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Exam 16: Planning for Capital Investments

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Question 31

True/False

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Investment projects A and B offer equal cash inflows over their lives, but the cash inflows for project A occur sooner than those for project B. The two projects are otherwise identical (the cost is the same, for example). Based on this information, the internal rate of return for A is lower than for B.

A) True
B) False

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Question 32

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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? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

A) $79,139
B) $60,000
C) $96,631
D) None of these answers are correct.

E) C) and D)
F) A) and B)

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Question 33

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Paul Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $12,000 per year for 3 years. Assuming that the required rate of return is 10%, what is the present value of these cash inflows? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round PV factors and intermediate calculations. Round your final answer to the nearest dollar.)

The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: $\begin{array}{ccccc}\text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \\\$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000\end{array}$ Using the incremental approach, the payback period for the investment is:

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

Generally, a company should use the MACRS method to calculate depreciation on its income tax return, due to the effects of the time value of money.

A cash flow that only occurs in equal amounts each year is referred to as:

Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years. Assuming a desired rate of return of 12%, is the project acceptable? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Depreciation on a capital investment (such as equipment) has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

Langdon Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $10,000 per year for 3 years. Assuming that Langdon's required rate of return is 8%, what is the present value of these cash inflows? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round your intermediate calculations. Round your final answer to the nearest dollar.)

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%.(PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)Required:Compute the net present value of this investment.What is the maximum amount that Chico should be willing to pay for the machine?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?

Select the term from the list provided that best matches each of the following definitions or descriptions

Burgess Corporation is considering purchasing equipment that costs $235,000. The equipment has an estimated useful life of 5 years and no salvage value. Burgess believes that the annual cash inflows from using the equipment will be $65,000.(PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)Required:Calculate the net present value of the equipment assuming that Burgess's cost of capital is 12%. Is the equipment an acceptable investment?Calculate the net present value of the equipment assuming that Burgess's cost of capital is 10%. Is the equipment an acceptable investment?Based on your results to parts 1) and 2), estimate the internal rate of return for the investment in the equipment.

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

Cash inflows from a capital investment may include the salvage value of capital assets and increases in revenues.

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?

A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable investment.

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

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? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)