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Exam 10: Planning for Capital Investments

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Question 51

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A capital investment decision is essentially a decision to exchange current cash outflows for future cash inflows.

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B) False

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Question 52

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Indicate whether each of the following statements is

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A postaudit should be conducted at the t...

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Question 53

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

The rate of return that equates the present value of cash inflows and outflows is the:

Janelle Bates has just inherited $250,000 from her uncle's estate.She is considering opening a small sewing and fabric shop.She would need to purchase inventory costing $50,000.Janelle plans to rent a shop in a local shopping center for $12,000 per year.Fixtures,display equipment,and furniture will cost $18,000 and will be depreciated $3,000 per year for 5 years to its expected salvage value of $3,000.Operating costs will amount to $25,000 per year.Janelle estimates her revenues from sales and sewing services will total $65,000.Because Janelle believes she can earn a 10% return by investing in mutual funds,she does not want to start the business unless she can earn at least this rate.Ignore income taxes. Required: 1)Prepare a schedule of expected cash flows for the proposed investment by completing the table provided below.In column 1 enter a brief description of the cash flow.In column 2 indicate whether the cash flow is an inflow (I)or an outflow (O).In column 3 enter the years in which the cash flow will occur.For example,if the cash flow occurs immediately enter a 0.If the cash flow occurs each year enter 1-5,etc.In column 4 enter the cash flow amount. $\begin{array}{|l|c|c|r|}\hline \text { Item Description } & \text { Inflow/Outflow } & \text { Years } & \text { Amount } \\\hline(\mathrm{CoL} \mathrm{1)} & (\mathrm{CoL} 2) & (\mathrm{CoL} 3) & (\mathrm{Col} .4) \\\hline \\\hline \\\hline \\\hline \\\hline \\\hline \\\hline \\\hline\end{array}$ 2)What is the initial outlay for this capital investment (the amount of the cash flow at time = 0)? 3)What is the amount of the annual net cash flow for this capital investment? 4)What is the net present value of the proposed venture? Should Janelle proceed?

All of the following are capital investment decisions except:

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%,what will the investment generate? (Do not round your intermediate calculations.Round your answer to the nearest whole dollar. )

Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a desired rate of return of 12%,is the project acceptable?

Indicate whether each of the following statements is

Indicate whether each of the following statements is

Indicate whether each of the following statements is

The purposes of the postaudit for capital investments include all of the following except:

The future value of $1 table should be used to discount lump sum cash flows expected to occur in the future.

Cash inflows from a capital investment may include the terminal value of capital assets and increases in revenues.

When the effect of income taxes is considered in a capital budgeting analysis,the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

If a project has a positive net present value,its internal rate of return will exceed the firm's hurdle rate.

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

Garrison Company has two investment opportunities.A cash flow schedule for the investments is provided below: $\begin{array}{|l|c|c|}\hline \text { Year } & \text { Investment } A & \text { Investment B } \\\hline 0 & (\$ 5,000) & (\$ 6,000) \\\hline 1 & 2,000 & 3,000 \\\hline 2 & 2,000 & 2,000 \\\hline 3 & 2,000 & 2,000 \\\hline 4 & 2,000 & 1,000 \\\hline\end{array}$ Considering the unequal investments,which of the following techniques would be most appropriate for choosing between Investment A and Investment B?

Saget Company is considering the purchase of equipment that would cost $35,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a required rate of return of 8%,what is the net present value of this investment opportunity?