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Exam 10: Planning for Capital Investments

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Question 21

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Which of the following would be considered a cash inflow in determining the value of a capital investment?

A) Incremental revenues from increased productivity
B) Cost savings from a reduction in labor hours
C) An increase in working capital commitments
D) Both incremental revenues from increased productivity and cost savings from a reduction in labor hours are correct.

E) A) and D)
F) All of the above

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Question 22

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Capital investment decisions involve investments in current assets.

A) True
B) False

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Question 23

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Indicate whether each of the following statements is

Southport Company is considering the purchase of a piece of equipment that costs $100,000.The equipment would be depreciated on a straight-line basis to its expected salvage value of $10,000 over its 10-year useful life.Assuming a tax rate of 40%,what is the annual amount of the depreciation tax shield provided by this investment?

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

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

Describe the decision rules management should use for accepting and rejecting capital projects under each of the following capital budgeting models: net present value model,internal rate of return model,payback period,and the unadjusted rate of return model.

When calculating the present value of an ordinary annuity,it is assumed that:

Which one of the following statements best describes an ordinary annuity?

The cost of capital is called all of the following except:

Fenwick Company is considering purchase of equipment that costs $60,000 and is expected to offer annual cash inflows of $16,645 for 5 years.Fenwick Company's required rate of return is 10%.The internal rate of return of this investment project is closest to:

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. Required: 1)Calculate the net present value of the equipment assuming that Alcorn's cost of capital is 12%.Is the equipment an acceptable investment? 2)Calculate the net present value of the equipment assuming that Alcorn's cost of capital is 10%.Is the equipment an acceptable investment? 3)What general conclusion can you reach from your results to parts 1)and 2)?

Which statement characterizes the time value of money concept?

Which of the following statements about postaudits is correct?

Which of the following is not a major cash inflow from a capital investment?

A cash flow that only occurs in equal amounts each year is referred to as:

Describe the approach that managers may take in making capital investment decisions.

Which of the following is not a factor in explaining why the present value of a future dollar is less than one dollar?

Finnegan Company plans to invest in a new operating plant that is expected to cost $500,000.The projected incremental income from the investment is as follows: $\begin{array}{|l|c|}\hline & \text { Net Income } \\\hline \text { Year } & \text { After Tax } \\\hline 1 & \$ 30,000 \\\hline 2 & \$ 45,000 \\\hline 3 & \$ 50,000 \\\hline 4 & \$ 55,000 \\\hline 5 & \$ 40,000 \\\hline 6 & \$ 20,000 \\\hline\end{array}$ The unadjusted rate of return on the initial investment would be approximately:

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. $\begin{array}{|l|l|l|} \hline \text {Your Answer } &\text {Definition or Description }&\text {Term } \\\hline &\text { A. The concept that recognizes that the present value of an opportunity to receive one dollar in the future is less than one dollar }&\text { 1. Accumulated conversion factors } \\\hline &\text { B. Annuity with the cash flows occurring at the end of each period }&\text { 2. Arnuaty } \\\hline &\text { C. Paid to investors and creditors for the use of their assets }&\text { 3. Caputal investments } \\\hline &\text { D. Review conducted to determine whether a project actually generated the results that were onginally expected }&\text { 4. Cost of capital } \\\hline &\text { E. Factors used to convert a series of future cash inflows into their present value equivalent }&\text { 5. Intemal rate of return } \\\hline &\text { F. The rate that produces a net present value of zero for an investment in a capital project }&\text { 6. Minimum rate of rebum } \\\hline &\text { G. Purchase of long term operational assets that involves a long term commitment of funds }&\text { 7. Net present value method } \\\hline &\text { H . Technique that evaluates investment opportunities by determining the length of time necessary to recover the initial net investment }&\text { 8. Ordinary annuity } \\\hline &\text { I. Measure of profitability computed by dividing the average incremental increase in annual net income by the average investment cost }&\text { 9. Payback method } \\\hline &\text { I. An equal series of cash flows received over equal intervals of time at a constant rate of return investment opportunity }&\text { 10. Postaudit } \\\hline &\text { J. Rate of retum required to persuade a company to accept an investment opportunity }&\text { 11. Time value of money } \\\hline &\text { K. Evaluation technique in which future cash flows are discounted back to present value equivalents, from which the cost of the investment is subtracted }&\text { 12. Unadjusted rate of reburn } \\\hline \end{array}$