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Exam 11: Capital Investment Analysis

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Question 41

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The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines and have asked the accountant to analyze them to determine which of the proposals (if any) meet or exceed the company's policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has an estimated useful life of 10 years. The accountant has identified the following data: Which of the investments are acceptable?

A) Machines A & C
B) Machines  B & C
C) Machine B only
D) Machine A only

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

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Question 42

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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 25.0%.

A) True
B) False

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Question 43

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An anticipated purchase of equipment for $490,000 with a useful life of 8 years and no residual value is expected to yield the following annual net incomes and net cash flows: What is the cash payback period?

A qualitative characteristic that may impact upon capital investment analysis is employee morale.

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

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

An 8-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 5%, determine the estimated annual net income.

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

Below is a table for the present value of $1 at compound interest. Using the tables above, what is the present value of $3,000 (rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 12%?

Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for 4 years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is

The formula for calculating the present value factor for an annuity of $1 is

Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for 7 years. Project B has a calculated net present value of $13,500 over a 4-year life. Project A could be sold at the end of 4 years for $25,000. (a) Using the table below, determine the net present value of Project A over a 4-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.

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 is the present value of $6,000 to be received at the end of each of the next 4 years, assuming an earnings rate of 10%?

Methods that ignore present value in capital investment analysis include the internal rate of return method.

A present value index can be used to rank competing capital investment proposals when the net present value method is used.

For Years 1-5, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years.

A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity.

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

In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation methods are often used?

Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for 7 years. The present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is