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Exam 25: Capital Investment Analysis

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Question 41

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The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

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Question 42

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Below is a table for the present value of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636 \\5 & 0.747 & 0.621 & 0.567\end{array}$ Below is a table for the present value of an annuity of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & { 10 \% }&12\% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 1.833 & 1.736 & 1.690 \\3 & 2.673 & 2.487 & 2.402 \\4 & 3.465 & 3.170 & 3.037 \\5 & 4.212 & 3.791 & 3.605\end{array}$ -Using the tables above, what would be the internal rate of return of an investment of $210,600 that would generate an annual cash inflow of $50,000 for the next 5 years?

A) 6%
B) 10%
C) 12%
D) 14%

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Question 43

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

Match each of the methods that follow with the correct category a-b) . -Cash payback method

A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality.

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

Which of the following is an advantage of the cash payback method?

Below is a table for the present value of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636 \\5 & 0.747 & 0.621 & 0.567\end{array}$ Below is a table for the present value of an annuity of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & { 10 \% }&12\% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 1.833 & 1.736 & 1.690 \\3 & 2.673 & 2.487 & 2.402 \\4 & 3.465 & 3.170 & 3.037 \\5 & 4.212 & 3.791 & 3.605\end{array}$ -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%?

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

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?

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.

Briefly describe the time value of money. Why is the time value of money important in capital investment analysis?

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

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.

Below is a table for the present value of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636 \\5 & 0.747 & 0.621 & 0.567\end{array}$ Below is a table for the present value of an annuity of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 1.833 & 1.736 & 1.690 \\3 & 2.673 & 2.487 & 2.402 \\4 & 3.465 & 3.170 & 3.037 \\5 & 4.212 & 3.791 & 3.605\end{array}$ -Using the tables above, what would be the present value of $15,000 to be received at the end of each of the next 2 years, assuming an earnings rate of 6%?

Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths and weaknesses of each method.

Match each definition that follows with the term a-f) it defines. -A measure of the average income as a percent of the average investment

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

Below is a table for the present value of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636 \\5 & 0.747 & 0.621 & 0.567\end{array}$ Below is a table for the present value of an annuity of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & { 10 \% }&12\% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 1.833 & 1.736 & 1.690 \\3 & 2.673 & 2.487 & 2.402 \\4 & 3.465 & 3.170 & 3.037 \\5 & 4.212 & 3.791 & 3.605\end{array}$ -Using the tables above, what would be the present value of $25,000 rounded to the nearest dollar) to be received 4 years from today, assuming an earnings rate of 10%?

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