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Exam 25: Capital Investment Analysis

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Question 71

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Using the following partial table of present value of $1 at compound interest, determine the present value of $50,000 to be received 3 years hence with earnings at the rate of 12% a year: $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636\end{array}$

A) $37,550
B) $31,800
C) $35,600
D) $39,850

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

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Question 72

Multiple Choice

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The formula for calculating the present value factor for an annuity of $1 is

A) Amount to be invested/Annual average net income
B) Annual net cash flow/Amount to be invested
C) Annual average net income/Amount to be invested
D) Amount to be invested/Equal annual net cash flows

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

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Question 73

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

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

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

A $550,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: $\begin{array} { c l } \text { Year } & \text { Net Cash Flow } \\1 & \$ 300,000 \\2 & 280,000 \\3 & 208,000 \\4 & 180,000\end{array}$ 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 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value.

Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions.

The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. 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: $\begin{array} { c l l } & \text { Income from } & \text { Net Cash } \\\text { Year } & \text { Operations } & \text { Flow } \\1 & \$ 100,000 & \$ 180,000 \\2 & 40,000 & 120,000 \\3 & 40,000 & 100,000 \\4 & 10,000 & 90,000 \\5 & 10,000 & 120,000\end{array}$ -The average rate of return for this investment is

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 $8,000 to be received 1 year from today, assuming an earnings rate of 12%?

The management of Zesty 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 Years 1 through 5 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: $\begin{array} { l l l } & \text { Income from } & \text { Net Cash } \\\text { Year } & \text { Operations } & \text { Flow } \\1 & \$ 100,000 & \$ 180,000 \\2 & 40,000 & 120,000 \\3 & 20,000 & 100,000 \\4 & 10,000 & 90,000 \\5 & 10,000 & 90,000\end{array}$ The cash payback period for this investment is

The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method.

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

In calculating the present value of an investment in equipment, the present value of the residual value should be added to the cash inflows.

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 average rate of return for the machine is 16.7%.

A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500. The payback period for the new machine is 6 years.

Match each definition that follows with the term a-e) it defines. -Also referred to as capital budgeting

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: $\begin{array} { c c c } \text { Year } & \text { Net Income } & \text { Net Cash Flow } \\1 & \$ 75,000 & \$ 280,000 \\2 & 100,000 & 300,000 \\3 & 109,000 & 200,000 \\4 & 36,000 & 120,000 \\& \$ 320,000 & \$ 900,000\end{array}$ The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value.

All of the following are factors that may complicate capital investment analysis except

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

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