FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 15: Capital Investment Analysis

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 31

Multiple Choice

Review LaterAdd Note

Review Later

Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows expected from capital investment proposals?

A) Internal rate of return
B) Cash payback
C) Net present value
D) Average rate of return

E) B) and C)
F) A) and D)

Correct Answer

verified

Show Answer

Question 32

Essay

Review LaterAdd Note

Review Later

The internal rate of return method is used to analyze a $831,500 capital investment proposal with annual net cash flows of $250,000 for each of the six years of its useful life. $\begin{array}{|l|l|l|l|}\hline 20 \% & 15 \% & 10 \% & \text { Year } \\\hline 0.833 & 0.870 & 0.909 & 1 \\\hline 1.528 & 1.626 & 1.736 & 2 \\\hline 2.106 & 2.283 & 2.487 & 3 \\\hline 2.589 & 2.855 & 3.170 & 4 \\\hline 2.991 & 3.353 & 3.791 & 5 \\\hline 3.326 & 3.785 & 4.355 & 6 \\\hline 3.605 & 4.160 & 4.868 & 7 \\\hline & & & \\\hline\end{array}$

Correct Answer

verified

Show Answer

Question 33

Multiple Choice

Review LaterAdd Note

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

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and a $40,000 residual value, is expected to yield total net income of $200,000 for 5 years. The expected average rate of return on investment is 18.2%.

In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods.

For years one through five, 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 2.5 years.

A qualitative characteristic that influences capital investment analysis is manufacturing productivity.

The management of Hence Corporation is considering the purchase of a new machine costing $200,000. 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: $\begin{array}{|l|l|l|}\hline\text { Net } & \text { Income from } \\\text { Cash }\\ \hline\text { Flow }& \text {Operations }&\text { Year }\\\hline \$ 90,000 & \$ 50,000 & 1 \\\hline 10,000 & 20,000 & 2 \\\hline 50,000 & 10,000 & 3 \\\hline 45,000 & 5,000 & 4 \\\hline 45,000 & 5,000 & 5 \\\hline\end{array}$ The net present value for this investment is:

Proposals L and K each cost $500,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal L is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal K are as follows: $\begin{array}{ll}\$ 250,000 & \text { Year 1 } \\200,000 & \text { Year 2 } \\100,000 & \text { Year 3 }\\90,000 & \text { Year 4 } \\60,000 & \text { Year } 5 \\\underline{50,000}& \text { Year } 6\\{\$ 750,000} \end{array}$ Determine the cash payback period for each proposal.

The methods of evaluating capital investment proposals can be grouped into two general categories: (1) average rate of return method and (2) cash payback method.

Periods experiencing increase in price levels are known as periods of:

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

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

When evaluating a proposal by use of the net present value method, if 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 process by which management allocates available investment funds among competing investment proposals is called:

Crane Company is considering the acquisition of a machine that costs $60,000. The machine is expected to have a useful life of 5 years, a negligible residual value, an annual cash flow of $15,000, and annual operating income of $15,000. What is the estimated cash payback period for the machine?

The management of London Corporation is considering the purchase of a new machine costing $750,000. The company's desired rate of return is 6%. The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively. In addition to this information, use the following data in determining the acceptability in this situation: $\begin{array}{|l|l|l|}\hline\text { Net } & \text { Income from } \\\text { Cash }\\ \hline\text { Flow }& \text {Operations }&\text { Year }\\\hline \$ 187,500 & \$ 37,500 & 1 \\\hline 187,500& 37,500 & 2 \\\hline187,500& 37,500 & 3 \\\hline 187,500 &37,500 & 4 \\\hline 187,500& 37,500 & 5 \\\hline\end{array}$ The net present value for this investment is:

One of the qualitative characteristics that influence capital investment analysis is product quality.

An analysis of a proposal by the net present value method indicated that the present value exceeded the amount to be invested. Which of the following statements best describes the results of this analysis?

If the rate of earnings is 10% and the cash to be received in two years is $10,000, determine the present value amount, using the following partial table of present value of $1 at compound interest. $\begin{array}{|l|l|l|l|}\hline 12 \% & 10 \% & 6 \% & \text { Year } \\\hline 0.893 & 0.909 & 0.943 & 1 \\\hline 0.797 & 0.826 & 0.890 & 2 \\\hline 0.712 & 0.751 & 0.840 & 3 \\\hline 0.636 & 0.683 & 0.792 & 4 \\\hline\end{array}$