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Exam 25: Capital Investment Analysis

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Question 101

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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 25.0%.

A) True
B) False

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Question 102

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A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The payback period for the machine is 12 years.

A) True
B) False

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Question 103

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

For Years 1-5, 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.

Methods that ignore present value in capital investment analysis include the net present value method.

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 $300,000 for the 5 years. The expected average rate of return is 30%.

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

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 of this investment: $\begin{array} { l l l } & \text { Income from } & \text { Net Cash } \\\text { Year } & \text { Operations } & \text { Flow } \\1 & \$ 20,000 & \$ 95,000 \\2 & 20,000 & 95,000 \\3 & 20,000 & 95,000 \\4 & 20,000 & 95,000 \\5 & 20,000 & 95,000\end{array}$ -The cash payback period for this investment is