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Exam 11: Capital Investment Analysis

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Question 1

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Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for 7 years. Project B has a calculated net present value of $5,500 over a 5-year life. Project A could be sold at the end of 5 years for a price of $30,000. (a) Using the table below, determine the net present value of Project A over a 5-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value? 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.

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(a)
*[$15,000 × 3.605 (Present value o...

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Question 2

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A company is considering the purchase of a new machine for $48,000.  Management expects that the machine can produce sales of $16,000 each year for the next 10 years.  Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year.  All revenues and expenses except depreciation are on a cash basis.  The payback period for the machine is 6 years.

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Question 3

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The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. 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 of this investment: The present value index 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 internal rate of return of an investment that required an investment of $227,460 and would generate an annual cash inflow of $60,000 for the next 5 years?

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.

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

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value.  The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000.  The machine will generate net cash flows per year of $6,000.  The payback period for the machine is 12 years.

Which of the following are present value methods of analyzing capital investment proposals?

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period.

The process by which management allocates available investment funds among competing investment proposals is called

Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years.

The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years, is

A company is considering the purchase of a new machine for $48,000.  Management expects that the machine can produce sales of $16,000 each year for the next 10 years.  Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year.  All revenues and expenses except depreciation are on a cash basis.  The payback period for the machine is 12 years.

Which of the following are two methods of analyzing capital investment proposals that both ignore present value?

Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows?

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

The management of California 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 of this investment: The present value index for this investment is

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

A $550,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value.

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