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Exam 25: Capital Investment Analysis

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Question 71

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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 $200,000 for the 5 years. The expected average rate of return on investment is 25.0%.

A) True
B) False

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Question 72

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The management of Arkansas 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 net present value for this investment is:

A) positive $36,400
B) positive $55,200
C) Negative $16,170
D) Negative $126,800

E) A) and D)
F) All of the above

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Question 73

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A present value index can be used to rank competing capital investment proposals when the net present value method is used.

The rate of earnings is 10% and the cash to be received in two year is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest:

The management of River 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:

A series of equal cash flows at fixed intervals is termed a(n) :

Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for four years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is:

The present value index is computed using which of the following formulas?

Briefly describe the time value of money. Why is the time value of money important in capital investment analysis?

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

The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing.

An anticipated purchase of equipment for $600,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: What is the cash payback period?

An 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated annual net income.

The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return?

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

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.

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.

An anticipated purchase of equipment for $580,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: What is the cash payback period?

In calculating the present value of an investment in equipment, the present value of the terminal residual value should be added to the cash inflows.

Heather Company is considering the acquisition of a machine that costs $432,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual cash flow of $120,000, and annual operating income of $83,721. What is the estimated cash payback period for the machine?