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Exam 10: Capital Investment Analysis

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Question 51

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

A) True
B) False

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Question 52

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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 in this situation: The present value index for this investment is:

A) 1.08
B) 1.45
C) 1.14
D) .70

E) None of the above
F) A) and D)

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Question 53

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The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. 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 in this situation: The net present value for this investment is:

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

By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money:

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

A series of equal cash flows at fixed intervals is termed a(n) :

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?

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

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. Using the tables above, what would be the present value of $15,000 (rounded to the nearest dollar) to be received four years from today, assuming an earnings rate of 10%?

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

An anticipated purchase of equipment for $580,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: What is the cash payback period?

The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) average rate of return and (2) cash payback methods.

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. Using the tables above, what would be the internal rate of return of an investment of $294,840 that would generate an annual cash inflow of $70,000 for the next 5 years?

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

A project has estimated annual net cash flows of $90,000. It is estimated to cost $324,000. Determine the cash payback period.

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 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 cash flows per year of $6,000. The payback period for the machine is 12 years.

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 12 years.

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 rejected.