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Exam 11: Capital Investment Analysis

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Question 21

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What is the present value of $8,000 to be received at the end of 6-years if the required rate of return is 15%? 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.

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$8,000 × 0...

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Question 22

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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.

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B) False

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Question 23

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A company is contemplating investing in a new piece of manufacturing machinery.  The amount to be invested is $100,000.  The present value of the future cash flows at the company's desired rate of return is $105,000.  The IRR on the project is 12%.  Which of the following statements is true?

The net present value has been computed for Proposals P and Q. Relevant data are as follows: Determine the present value index for each proposal. Round your answers to two decimal places.

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

Using the following partial table of present value of $1 at compound interest, the present value of $15,000 to be received 3 years hence with earnings at the rate of 6% a year is

Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4 years, cost $480,000, and has a $20,000 residual value.

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

The rate of earnings is 12% and the cash to be received in 2 years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest:

The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

The rate of earnings is 6% and the cash to be received in 4 years is $20,000. The present value amount, using the following partial table of present value of $1 at compound interest is

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

The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. 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 of this investment: The present value index for this investment is

Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of

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

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 5 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:

Proposals A and B each cost $600,000 and have 5-year lives.   Proposal A is expected to provide equal annual net cash flows of $159,000, while the net cash flows for Proposal B are as follows: Determine the cash payback period for each proposal. Round answers to two decimal places.

Proposals M and N each cost $550,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Determine the cash payback period for each proposal.

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

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.