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Exam 25: Capital Investment Analysis

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Question 1

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By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money:

A) has an international rate of exchange
B) is the language of business
C) is the measure of assets, liabilities, and stockholders' equity on financial statements
D) has a time value

E) None of the above
F) C) and D)

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Question 2

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The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

A) True
B) False

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Question 3

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Determine the average rate of return for a project that is estimated to yield total income of $250,000 over four years, cost $480,000, and has a $20,000 residual value.

Average rate of return equals estimated average annual income divided by average investment.

The management of Nebraska 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 average rate of return for this investment is:

In calculating the net present value of an investment in equipment, the required investment and its terminal residual value should be subtracted from the present value of all future cash inflows.

A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual cash flows from the machine will be $3,500. The payback period for the new machine is 6 years.

If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.

Determine the average rate of return for a project that is estimated to yield total income of $400,000 over four years, cost $720,000, and has a $70,000 residual value. Round answers in percentage to one decimal place.

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 50%.

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows: The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Required: Determine the net present value.

The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. 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 cash payback period for this investment is:

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called:

A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for eight years. Determine the internal rate of return for this project, using the following table.

The management of Charlton 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:

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. Using the tables above, what would be the present value of $15,000 (rounded to the nearest dollar) to be received four years from today, assuming an earnings rate of 10%?

Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?

The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines and have asked the accountant to analyze them to determine the best average rate of return.

In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of:

A project has estimated annual cash flows of $95,000 for four years and is estimated to cost $260,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. 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.