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Exam 16: Planning for Capital Investments

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Question 1

Multiple Choice

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The present value index indicates the:

A) time it will take to recover the initial cash outflow of an investment.
B) additional cash inflows from operating activities.
C) rate of return per dollar invested in a capital project.
D) ratio of the net present value of an investment to the initial investment.

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

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Question 2

Multiple Choice

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Which method for evaluating capital investment proposals deducts the present value of cash outflows from the present value of cash inflows?

A) Payback method
B) Internal rate of return
C) Net present value
D) Unadjusted rate of return

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

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C

Question 3

Multiple Choice

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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?

Butch's Barbecue thinks that offering delivery will increase their sales. Butch's is considering whether to purchase a used delivery truck costing $12,000. Additional net income from the delivery service will be $1,400 per year. The truck will last approximately 5 years. What is the unadjusted rate of return based on the average investment?

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

Morrisey Company has two investment opportunities. Both investments cost $5,500 and will provide the same total future cash inflows. The cash receipt schedule for each investment is given below: What is the net present value of Investment II assuming an 8% minimum rate of return? Use Appendix Table 2. (Do not round your intermediate calculations. Round your answer to nearest whole dollar.)

Which of the following statements concerning payback analysis is true?

Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years. Assuming the company is subject to a 40% tax rate during the period, and a zero salvage value, what is the depreciable cost of the new asset?

Ashley projects that she can get $100,000 cash per year for 5 years on a real estate investment project. If Ashley wants to earn a rate of return of 12%, what is the maximum that she should pay for the investment? . (Round your answer to the nearest dollar.)

A dollar to be received in the future is subject to the effects of risk and inflation.

Nguyen Company has an opportunity to purchase an asset that will cost the company $36,000. The asset is expected to add $12,000 per year to the company's net income. Assuming the asset has a five-year useful life and zero salvage value, the unadjusted rate of return (based on average investment) will be:

All of the following are capital investment decisions except:

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.

Select the incorrect statement concerning the internal rate of return (IRR) method of evaluating capital projects.

Grayson Company is considering purchase of equipment that costs $49,000 and is expected to offer annual cash inflows of $13,000. Grayson's minimum required rate of return is 10%. How many years must the cash flows last for the investment to be acceptable? (Do not round your intermediate calculations. Round to nearest whole year.)

When a capital investment is expected to provide unequal annual cash inflows, the payback period can be calculated by accumulating the incremental cash inflows until the sum equals the amount of the original investment.

Which of the following are not present value methods of analyzing capital investment proposals?

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?

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? Use Appendix Table 2. (Do not round your intermediate calculations. Round your answer to the nearest whole dollar.)

Garrison Company has two investment opportunities. A cash flow schedule for the investments is provided below: Considering the unequal investments, which of the following techniques would be most appropriate for choosing between Investment A and Investment B?