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Exam 26: Capital Investment Analysis

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Question 51

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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.

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Question 52

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The management of River 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 net present value for this investment is:

A) Positive $20,140
B) Negative $20,140
C) Positive $19,875
D) Negative $19,875

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Question 53

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In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values.

The management of Indiana 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 average rate of return for this investment is:

If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.

The rate of earnings is 10% and the cash to be received in two year is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest:

Average rate of return equals average investment divided by estimated average annual income.

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows generated by the project is $145,000. Should they invest in this project?

Below is a table for the present value of $1 at Compound interest. Below is a table for the present value of an annuity of $1 at compound interest. Using the tables above, what would be the internal rate of return of an investment that required an investment of $189,550, and would generate an annual cash inflow of $50,000 for the next 5 years?

A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for eight years. Determine the internal rate of return for this project, using the following table.

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called:

In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation method(s) are often used?

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 net present value for this investment is:

Match the term with the correct definition.

The rate of earnings is 10% and the cash to be received in three years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest:

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

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company's desired rate of return is $105,000. The IRR on the project is 12%. Which of the following statements is true?

The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis.

All of the following qualitative considerations may impact upon capital investment analysis except:

A $550,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net cash flows are as follows: The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Determine the net present value.