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Exam 10: Capital Investment Analysis

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Question 61

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The management of Charlton Corporation is considering the purchase of a new machine costing $380,000. 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 in this situation: The cash payback period for this investment is:

A) 4 years
B) 5 years
C) 19 years
D) 3.3 years

E) None of the above
F) All of the above

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Question 62

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The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.

A) True
B) False

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Question 63

Multiple Choice

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The present value index is computed using which of the following formulas?

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

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:

Sunrise Inc. is considering a capital investment proposal that costs $227,500 and has an estimated life of four years and no residual value. The estimated net cash flows are as follows:

The production department is proposing the purchase of an automatic insertion machine. They have 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 a estimated useful life of 10 years.

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

The management of Zesty 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 in this situation: The cash payback period for this investment is:

Proposals L and K each cost $500,000, have 6-year lives, and have expected total cash flows of $720,000. Proposal L is expected to provide equal annual net cash flows of $140,000, while the net cash flows for Proposal K are as follows:

Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $13,500 over a four year life. Project A could be sold at the end of four years for a price of $25,000. (a) Using the proper table below determine the net present value of Project A over a four-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value?

The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) methods that ignore present value and (2) present values methods.

Which of the following is important when evaluating long-term investments?

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 50%.

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 in this situation: The present value index for this investment is:

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 in this situation: The present value index for this investment is:

For years one through five, a proposed expenditure of $500,000 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 5 years.

The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return?