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Exam 16: Planning for Capital Investments

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Question 21

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Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?

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The cost of capital measures the return ...

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Question 22

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Indicate whether each of the following statements is true or false. 1. A capital investment is a purchase of a long-term operational asset. 2. Investments in capital assets normally are recovered by selling the assets. 3. The profitability of a business is greatly influenced by the quality of its capital investment decisions. 4. A capital investment decision exchanges current cash inflows for future cash outflows. 5. The time value of money concept is often used in making capital investment decisions.

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1. True
2....

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Question 23

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How would an organization benefit from conducting postaudits of its capital investment decisions?

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

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

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.

Morrisey Company has two investment opportunities. Both investments cost $5,500 and will provide the same total future cash inflows. The cash receipt schedule for each investment is given below: $\begin{array} { | l | c | c | } \hline & \text { levestment I } & \text { lovestment II } \\\hline \text { Penod 1 } & \$ 1,000 & \$ 1,000 \\\hline \text { Penod 2 } & 1,000 & 2,000 \\\hline \text { Penod 3 } & 2,000 & 3,000 \\\hline \text { Penod 4 } & 4,000 & 2,000 \\\hline \text { Total } & \$ , 000 & \$ 8 , 000 \\\hline & & \\\hline\end{array}$ The net present value of Investment II assuming an 8% minimum rate of return would be which of the following amounts? (Do not round your PV factors and intermediate calculations. Round your answer to nearest whole dollar.)

An investment that costs $20,000 will produce annual cash flows of $5,000 for a period of 6 years. Further, the investment has an expected salvage value of $3,000. Given a desired rate of return of 12%, the investment will generate a (Do not round your PV factors and intermediate calculations. Round your answer to the nearest whole dollar.) :

An investment that cost $30,000 provided annual cash inflows of $9,000 per year for five years. The desired rate of return is 10%. The internal rate of return from the investment was (Do not round your PV factors and intermediate calculations.) :

Indicate whether each of the following statements is true or false. 1. Internal rate of return measures the difference between an investment's rate of return and the company's required rate of return. 2. A spreadsheet program is useful in doing internal rate of return analyses. 3. Capital investment analyses should take tax consequences into account. 4. Depreciation on equipment or a building has the effect of sheltering some of a corporation's income from income taxes. 5. The amount of a depreciation tax shield is calculated by multiplying the amount of depreciation by (1 - the tax rate).

Which of the following is the approximate internal rate of return for an investment that costs $33,550 and provides a $5,000 annuity for 10 years?

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

Which of the following are not present value methods of analyzing capital investment proposals?

Cash outflows generated by capital investments include all of the following except:

Cash outflows can be categorized into all of the following groups except:

The present value index indicates:

Evergreen Company has two investment opportunities. Both investments cost $5,000 and will provide the same total future cash inflows. The cash receipt schedule for each investment is given below: $\begin{array}{|l|r|r|}\hline &\text { Invertment I}&\text { Invertment II}\\\hline \text { Period 1 } & \$ 1,000 & \$ 3,000 \\\hline \text { Period 2 } & 1,000 & 2,000 \\\hline\text { Period 3 } & 2,000 & 2,000 \\\hline \text { Period 4 } & 4,000 & 1,000 \\\hline \text { Total } & \$ 8,000 & \$ 8,000 \\\hline\end{array}$ Select the correct statement.

Generally, the unadjusted rate of return should be calculated based on the average investment rather than the amount of the original investment in a depreciable asset such as equipment.

In performing capital budgeting analysis that takes time value of money into account, cash flows generated by a capital project are assumed to be reinvested at the project's rate of return.

Select the incorrect statement concerning the internal rate of return (IRR) method of evaluating capital projects.