results actually achieved, was the asset in fact an acceptable investment?

Jiminez Company has two investment opportunities. Both investments cost $5,000 and will provide the following net cash flows: What is the total present value of Investment A's cash flows assuming an 8% minimum rate of return? (Do not round your intermediate calculations. Round your answer to the nearest whole dollar.) Year Investment Investment 1 \ 3,000 \ 3,000 2 3,000 4,000 3 3,000 2,000 4 3,000 1,000

Which of the following statements concerning payback analysis is true?

How would an organization benefit from conducting postaudits of its capital investment decisions?

George Company has the opportunity to purchase an asset that costs $40,000. The asset is expected to increase net income by $10,000 per year. Depreciation expense will be $5,000 per year. Based on this information the payback period is:

Indicate whether each of the following statements is true or false.Internal rate of return measures the difference between an investment's rate of return and the company's required rate of return.A spreadsheet program is useful in doing internal rate of return analyses.Capital investment analyses should take tax consequences into account.Depreciation on equipment or a building has the effect of sheltering some of a corporation's income from income taxes.The amount of a depreciation tax shield is calculated by multiplying the amount of depreciation by (1 - the tax rate).

The present value of an annuity of $1 table could be constructed using the factors contained in the present value of $1 table.

Which of the following is not a major cash inflow from a capital investment?

Cash inflows generated by capital investments include all of the following except: