Exam 16: Planning for Capital Investments

Finnegan Company plans to invest in a new operating plant that is expected to cost $500,000. The projected incremental income from the investment is as follows: Net Income Year After Tax 1 \ 30,000 2 \ 45,000 3 \ 50,000 4 \ 55,000 5 \ 40,000 6 \ 20,000 The unadjusted rate of return on the initial investment would be approximately:

What amount of cash would result at the end of one year, if $15,000 is invested today and the rate of return is 8%? (Do not round your PV factors.)

When a capital investment is expected to provide unequal annual cash inflows, the payback period can be calculated by accumulating the incremental cash inflows until the sum equals the amount of the original investment.

Theresa is considering starting a small business. She plans to purchase equipment costing $145,000. Rent on the building used by the business will be $26,000 per year while other operating costs will total $30,000 per year. A market research specialist estimates that Theresa's annual sales from the business will amount to $80,000. Theresa plans to operate the business for 6 years. Disregarding the effects of taxes, what will be the amount of annual net cash flow generated by the business?

What amount of cash must be invested today in order to have $60,000 at the end of one year assuming the rate of return is 9%? (Do not round your PV factors.)

Select the incorrect statement regarding postaudits of capital investment decisions.

Saget Company is considering the purchase of equipment that would cost $35,000 and offer annual cash inflows of $10,500 over its useful life of 5 years. Assuming a required rate of return of 8%, what is the net present value of this investment opportunity?

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

Describe what is meant by the time value of money.

The rate of return that equates the present value of cash inflows and outflows is the:

Which of the following is not a factor in explaining why the present value of a future dollar is less than one dollar?

Select the incorrect statement concerning the present value index (PVI).

Indicate whether each of the following statements is true or false. 1. If two capital investments both have positive net present values, both offer an actual rate of return that is higher than the required rate of return. 2. Company M has two potential capital investments, each of which has a positive net present value. M can only accept one of the investments. In this situation, it should always accept the project that has the higher net present value. 3. Net present value is calculated by dividing the present value of cash inflows by the present value of cash outflows associated with a capital investment. 4. The present value index can be used to compare different capital investment projects. 5. The higher the present value index, the lower the rate of return per dollar invested in the project.

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.

Chico Company is considering the purchase of a new high-speed machine for its factory. The machine will cost $160,000 and will save the company $45,000 per year in cash operating costs. The machine has an estimated useful life of five years and no expected salvage value. The company's cost of capital is 12%. Required: 1) Compute the net present value of this investment. 2) What is the maximum amount that Chico should be willing to pay for the machine? 3) What are the minimum annual cash savings that will make the machine acceptable on a net present value basis if the purchase price is $160,000?

Mr. J's Bagels invested in a new oven for $14,000. The oven reduced the amount of time for baking which increased production and sales for five years by the following amounts of cash inflows: Year 1 Year 2 Year 3 Year 4 Year 5 \8 ,000 \6 ,000 \5 ,000 \6 ,000 \5 ,000 Using the averaging method, the payback period for the investment in the oven would be:

Butch's Barbecue thinks that offering delivery will increase their sales. Butch's is considering whether to purchase a used delivery truck costing $12,000. Additional net income from the delivery service will be $1,400 per year. The truck will last approximately 5 years. What is the unadjusted rate of return based on the average investment?

Benson Corporation is considering an investment in equipment that would cost $50,000 and provide annual cash inflows of $14,000. The company's required rate of return is 12%; the internal rate of return for the investment is 10.5%. Should the company make this investment?

If a project has a positive net present value, its internal rate of return will exceed the firm's hurdle rate.

If a company has to pay a given amount of income taxes over the life of a capital investment, managers of the company should seek to pay the taxes as early as possible in the investment's life.