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Exam 10: Capital Investment Analysis

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Question 71

Multiple Choice

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Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240.Estimated cash flows are expected to be $40,000 annually for 7 years.The present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively.The internal rate of return for this investment is

A) 10%
B) 6%
C) 12%
D) 8%

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

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Question 72

Multiple Choice

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Which of the following is not considered a complicating factor in capital investment decisions?

A) income tax
B) lease versus purchasing options
C) equal proposal lives
D) qualitative factors

E) All of the above
F) C) and D)

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Question 73

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The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period.

Match each definition that follows with the term a-e it defines. -Recognizes that a dollar today is worth more than a dollar tomorrow

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

The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $360,000 for the 4 years, is

Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?

The average rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

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.

Using the tables above, what is the present value of $6,000 to be received at the end of each of the next 4 years, assuming an earnings rate of 10%?

The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years, is

A project has estimated annual net cash flows of $80,000.It is estimated to cost $600,000.Determine the cash payback period.

A qualitative characteristic that may impact upon capital investment analysis is employee morale.

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.

Tipper Co.is considering a 10-year project that is estimated to cost $700,000 and has no residual value.Tipper seeks to earn an average rate of return of 15% on all capital projects.Determine the necessary average annual income using straight-line depreciation that must be achieved on this project for it to be acceptable to Tipper Company.

A 6-year project is estimated to cost $350,000 and have no residual value.If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated annual net income.

Sunrise Inc.is considering a capital investment proposal that costs $227,500 and has an estimated life of 4 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 10%.The present value of $1 at compound interest rates of 10% for 1, 2, 3, and 4 years is 0.909, 0.826, 0.751, and 0.683, respectively.Determine the net present value.Round interim answers to the nearest dollar.

The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 over the 20 years is

The cash payback method of capital investment analysis is one of the methods referred to as a present value method.

A project has estimated annual cash flows of $90,000 for 3 years and is estimated to cost $250,000.Assume a minimum acceptable rate of return of 10%.Using the following tables, determine the a net present value of the project and b the present value index, rounded to two decimal places. 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.