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Exam 16: Planning for Capital Investments

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Question 51

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Langdon Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $16,800 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 intermediate calculations. Round your final answer to the nearest dollar.)

A) $46,667
B) $43,210
C) $40,009
D) $43,295

E) None of the above
F) A) and B)

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Question 52

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Alcorn Company is considering purchasing equipment that costs $400,000. The equipment has an estimated useful life of 8 years and no salvage value. Alcorn believes that the annual cash inflows from using the equipment will be $80,000.(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 Alcorn's cost of capital is 12%. Is the equipment an acceptable investment?Calculate the net present value of the equipment assuming that Alcorn's cost of capital is 10%. Is the equipment an acceptable investment?What general conclusion can you reach from your results to parts 1) and 2)?

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To calculate the net present value (NPV)...

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Question 53

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The cost of capital represents the maximum acceptable rate of return that a capital investment should earn.

Morrisey Company has two investment opportunities. Both investments cost $6,800 and will provide the same total future cash inflows. The cash receipt schedule for each investment is given below: $\begin{array}{ccc}&\text { Investment I}&\text { Investment II }\\\text { Period 1 } & \$ 1,900 & \$ 1,900 \\\text { Period } 2 & 1,900 & 3,080 \\\text { Period } 3 & 2,900 & 4,260\\\text { Period } 4 &\underline{ 5,440} & \underline{2,900} \\ \text { Total } &\underline{ \$ 12,140 }& \underline{\$ 12,140}\end{array}$ What is the net present value of Investment II assuming an 12% minimum rate of return? (PV of $1and PVA of $1) (Do not round intermediate calculations. Round your answer to nearest whole dollar.)

Mr. J's Bagels invested in a new oven for $14,000. The oven reduced the amount of time for baking which increased production and sales for five years by the following amounts of cash inflows: $\begin{array}{ccccc}\text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \\\$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000\end{array}$ Using the averaging method, the payback period for the investment in the oven would be:

Five years ago, Burton Company purchased equipment with an expected useful life of 5 years. The initial cost of the equipment was $160,000. Burton's cost of capital is 12%; when it purchased the equipment, Burton computed a net present value of $15,824 for the investment. During the current year, the equipment reached the end of its useful life. Burton determined that, over the 5-year life, the equipment had generated annual cash inflows of $46,000.Required:Conduct a post-audit to determine whether the equipment achieved the net present value the company had expected. Based on the results actually achieved, was the asset in fact an acceptable investment? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)

The unadjusted rate of return is found by dividing the average incremental increase in annual operating income by the cost of the investment.

Harvey wants to determine the net present value for a proposed capital investment. He has determined the desired rate of return, the expected investment time period, a series of cash inflows of equal amount, the salvage value of the investment, and the required cash outflows. Which of the following tables would most likely be used to calculate the net present value of the investment?

Select the term from the list provided that best matches each of the following definitions or descriptions. Put the number of the term in the answer column.

Ashley projects that she can get $190,000 cash per year for 5 years on a real estate investment project. If Ashley wants to earn a rate of return of 10%, what is the maximum that she should pay for the investment?(PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

When a capital investment is expected to provide unequal annual cash inflows, the payback period cannot be calculated.

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

All of the following are capital investment decisions except:

In Year 1, Chandler Company purchased equipment with an expected useful life of 5 years. The initial cost of the equipment was $85,000. Chandler's cost of capital is 12%. At the time it purchased the equipment, Chandler projected the following cash inflows from use of the equipment: $\begin{array} { c c } \text { Year } & \text { Projected Cash Inflow } \\1 & \$ 20,000 \\2 & \$ 30,000 \\3 & \$ 35,000 \\4 & \$ 25,000 \\5 & \$ 15,000\end{array}$ At the end of Year 5, the equipment had reached the end of its useful life. Chandler determined that it had actually generated the following cash flows: $\begin{array} { c c } \text { Year } & \text {Actual Cash Inflow } \\1 & \$ 10,000 \\2 & \$ 20,000 \\3 & \$ 30,000 \\4 & \$ 30,000 \\5 & \$ 30,000\end{array}$ (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)Required:What was the net present value that Chandler calculated for the equipment when the company purchased the asset?Calculate the net present value that the equipment achieved, based on the actual cash inflows.Comment on the pattern of actual cash inflows, compared to the cash flows that had been projected.Was the equipment in fact an acceptable investment, based on the cash flows actually achieved?

Cash outflows from a capital investment project include:

If a company has to pay a given amount of income taxes over the life of a capital investment, managers of the company should seek to pay the taxes as early as possible in the investment's life.

What amount of cash must be invested today in order to have $60,000 at the end of one year assuming the rate of return is 9%? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Which statement characterizes the time value of money concept?

Joan Osborne is evaluating a potential capital investment. She has calculated the net present value using a minimum rate of return of 10%. Using this rate, the net present value is negative. What does this tell her about the rate of return expected for the project?

Redmond Company is considering investing in one of the following two projects: $\begin{array}{l}\text { Annual cash Inflows }\\\begin{array} { c r r } \text { Year } & \text { Project A} & \text { Project B} \\1 & \$ 2,000 & \$ 4,000 \\2 & 3,000 & 2,000 \\3 & 3,000 & 2,000 \\4 & 1,000 & 1,000 \\\hline \text { Total } & 9,000 & 9,000\end{array}\end{array}$ (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required:Which project is more desirable strictly in terms of cash inflows? Why?Compute the present value of each project's cash inflows assuming the company's required rate of return is 12%.What is the maximum amount Redmond should be willing to pay for each project?Suppose each project costs $7,000. Which project(s) should be accepted? Note that only one project can be accepted.