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Exam 25: Capital Investment Analysis

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Question 41

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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.

A) True
B) False

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Question 42

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Which of the following is true of the cash payback period?

A) the longer the payback, the longer the estimated life of the asset
B) the longer the payback, the sooner the cash spent on the investment is recovered
C) the shorter the payback, the less likely the possibility of obsolescence
D) All of these choices

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

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Question 43

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A project has estimated annual net cash flows of $60,000. It is estimated to cost $240,000. Determine the cash payback period.

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 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: ​​ -The cash payback period for this investment is

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

The management of Charlton 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 five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:​ The cash payback period for this investment is

The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. 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 of this investment:? $\begin{array}{rrr}\text { Year } & \text { Income from } & \text { Net Cash } \\& \text { Operations } & \text { Flow } \\\hline 1 & \$ 100,000 & \$ 180,000 \\2 & 40,000 & 120,000 \\3 & 20,000 & 100,000 \\4 & 10,000 & 90,000 \\5 & 10,000 & 90,000\end{array}$ The net present value for this investment is

If a proposed expenditure of $70,000 for a fixed asset with a four-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.

The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $300,000 for the five years. The expected average rate of return is 37.5%.

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

The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

Match each definition that follows with the term (a-e) it defines. -Often referred to as the discounted cash flow method

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

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

A project is estimated to cost $273,840 and provide annual net cash flows of $60,000 for seven years. Determine the internal rate of return for this project, using the following present value of an annuity table.

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows:? The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively.Determine the average rate of return on investment, including the effect of depreciation on the investment.

A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is six years.

A company is planning to purchase a machine that will cost $24,000, have a six-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.

What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?

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 Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively.​Determine the net present value.