Exam 8: Long-Term Capital Investment Decisions

A local company requires all capital investments to generate a minimum internal rate of return of 16%. The company is currently considering an investment that is expected to generate annual cash inflows of $45,000 for 7 years. The cost of this investment is $180,000. Required: Would you recommend the company make this investment? Why or why not? Show computations and ignore income taxes.

If a project has an internal rate of return of 12% and a negative net present value, which of the following statements is trueregarding the discount rate used for the net present value computation?

A company choosing between two or more acceptable investment alternatives is called a:

Cardinal Inc. purchased an asset costing $25,000. Annual operating cash inflows generated from the asset are expected to be $6,595 each year for five years. No salvage value is expected at the end of the asset's life. Using time value of money tables, which of the following rates is closest to the internal rate of return on the project?

Peddler Products Inc. requires all capital investments to generate an internal rate of return of 14%. The company is currently considering an investment that is expected to generate annual cash inflows of $25,000 for 5 years. Required: What amount should the cost of the investment not exceed? Show computations and ignore income taxes.

Tyson Enterprises is considering investing in a machine that costs $30,000. The machine is expected to generate revenues of $10,000 per year for six years. The machine would be depreciated using the straight-line method with no half-year convention over its six year life and have no salvage value. The company considers the impact of income taxes in all of its capital investment decisions. The company has a 40 percent income tax rate and desires an after-tax rate of return of 12 percent on its investment. The net present value of the machine is:

The time value of money concept focuses on:

Lee Enterprises accepts capital investment projects with a payback period of five years or less. Under this condition, which of the following projects would be acceptable?

Mac Products Inc. is considering the purchase of a new machine. The estimated cost of the machine is $30,000. The machine is expected to generate annual cash inflows over the next three years as follows: The machine will be depreciated with no half-year convention over its three-year life using the straight-line method and is not expected to have a residual value at the end of its useful life. The company considers income tax effects in all of its capital investment decisions. If the company's income tax rate is 35% and they desire an after-tax return of 14% on investments, the net present value of the new machine is:

Which of the following does not consider the time value of money?

When using the NPV method for a particular investment decision, if the present value of the cash inflows is equal to the present value of the cash outflows, then:

Talley Manufacturing has a project that requires an initial investment of $150,000 and has the following expected stream of cash flows: Assuming the company's cost of capital is 14 percent, what is the profitability index for the project?

A local merchant is considering the purchase of a new machine which has an initial cost of $65,000. Annual operating cash inflows are expected to be $12,500 each year for ten years. No salvage value is expected at the end of the machine's life. The company's cost of capital is 11 percent. Required: Compute the net present value of the machine. (Ignore income taxes)

O'Malley Inc. purchased an asset costing $90,000. Annual operating cash inflows are expected to be $20,000 each year for six years. No salvage value is expected at the end of the asset's life. Assuming O'Malley's cost of capital is 16 percent, what is the asset's net present value? (ignore income taxes)

Trenton Inc. is considering an equipment purchase that has a cost of $15,000. The equipment is expected to have a salvage value of $2,000 at the end of three years. In addition, the equipment is expected to generate cash flows over the next three years as follows: If Trenton's cost of capital is equal to 14 percent, the net present value of the equipment is: (ignore income taxes)

Blue Fin Inc. requires all capital investments to generate a minimum internal rate of return of 15%. The company is currently considering an investment that is expected to generate annual cash inflows of $10,000 for 6 years. The cost of this investment is $30,000. Required: Would you recommend the company make this investment? Why or why not? Show computations and ignore income taxes.

If a project has an internal rate of return of 14% and a positive net present value, which of the following statements istrue regarding the discount rate used for the net present value computation?

Charles Inc. has the following information available regarding one of the projects it is considering: The profitability index of this project is:

ABC Manufacturing has a project that requires an initial investment of $100,000 and has the following expected stream of cash flows: Assuming the company's cost of capital is 12 percent, what is the profitability index for the project?

What is the difference between the discount rate used for net present value computations and the internal rate of return? Explain your answer.